Warren Buffett’s decision to dump airline stocks is an unusual move for the long-term focused investor and could be a reckoning for index investing, CNBC’s Jim Cramer said Monday.
U.S. airline stocks sold off during the trading day as investors learned that the Oracle of Omaha said Berkshire Hathaway offloaded its big positions in American, Delta, Southwest and United due to depleted travel demand amid a coronavirus pandemic.
“To me that was an affirmation that … this is where you have to go,” the “Mad Money” host said while pointing to his recommendation of about 100 equities that can perform in this market environment. “Buffett has a long time horizon, some would say too long.”
The move by Buffett, a staunch advocate of investing in low-income index funds, is a noteworthy change for the renowned investor who famously suggested in both 1987 and 2008 that investors should get aggressive about stocks when others are fearful. Buying a down-and-out equity can yield a big return when the market rebounds.
He is now hesitant, however, about the near-term future. Berkshire Hathaway over the weekend revealed it lost $50 billion in its investments during the tumultuous first quarter.
“He’s perfectly willing to lose money in the short-term if he believes there’s a long-term opportunity, but he didn’t [get aggressive] with the airlines,” Cramer said. “He acknowledged that the facts have changed, and he bailed on the whole group because he knows these stocks are toxic.”
The stock market finished the trading day in the green as investors considered the reopening of the U.S. economy and teetering relations with China. The Dow Jones picked up 26 points, or 0.11%, to close at 23,749.76, and the S&P 500 expanded 0.43% to 2,842.74. The Nasdaq Composite surged ahead 1.23%.
“I recommend selling” some position in the S&P 500 index fund “if the [upward] streak continues,” Cramer said.
He also said he thinks “many investors are in denial about how bad things can be for” some of the most vulnerable companies.
Cramer, on the other hand, has spent recent weeks advocating that “Mad Money” viewers opt for stock picking over index investing in this uncertain market. The host warns that a basket of stocks — such as the S&P 500, which is largely representative of large-cap publicly traded companies — forces investors to take the high-performing holdings with the laggards.
“If you’re in individual stocks and they can grow even in tough times, then you should be in much better shape than the index-fund investors who are really stuck holding the bad with the good, because right now there’s a lot more bad than Wall Street seems to think,” he said.
Buffett, however, continued to voice support for buying a broad stock market index fund for the long haul at Berkshire’s annual meeting. He said people are paying “huge amounts of money” for “advice they really don’t need” through a stock brokerage.
“In my view, for most people, the best thing to do is owning the S&P 500 index fund,” Buffett said. “If you bet on America and sustain that position for decades, you’d do far better than buying Treasury securities, or far better than following people who tell you” what securities to buy.
