Warren Buffett on Investing in the Airline Industry

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More than half a century ago, Ben Graham was critical of investing in airline stocks. His pupil Warren Buffett has said the same thing.

In a speech to students at the Kenan-Flagler Business School at the lpehwxv University of North Carolina at Chapel Hill in 1995, Warren stated:

The fella that runs USAir is a wonderful guy, but he just happens to be in an extraordinarily tough business. And the interesting thing is that I had written something for {Benjamin} Graham’s book in the early 70’s about how the airline business was about the toughest business there was.

And the interesting thing is, of course, is that if you go back to the time of Kitty Hawk, net, the airline transport business in the United States has made no money. I mean, just think if you had been down there at Kitty Hawk, and you had saw this guy {Wilbur Wright} go up {in the air}, and all of a sudden this vision hit you that tens of millions of people would be doing this all over the world some day and that it would bring us all closer together and everything, and think my God this is something to be in on.

And despite putting in billions and billions and billions of dollars, the net return to owners from being in the entire airline industry, if you owned it all, and if you put up all this money, is less than zero.

If there had been a capitalist down there {at Kitty Hawk the day the Wright brothers made their first flight} the guy should have shot down Wilbur! I mean … {audience laughter}. You know… one small step for mankind, and one huge step backwards for capitalism!

But anyway…. So along comes 1989 and I’ve got a lot of cash. And no one misled me in any way shape or form. And I mean this was 100% my decision {to invest in USAir}. And I put money in it. Seth Scofield, you can’t find a better human being or manager than Seth Scofield, but he is operating with revenues based on market factors and cost that are not based market factors, and that’s a recipe for a lot of trouble.

So I now have this 800 {telephone} number, and if I ever get the urge to buy an airline stock I dial this number. And I say my name is Warren, and I’m an “air-o-holic,” and then this guy talks me down on the other end {of the line}….

High fuel costs have turned the airline industry into a good investment

Paradoxically, high fuel costs have turned the airline industry into a good investment. When oil prices skyrocketed in 2008 to $147 a barrel, the airlines cut capacity, ground flights, develop more-efficient scheduling, and take other steps to offset higher fuel costs. High fuel costs also curtailed the start-up or accelerated the demise of many airlines. Barriers to competition rose. In the past few years, the industry has consolidated and oil prices are lower. Airlines are running their businesses for profitability and not for market share. Airlines have raised fares, unbundled their offerings by charging for bags, extra legroom, and food, while maintaining low capacity growth.

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Consider Nurturing Yourself

Consider Nurturing Yourself

Here’s a typical day for Eve: After five hours sleep, she rises, gets her two busy preteens off to school, feeds the new puppy, and drives two hours to her job as an attorney. Once she arrives at home, she helps her kids with homework, then catches up on her own legal work till after midnight. FYI, she’s a single mom, too.

“I’m so stressed, I feel I’m about to have a heart attack,” Eve told me recently. “Actually, that might not be so bad. At least I’d finally get some rest.”

Eve was kidding, of course. But her words struck a chord, perhaps because the story is so familiar. Women tend to focus on others first. But for many of us, the nurturing switch is stuck in the ‘on’ position until a jolt (like getting sick) forces us to attend to our own needs.

We talked about how she might devote some attention to herself-not just to her kids and to her work. “Can you think of ways you could nurture yourself?” I asked.

'Let Your Life Speak: Listening for the Voice of Vocation' by Parker J. Palmer (ISBN 0787947350) “Get more sleep, hire a babysitter for a few hours so I could put my feet up, have a girls’ night out with friends,” she said. But would she do it? “I’d feel guilty about neglecting my kids,” Eve admitted.

What we women must learn is to give ourselves TLC, too, while we nurture others. This means accepting, as Parker J. Palmer puts it in his book “Let Your Life Speak”: “Self-care is never a selfish act …. Any time we can listen to our true self and give it the care it requires, we do so not only for ourselves but for the many others whose lives we touch.”

Eve is learning. She still spends evenings with her children, but she has a babysitter for Saturday mornings. And Palmer’s quote reminds her that when she nourishes herself, she generates energy to care for those she cherishes.

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India in the ‘Fragile Five’ Club of Emerging Nations in Turmoil

The phrase ‘Fragile Five’ was coined by a research analyst at Morgan Stanley in 2013 to classify Turkey, Brazil, India, South Africa and Indonesia as economies that have become too reliant on foreign investment to bankroll their development ambitions. These countries have one essential thing in common—high and rising current account deficits that compel them more dependent on foreign capital flows. The expression has caught on in large degree for the reason that it emphasizes the strains that befall when countries place too much emphasis on fuelling fast rates of economic growth.

The Emergence of Narendra Modi

The Emergence of Narendra Modi

India’s confused point of view was reflected in the emergent legacy of Manmohan Singh, who may be reminisced as the nation’s best finance minister and its worst prime minister. The breakthrough opening of India that Singh planned as finance minister in the 1990s has been generally outdone by growing corruption and incompetence during his ten year tenure as prime minister. As his feeble coalition government continued to dither despite slowing growth and rising inflation, surveys showed that Indian voters were looking to new faces—even a strongman—to put things right.

'India for a Billion Reasons' by Amit Dasgupta (ISBN 8183281435) Over the years, political momentum shifted to regional parties with strong leaders, and in recent months to the opposition Bharatiya Janata Party (BJP) and its prime ministerial candidate, Narendra Modi, the energetic but overbearing regional leader who positioned his state of Gujarat as the “China of India” after presiding over Gujarat as Chief Minister for twelve years.

A recipe of good luck and resolution has reawakened economists’ cheerfulness about India just as the halo besieging Narendra Modi is beginning to grow fainter. Good luck has come in the form of plummeting oil prices, which are reducing the import burden. Modi took benefit of the price cut to abolish diesel-fuel subsidies and raise regulated natural-gas prices by a third, saving India’s under-pressure budget close to 1% of gross domestic product and disentangling a key market distortion.

Propelling India Forward

'Imagining India: The Idea of a Renewed Nation' by Nandan Nilekani (ISBN 0143116673) The benchmark Sensex Index on the Bombay Stock Exchange has by now climbed 30% ever since Modi became prime minister. But, he may still not have provided enough to lift India’s stock markets higher right away. Companies traded on India’s Sensex index already boast an average price/earnings ratio of 17.4 times 2014 estimates, compared with 11.4 for Brazilian shares, 9.5 for stocks in Shanghai, and 4.7 for distressed Russia. So a good portion of reform success is already priced in.

Not like in China, which is grappling to transform from manufacturing to a more consumer-oriented economy, India’s evolution counts on strengthening uncompetitive factories, which produce just 16% of GDP, compared to more than 20% in most emerging markets.

At any rate, Modi is endeavoring to impel his country in a positive direction. That alone makes India an refuge among the BRIC markets. Brazil and Russia are rallying around leaders who are moving resolutely in the wrong direction, as far as world markets are concerned, while China sends mixed, opaque signals about its own promised reforms and seems resigned to economic slowdown.

India: A Reading List

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How to Relax After Work

How to Relax After Work

'Five Good Minutes in the Evening' by Jeffrey Brantley, Wendy Millstine (ISBN 1572244550) When you drag yourself home after a crazy-hectic day, steer clear of all e-mails and voice mails, at least initially, suggests [Jeffrey Brantley, MD, and [Wendy Millstine in their book “Five Good Minutes in the Evening” Their subtitle: ‘100 Mindful Practices to Help You Unwind from the Day and Make the Most of Your Night.’

“E-mails and voice messages perpetuate the constant busyness, hurry, and worry of modern life,” says Brantley, director of the Mindfulness-Based Stress Reduction Program, part of the Duke University Health System’s Integrative Medicine Program. “It’s important to step back from those things from time to time and give yourself some space.”

To do just that, set aside a certain period (between 30 minutes and an hour) to let go of the need to respond to other people-electronically, that is. Sit in a comfortable place for a short while and remind yourself that your serenity and peace of mind, for those precious moments, are yours to savor.

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Investing is a Passive Pursuit

Investment Process: Common Sense and Knowledge of Business is Important

“The stock market is designed to transfer money from the active to the patient.”
– Warren Buffett

Efforts to time the market, select mispriced stocks or pursuing “hot” investment managers and mutual fund managers are likely to do more harm than good.

Investing is one of those rare human endeavors where effort doesn’t necessarily pay off. Taking a hiatus on trading one’s account may actually be helpful to a portfolio’s returns.

I remember reading about a study by Fidelity had concluded that the customer investing accounts that had performed the best were the ones held by people who had forgotten they even had Fidelity accounts, and so did no trading from their accounts.

Similarly, when families fight extended court battles over many years for rights over inherited assets, the investment accounts in question cannot be touched for 10 or 20 years. Such feuding families found that over an extended period of inactivity, their investments performed the best.

Daniel Solin of DailyFinance explores the ramifications of these stories:

These investors took no advice from a “market-beating” broker or adviser. Considered no financial news. Made no effort to time the market. Made no additions to or subtractions from their portfolios. They engaged in no analysis of any kind. And yet, it worked. Could this be the key to investing success?

Here’s sage advice from Warren Buffett:

  • In Berkshire Hathaway’s 1990 Chairman’s letter and annual report, Warren Buffett wrote, “Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings.”
  • In Berkshire Hathaway’s 1996 Chairman’s letter and annual report, Warren Buffett wrote, “Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.”

However, long periods of neglect can only be taken so far before it gets dangerous. Unless you periodically rebalance your portfolio or sell stocks where your original investment philosophy no longer holds or where the fundamentals have deteriorated, you will either be taking too much or too little risk. Over time, this can have serious consequences.

A rational investor must take the path of simplicity and relative moderation via the use of index funds, ETFs, and other passive investments rather than fooling themselves into believing that they can consistently “beat the market.”

The best returns originate from those investors who wait for the best opportunity to show itself before making a commitment. Those who chase the current hot stocks usually end up losing more than they gain, over the long term.

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Fortune Magazine’s Summer 2014 Business Book Recommendations

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Project Management: How to Answer the Critics

Three Considerations for Establishing a Project Team

The corporate ladder is a permanent fixture in traditional organizations. Its defenders often claim that humans have an innate ne for hierarchy and power. They also argue that the organization’s interests are best served when supervisors wield both a carrot and a stick: the prospect of promotion and the firm hand of authority.

How can project-team organizations, or companies considering a transformation, respond to the critics? Quinn Mills, author of “Rebirth of the Corporation”, answers some common objections:

  • 'The Lazy Project Manager: How to be twice as productive and still leave the office early' by Peter Taylor (ISBN 1906821674) Project teams ignore the human need for hierarchies. Do not confuse adaptation to a hierarchy with a need for it.
  • People who hope for a promotion are motivated to perform well. While the prospect of promotion can be a motivator, the satisfaction and recognition that come from job-accomplishment more than offset the absence of corporate ladders.
  • Individual performance within the team settles at the lowest common denominator. This is more likely to happen in a hierarchy, where employees often make a game of outsmarting their supervisors. In a project-based organization, peers depend on each other to carry the toad an extremely intolerant of shirkers.
  • People lose their Individualism in project teams. You can counteract any los Individualism by providing each employee with performance appraisals and a person development plan.
  • 'The One-Page Project Manager: Communicate and Manage Any Project With a Single Sheet of Paper' by Clark A. Campbell (ISBN 0470052376) Some companies failed after experimenting with project teams. While some project-based organizations have failed, it is debatable whether the organizational structure itself was responsible for the failures.
  • The advantages of the project-team structure can be obtained in traditional hierarchies. A traditional organization could, in theory, gain the advantages of a project-based organization. However, this would happen only if upper management turned employees into decision makers, eliminated multiple layers of managerial bureaucracy, and encouraged workers to function in small teams. Not likely without a fundamental shift in structure.
  • Project teams take all the fun out of being a boss. If your idea of fun is giving orders and acting in a high-handed fashion, you will not enjoy project teams. However, if your fun comes from helping others to grow, you will find them ideal.

Recommended Books on Project Management

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Two-Minute Stress Buster: Relief with a Bend of the Waist

Two-Minute Stress Buster Say you have only two minutes to de-stress between appointments at work or when a project just isn’t going well. Here’s a quick and easy stress buster: do a waist bend.

Simply bend forward until you feel tension in your hamstrings. Visualize your muscle fibers elongating and relaxing (that will also keep your mind off your worries).

As you continue stretching, you’ll feel your lower back and neck begin to relax. Don’t go overboard.

  • Just take care not to lock your knees.
  • Make sure that you undo your first button if your pants seem tight around your waist.
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Profitability of Airlines: Cheaper Oil, Long Term Strategy, and Capacity

Profitability of Airlines: Cheaper Oil, Long Term Strategy, and Capacity

High oil prices force airlines to make hard choices that are usually good for the long-term investability in the airline sector, mostly regarding capacity decisions and passenger fees.

Benefits from lower fuel prices pivot on what is called “revenue offset.” From 1995 through 2008 airlines traded at a -0.64 inverse correlation with oil prices. Since then airlines have traded at a +0.63 positive correlation with oil prices. That relationship flipped because investors now believe airlines, like other transports, can pass through fuel prices.

American Airlines has recently reduced its domestic capacity for January 2015 and February 2015 by roughly 4.0%. With the recent decrease in fuel prices, the analysts and the financial media were forecasting that the airlines might lower fares passing on to consumers some savings from the fuel.

While this may have been the case in past boom-and-bust cycles, American Airline’s management appears dedicated to sustaining capacity discipline and further improving profitability of its airline. United, Delta, American, and Southwest are likely to generally follow this inclination and maintain—or even decrease—capacity notwithstanding more favorable fuel prices.

2015 is likely to be the first year since 2007 where domestic capacity will outgrow real GDP. Should the US economy maintain slow growth amid low oil prices, we would not be surprised to see a minor capacity uptick in domestic. Airlines will say this is acceptable because it is from gauge and stage length, but they both still count.

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The Art of Stillness

The Art of Stillness: Adventures in Going Nowhere, Pico Iyer

We all know that in our undermined lives, one of the things most undermined is ourselves. Many of us have the sensation that we are standing about two inches away from a huge canvass. It’s noisy. It’s crowded. And it’s changing every second. And that screen is our lives. It’s only by stepping back and holding still, that we can begin to see what the canvass means.

One of the first things you learn when you travel is that nowhere is magical unless you can bring the right eyes to it. I find that the best way I could develop more attentive and more appreciative eyes was, oddly to go nowhere… just by sitting still.

In the age of constant movement, nothing is so urgent as sitting still.

'The Art of Stillness: Adventures in Going Nowhere' by Pico Iyer (ISBN 1476784728) At some point, all the horizontal trips in the world stop compensating for the need to go deep, into somewhere challenging and unexpected; movement makes most sense when grounded in stillness. In an age of speed, I began to think, nothing could be more invigorating than going slow. In an age of distraction, nothing could feel more luxurious than paying attention. And in an age of constant movement, nothing is more urgent than sitting still.

Pico Iyer in ‘The Art of Stillness: Adventures in Going Nowhere’

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