One Of My Worst Investments Ever


If you ever meet someone that says “I’ve never made a mistake”, I will happily point out to you a complete liar.  Nobody goes through life without making at least a few mistakes.

The trick however, is to not make too many of them.  Keep the numbers low (if you can).  Do that and you’ll sail through life with relative ease.

The key to keeping the numbers low, is learning from those mistakes.  This is true in investing, and all other walks of life.  Face your mistakes.  Don’t ignore them.  Don’t hide mistakes from others, and certainly don’t tell yourself, “I won’t do that again” and then repeat the same blunder all over again.

Along this same line of thinking, I thought it might be entertaining and instructive today if we took a look back at one of my big investing blunders ever.

Let’s review my investment in Southwest Airlines!

 

Performance

So how bad was my Southwest investment performance?  I purchased shares back in August of 2017, roughly 3.25 years ago at an average purchase price of $52.98 per share.

Today Southwest shares trade at $61.05.  On the surface this doesn’t sound so terrible, but look at a comparison with the S&P500:

southwest 3 yearOuch!  Southwest has returned 15% during that time period (dividends not included), compared to a return of 60% for the S&P 500. Clearly it’s been a EPIC investing blunder on my part.

Why did I ever believe Southwest was going to be a good investment?

 

 

Why Did I Invest?

Back in 2017, the world was a very different place.  Airlines were actually pretty profitable back then.  That’s right kids — People used to travel by plane regularly for work, and leisure.  They went on vacations, flew to conferences, and visited different countries to experience the culture, sights, and food.

I know — it’s hard to believe the world has changed that much, right?

Back in 2017, I did a write-up on my reasons for investing, (and you can still read that post) but the reasons boil down to a few key ideas:

– Historically Southwest had earned good returns on equity (>20%).  They were a solid, efficient operator with low debt levels.

Big upcoming investments in the new 737 MAX would lead to efficiency improvements and the ability to compound capital at good rates of return.

Cheap shale oil would keep the cost of aviation fuel cheap for years to come.  This would likely mean higher levels of profitability for Southwest in the years ahead.

– The airline market in the U.S. has been reduced down to a few major players.  Essentially, an oligopoly for all intents and purposes.  Oligopolies are a form of market structure in which the limited number of players enjoy higher levels of profitability due to decreased market competition.

– Compared to the S&P 500, Southwest was a decent value.  It was arguably the most efficient player in the U.S. airline business, earning returns on capital that exceeded that of the average S&P 500 business.

The future for Southwest Airlines looked pretty rosy back in 2017.  I made the mistake of investing with the belief that the future would look pretty much like it had in the past…

Then, everything went to hell in a handbasket.

 

What Went Wrong

A few major things went wrong with this investment.  The first signs of trouble began back in October 2018, when Lion Air flight 601 crashed in Jakarta.

If you recall, the 737 MAX was a brand new aircraft back in 2017, and only a few airlines had started to fly them.  Southwest had placed a giant order for 737 MAX aircraft, and (at the time) was the largest operator of the 737 MAX in the United States.

After another tragic crash in Ethiopia, it became clear that something was very wrong with Boeing’s latest aircraft.  The crashes and subsequent grounding of the planes ruined my compounding hypothesis for Southwest.  The massive investment in a more efficient fleet of aircraft was NOT going to happen, and operating margins declined as a result of having to fly older less-efficient aircraft.

Sure, Southwest could still repurchase shares on the open market, but returns from this kind of compounding are pretty limited.

With all of the new planes grounded, Southwest was forced to fly older, less fuel efficient aircraft.

Then, Covid-19 began to rear it’s ugly head in early 2020.  Essentially all air travel ground to a halt.  Airports became ghost towns as travelers stayed away (for fear of catching the virus).  Borders were closed, and international flights were canceled.

For a few weeks in April 2020, less than 100,000 people were flying per day (in the United States).  Compare this to the roughly 2 million people flying per day back in 2019, and you can get a picture of how desperate things were for the airlines.

tsa screeningsDividends were cut, and share prices crashed.  Complete failure was eminent.  Without government intervention in the form of massive loans, all airlines in the U.S. would have gone bankrupt.

Thankfully the U.S. government recognized the continuing need for air travel after the pandemic, and provided necessary loans to keep the airlines afloat.

While these loans kept airlines (like Southwest) operating, the massively increased debt levels are bad for shareholders.  Instead of cash flow being reinvested into the business or being distributed to shareholders, cash will be used to service these new debts.

 

Final Thoughts

Clearly, very little went right with this investment.  In fact, most of the things that went wrong, I never even dreamed were a possibility when I first invested.  I obviously misunderstood the risks, and this was a huge mistake on my part.

Against all odds however, things have begun to look up for Southwest.  Vaccinations are happening, and people are beginning to travel again.  Ever so slowly, air travel numbers are increasing.  In the last 6 months alone, shares in Southwest have risen by 53%.

Pent up demand for leisure air travel will probably boost Southwest later this year, as more of the population gets vaccinated.  LOTS of people want to travel again, and that increase in demand will probably boost ticket prices (in the short term).

Longer term however, Southwest faces a larger debt burden, and a aging fleet of aircraft.  According to some sources, they’re about to place an order for 737-MAX aircraft again (now that the 737 MAX has been re-certified).

It’s not back to business as usual however — With greater debt levels, the ability of Southwest to reinvest in newer more efficient aircraft is going to be limited.  On top of that, it may take several years before leisure and business travel demand get back to the levels we saw in 2019.

My big dilemma now is, “What should I do with this investment?”  Should I sell, taking my meager gains and invest in something better?  Or, should I hang onto my Southwest shares, hoping to eventually capture more gains as the business improves?

It’s a difficult decision, and I haven’t completely decided what I’ll do yet.

Should I Sell, Hold, or Buy more? I’d love to read your thoughts about this investment in the comments below! 

 

[Image Credit: CNBC, Democratic Underground]

25 thoughts on “One Of My Worst Investments Ever

  • March 21, 2021 at 5:42 AM
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    If this is one of your worst, you’re doing great!

    We’re very modest holders of Southwest and are happy for them to stay in the portfolio long term. But I think a big position should be trimmed for better opportunities elsewhere. Airlines are fun companies but not great investments!

    Reply
  • March 21, 2021 at 6:14 AM
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    Appreciate the openness and honesty of this post.

    My advice would be the same for most all long-term investors: Try to avoid the temptation to own individual stocks, buy the market along the lines of VTSAX. Do so in an asset allocation plan that works for your risk tolerance. Easy peasy. So, sell and reinvest in the broad US market.

    We own a few individual stocks (about 3% of our overall portfolio) that we manage ourselves and have been largely fortunate with returns but after we FIRE, cutting our taxable income substantially, we plan on selling these at a 0% tax rate. Simplicity.

    Reply
  • March 21, 2021 at 10:45 AM
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    I think holding the airline stock is a great plan. CoVID won’t last forever, and I think airlines will go back up again. Good luck!

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  • March 21, 2021 at 11:14 AM
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    This is why we need to diversify widely across our holdings. I also bought a very small position in Delta Airlines just before the pandemic . I’ve eked out a small 10% gain but I’ll continue to hold it. I’d recommend you hold most of all your positions as Southwest should come back to operating properly post pandemic.

    Have a great spring up there in the Pacific Northwest.

    – Mike

    Reply
  • March 21, 2021 at 2:43 PM
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    I work in the airline industry. Airlines are a horrible investment. In the entire history of airlines, they are still in the red. I don’t even hold my own company’s stock, despite it being offered at a discount.

    I love my job (as much as possible given world events) but airlines are almost always financial disasters.

    Reply
  • March 21, 2021 at 4:31 PM
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    You definitely couldn’t have predicted the 737 MAX fiasco or COVID. Sometimes the numbers look good and then @#$% happens.

    I would bet Southwest will bounce back again in a fair amount of time – hold strong, my friend! 🙂

    Reply
  • March 21, 2021 at 5:11 PM
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    Yeah bad luck, there are much worse investments out there. I’m sure it’ll bounce back especially if travel comes back strong as I expect it will by the summer/fall.

    But I don’t know that Southwest will outpace the S&P 500. I am personally trying to simplify my portfolio and only invest in individual high growth stocks that I believe in.

    Reply
  • March 21, 2021 at 5:20 PM
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    If you sell it now, earning 15% on your money doesn’t sound so bad.

    But if you believe in this company and believe in the long term, they’ll bounce back, you can hold it knowing probably the bounce back won’t happen for another 2-4 years perhaps.

    Either way, your worst investment ever, sounds not so bad. Good luck Mr. Tako! Thanks for the honest and thoughtful post.

    Reply
  • March 21, 2021 at 6:15 PM
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    If this is your very worst, let me share mine. I had one that went completely bust to the point that even their website disappeared.

    That’s when I realized trading stocks wasn’t my game. I discovered VTSAX soon afterwards and I’ll be forever grateful to Mr. Bogle.

    Reply
  • March 21, 2021 at 7:26 PM
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    I’ve had to sell some positions for losses last year for various reasons and I still have some positions that haven’t recovered including some oils and pipelines. If the above is one of your worse performers than I would say your still doing pretty good.

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  • March 21, 2021 at 8:41 PM
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    I invested in Ford and GE. Those didn’t turn out so well. I’d have loved a 15% gain!

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  • March 21, 2021 at 11:50 PM
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    Hold.
    Nothing wrong with your initial investment analysis / thesis.
    Airlines are cyclical – so timing is necessary (buy low when they’re hated like now, sell when everyone can’t get enough of them).
    Some guy named Warren Buffett bought into the airline business too. Likely for the fact that they’ve become oligopolies, which are always a good place to look for INVESTMENTS (not trades).

    Reply
  • March 22, 2021 at 7:51 AM
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    Really not that bad. I owned Boeing and then had the Max and then Covid. It went from in the $400’s a share to like in the $90’s. Boeing was predicted to be almost $500 a share by the end of the year before all this happened and the 5 year forecast was in the $900’s if my memory is right. Then poof! Big loss.

    I believed that the low was way too low and would bounce back. I converted my shares of Boeing from my IRA to my Roth IRA at around $100 a share and didn’t have to pay taxes on it until now. I also rebalanced and bought some more stock. I then sold it when it bounced back to $220 a share. I believe Boeing to have a long rebuilding process so cashed out.

    I would also like to point out to Mike H’s reply about that is why you need to diversify that is just one investment philosophy. If you have a long time frame and can stand the ups and downs, then another philosophy is to have no diversity. Charlie Monger mentioned in one interview that if he was investing just his own money, then he would just own 3 stocks. As Warren Buffet, his business partner, has pointed out that diversification makes it impossible to really move the needle. Yes, the needle will not move down much from the market, but the needle will not move up much from the market. On a podcast I was listening to, the speaker (I don’t remember his name) stated that the problem with active managed funds or hedge funds is that they usually just have 1 or 2 really good ideas but are investing in a lot more to diversify.

    I own just 6 stocks not counting a couple of really small ($1000) stock gambles. Even with my big Boeing loss ($14,000 loss at time of sale), I still beat the market. Of the $15,000 I transferred from my IRA to my Roth IRA, it is now worth around $35,000 after 12 months.

    I’m not saying this strategy is good for everyone because I don’t believe it is. But for those of you owning 15-20 stocks consider testing this. Make a list of your favorite 5 or 6 stocks and write down their values and see what they are worth in 12 months and see how that compares to your larger portfolio as a whole. I used to own a larger portfolio of 15 stocks or so, but there were really only a handful of those that I really felt good about.

    Reply
    • March 22, 2021 at 9:11 PM
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      You bring up a good point. If your conviction is strong enough a concentrated portfolio is the way to go. However if you already achieved enough to retire early like me and Mr Tako then I would argue preservation of capital is also important and furthermore avoids wipeout risk being a big impact to your portfolio. Even the best run company can get with something unforeseen (a black swan event.)

      Furthermore as an early retiree I don’t need to outperform a benchmark but I need enough to provide a 3-4% yield and one that grows faster than inflation each year. With that goal diversification is a good way to get there.

      -Mike

      Reply
  • March 22, 2021 at 8:31 AM
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    Sell, buy $COST or $AAPL and sleep well.

    Reply
  • March 22, 2021 at 10:43 AM
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    I think Southwest will eventually recover though. If this is one of your worst investments, you’ve done well as an investor Mr. Tako. 🙂

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  • March 22, 2021 at 3:45 PM
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    I don’t think you’ve made a mistake. No one in their right mind could have seen the coronavirus pandemic coming. Southwest was and still is a fantastic company that has a lot of work to do to rebuild its business and get passengers flying airplanes again.

    If one of your worst investments actually returned money.. it makes others whose worst investments caused them to lose money feel bad 😉

    Reply
  • March 22, 2021 at 7:05 PM
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    I think air travel will go back to the previous level before too long. People love flying. I picked up a few shares of Boeing last year. I think they’ll be able to fix things and turn it around.
    My worst investments actually lost money so I think you’re doing quite well.

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  • March 22, 2021 at 7:19 PM
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    I own a modest amount of Southwest. Luckily I just purchased last fall and so have reaped a pretty decent gain since my purchase. I bought in the hopes that they’d hit a price range close to where they’re currently at. I personally don’t think they’ll outpace the S&P in the long term, but this year and next I think there’s room to grow.

    Reply
  • March 23, 2021 at 3:14 AM
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    Not bad for a worst investment! Actually, you could’ve sold at the bottom and realised the loss, then it would’ve only been good for capital loss harvesting =)

    My worst investments were:
    1. catching a falling knife in two investments equalling a 90% loss, with no chance of recovery.
    2. Buying an option on a share thinking it was just a cheaper version of the same share, ie no idea what an option was – 100% loss due to expiring worthless. Great lesson in learning about what the heck I’m investing in.
    3. local investments where our currency plunged 65% in value versus the USD during Covid. Still holding these, they’re only 20% down now as the currency has recovered. These are a little out of my control since I measure in USD, but invest in local currency. There’s little I can do about something like FX when the underlying investments were sound. They’re for a timeframe of 40years so will just wait it out.

    Funny how sometimes we do all this effort and just buying the index was a far better choice.

    Reply
  • March 28, 2021 at 9:10 PM
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    “One of my worst investments…”

    > Provides evidence for a ~5%/year gain.

    Surely that means your checking and savings accounts are actually some of your worst investments then right?! 🙂 Haha.

    I actually really enjoy the *idea* of talking about investment thesis and how they went south. I think investors can often learn more from those failings than the successes.

    C’mon! You’ve got worse than this. Bring it! I know I’ve got at least a bankruptcy or two under my belt, not to mention delistings that are sitting on pink sheets these days worth pennies on the dollar. I keep them around as reminders.

    Reply
  • April 17, 2021 at 1:37 PM
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    If it makes you feel any better, one of my worst investments was the one I didn’t make in SW (LUV). Was going to buy it in low 30’s last year but waited. Now it’s back at all time times highs.

    Reply

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