Has Warren Gone Off the Rails?

I've been in a good mood all week about the announcement that Warren Buffett was investing $32 billion in Burlington Northern Santa Fe, the nation's 2nd largest railroad. "From my standpoint, it's a lot easier to make a $32 billion investment than 10 $3 billion investments," Mr. Buffett said, and also noted, with his customary dry wit, that he was probably doing it because his dad never bought him a train set as a kid.

At first blush, this is so radically counter-intuitive a move that you just don't know what to say about it. A railroad? Really? Isn't that hopelessly brick-and-mortar? And so 19th century? Why not an investment in this and that? High-tech wazoos or something? Synthetic brain cells, maybe? Online gadgetrons? There's so much fascinating new stuff out there! But choo-choos? Seriously?

And then you think, wait... this is Warren Buffett we're talking about. The guy who never invests in anything he doesn't understand. How much of what's going on right now do YOU understand? Want somebody to explain the business model for the latest Silicon Alley start-up to you again? How about stem-cell research? Cloning? Alternative energy sources that may be commercialized one day?

We do know one thing. As the American economy improves, people are going to need to ship things from one end of the country to another. Rail is a cheaper way for people to do so than a lot of other methods. If you believe in our nation and its businesses, the move makes tremendous sense, even if it doesn't adhere 100% to conventional wisdom.

How stupid has conventional wisdom been this year?

Let's take a little quiz. If you had $30 billion and you had a choice where to put it, would you invest in...

-- Railroads or Airlines? (Railroads)

-- Railroads or magazines? (Railroads)

-- Railroads or newspapers? (Railroads)

-- Railroad or automotive companies? (Railroads)

-- Railroads or the latest social networking phenom? (Railroads!)

-- Railroads or chicken? (Chicken)

In the latter case, you should probably know that I will always bet on chicken if given the opportunity. The ubiquity of chicken in our daily lives shows no signs of diminution. Wherever you turn around, somebody's eating one. You can bet that's going to continue. So compared with most other investments available right now, other than insured triple tax free bonds, chicken is even better than railroads.

Other than that, you have to like the way Warren is thinking. It says that you don't have to be nuts or smoking something in order to put your money on the home team, which is not Wall Street -- it's America. It's a bet FOR something, not against.

Railroads? I'm on board.

 

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Comments

[hp blogger Matt Wasson]

I'm not sure it's all about betting on the US, though I understand why he would portray it that way. I suspect there are a whole number of motives. My first thought was that he's betting on Asian demand for Powder River Basin coal - I've only seen one supporting opinion so far, though - but it's worth a read: http://www.istockanalyst.com/article/viewarticle/articleid/3612282

But the dollar is headed south and China became a net coal importer in 2008 and nobody thinks that's ever going to turn around again. Another factor is that opening up an export market for PRB coal will enable producers to leverage higher domestic prices as Appalachian producers have done, which will allow BNSF to leverage higher prices as well. A virtual monopoly on an emerging western coal export market, higher prices for both eastward and westward-bound PRB coal... There's a lot not to like in terms of climate, but as an investment? I'll leave it to better heads than mine to decide that one, but I find it hard to imagine this wasn't a factor in his thinking.

[seawolf77]

Warren Buffet going off the rails on a crazy train. ALL ABOARD HA HA HA HA!

[yappnmutt]

the coal being transported is going to china. its a commodity bet and a forex bet. its a bet on china. its a bet on the usa.

[spyguy68]

This is a VERY SMART move.

Once Peak Oil hits within the next few years, all the trucks are going to be dead on the side of the road with no fuel. Sure, US trains also use diesel fuel but do so much, much more efficiently than trucks do and it is not that hard to electrify the rails (particularly in the east) just like they have in Japan and Europe.

Note that BNSF has been very quietly double tracking all their main lines so they will soon be able to run trains ten minutes apart from coast to coast at 70 - 100 MPH, just like the train systms in Japan and Europe.

This is a long term bet that will pay off big time in the long tun, especially after oil goes to $200/bbl..

[Robert59]

I don't think it's counterintuitive at all. Where do you think all those high speed rail lines are going to end up? What makes the most sense is to get the freight on railroads, take them to hubs and use trucks for short haul, not long. If we can get trains to move people nearly as quickly as planes, the airline industry will get even smaller.

He's looking long term, something rarely done it seems by the investment class these days.

[grateful4thedead]

all he did was trade that horrifically overpriced berkie B share paper (p/e of 50 ish), which is due to go down soon along with the rest of this overvalued equity market, for some hard capital goods.

[progressivegreg]

He also gets the tracks! He will be charging every type of train that travels on "his" tracks! As we move into more rail to move people all that track will get lot's of heavy use. CSX is running an ad that talks about how many miles it can move tons of goods for 1 gallon of fuel. Seems like a good bet to me!

[ringo3khan]

Historically speaking; it's a lousy bet.