“PEOPLE IN THESE PARTS GET THE TIME OF DAY FROM THE ATCHISON TOPEKA AND THE SANTA FE…”

11/4/09

The big business news story of yesterday was Warren Buffett’s Berkshire Hathaway’s purchase for $100 in either cash or Berkshire stock of the 77% of Burlington Northern it didn’t already own.

Mr. Buffett, displaying his usual, and lately grossly misplaced, optimism, called the purchase “…an all-in wager on the economic future of the United States. I love these bets,” quickly adding that the deal was “not a bet on next month or next year.”

The press and the analytical community quickly busied itself with trying to discern the Oracle of Omaha’s possible additional, or at least more specific, motivations for buying BN at a 31% premium to the stock’s price before the announcement and/or with opining on the merits of the purchase. Being interested in the thought processes of truly consistently sage investors, a class that Mr. Buffett, though not infallible, seems to define, I have joined in this game of speculation.

Clearly, the BN purchase was a big “green” bet by Mr. Buffett, a motivation generally acknowledged by all concerned. Moving freight by rail is far more efficient than moving freight by truck. As fuel gets more expensive and concern for hydrocarbon emissions increases, both of which still appear to be secular trends, rail will become and increasingly sensible and fashionable way to move freight.

BN is also attractive to Mr. Buffett because it is one of the industries not subject to foreign competition and outsourcing. It is also heavily regulated and provides steady, though not spectacular, returns.

Unlike talk radio hosts who somehow caught lightning in a bottle and assume that such bits of luck make them qualified to opine on subjects about which they know less than nothing, I don’t second guess the financial and investment prowess of Warren Buffett. He remains the foremost investor in the world. However, while I don’t question what Mr. Buffett does, I do question what Mr. Buffett tells us about what he does. Like any good investor, Mr. Buffett knows not to tell his inquisitors too much about his motivations or his plans.

Think for a moment what railroads do. They move commodities, such as coal and wheat. They also move bulky manufactured goods, including cars, electronic products, and any number of other consumer and capital goods. Increasingly, the direction of these movements has been commodities toward ports for export and manufactured goods away from ports toward final purchase points inside the U.S. Indeed, the railroads have enjoyed something of a resurgence over the last few years, and not only because of their ability to move freight relatively efficiently; much of their resurgence has arisen as the aforementioned directions of the freight it moves have become a more permanent feature of world trade patterns…commodities out of the U.S., manufactured goods into the U.S.

So, yes, Mr. Buffett’s purchase of BN is “…an all-in wager on the economic future of the United States.” But I would like to add a few words to that anodyne aphorism. Given the rail industry’s relative immunity to foreign competition, and, more importantly, its role in exporting commodities and importing manufactured goods, a bet on rail is, even though Mr. Buffett would never say this, an all-in wager on the economic future of the United States as a Third World country. As with most of Mr. Buffett’s bets, I’d say this was a pretty good one.