Sunday, November 08, 2009

BNSF and Warren Buffet: Does it mean anything?

After the announcement this week that Warren Buffet was going to buy out the remaining bit of Burlington Northern Santa Fe that he didn't already own seemed to spark some debate about what it should mean. I suggest that we might not want to read too much into it.

Buffet deserves a huge amount of deference because of his ability to make money, to make smart choices, to see the fundamentals of the fundamentals, but it might not always be a good idea to think that the common investor, or even an economist, should mimic his actions.

A GDP play was how most people seemed to read it this week. The idea is that as the economy cranks back up so will the fortunes of BNSF. There is truth in it. When cargo falls away to nothing there is nowhere to go but up.

An oil-price play is another way to take it. If the price of a barrel continues to climb, and as the dollar falls, fuel prices will escalate. Trucking becomes increasingly inefficient and rail begins to make a lot more sense for moving freight around this country.

The problem with both of these notions is that any advantage rail has is strictly near-term. Until there is significant investment in the rail infrastructure, until we can actually move more trains and more freight, the growth potential is limited. Expansion of the US rail lines is absolutely necessary. Passenger rail is limited by the constraints on freight rail. When they compete for the same space on the same set of tracks, we are losing some potential in both.

Unless Buffet knows something more about real infrastructure investment, the chances of making huge sums of money in his purchase of BNSF seems unlikely. He'll make some money in the recovery, and he'll make some money as the price of fuel climbs, but it is unlikely that he bought it for any of these reasons.

The two reasons Buffet gave are the more likely reasons than any of the speculative motives: he is always willing to buy more of anything he is invested in---and his father never bought him a toy train when he was a child


  1. Buffett also owns power generation companies - i.e. coal plants, and a big piece of BNSF's business is moving coal. So it might also be a vertical integration move for Berkshire.

  2. Well, there certainly is some value in owning the rail lines. And if you're looking to move a lot of coal, it should help.