Warren Buffett's Bet on Rail and America

It's not so much a bet on rail as it is a bet on the American economy; Berkshire Hathaway (BRK.A) and Warren Buffett's purchase of Burlington Northern (BNI) which involved buying the remaining 77% stake to take complete control over the railway company is a stern statement about the direction and prosperity of America. The $44Billion value of the deal including debt and previous investments makes it, for Berkshire, the biggest investment in the history of their business.

An efficient rail system, especially one built on high-speed rail transit, has been one focus of the current U.S. Administration with plans calling for an $8Billion investment in rail as part of the Stimulus Package, with another $5Billion rail investment set aside in the budget for 2010. While President Barack Obama's plans call for efficiencies and high speed in the passenger rail business, the infrastructure work is sure to bode well for the transports and delivery businesses as well.

It is in this business that Mr. Buffett plans to play the recovery of American economics. Eventually as demand for good picks up with improving unemployment, the demand for transport of those various goods for manufacturing and sale will boost the prospects of companies like Burlington Northern.

Investors over the years have learned to trust the calculated wisdom of Mr. Buffett, and it generally isn't a good idea to bet against the man who has built one of the biggest fortunes in our time. As he's shown as recently as the financial crises (with an investment near the bottom in Goldman Sachs that's seen much- applauded profits), the Oracle of Omaha isn't sitting on any of his laurels. This investment is as much a bet on an American recovery in jobs and economic growth as it is about the prospects of the two hundred year old rail business.

Even if investors aren't convinced rail is the future, the actions of one of America's wisest and most patient investing minds have to taken seriously.

Disclosure: Author holds no position in BRK.A or in BNI

Comments

[bindlepete:]

I disagree with the emphasis as I see this as a bet on the fuel shortage due to efficiency of the rail roads.

Further, it is a bet on coal and electricity. Hauling coal from the Powder River Basin is BNI's lifeblood. and the utilities will survive as they are monopolies and regulation will not put them down.

Their paper/ bonds are what keep the ever powerful insurance industry alive. So Insurance and electricity are combined,an over powering force in Washington.

I have fought them both and know.

Nov 04 10:51 AM

[kebu77:]

And you double the efficiency if you go to electric rail. Coal-fired electric rail is really green compared with diesel over-the road trucking.

Nov 04 12:13 PM

[Will Wharton:]

Most of Burlington's track lines head westward, crossing upper resource rich regions (timber, coal, etc.) like Montana, Seattle and Vancouver. The tracks end in ports shipping most of their goods to and from Asia, especially China and India. This in effect means that Buffet's "bet on America" is a bet that the United States will be importing more manufactured goods from these regions into the country and selling more and more of its raw materials, unfinished goods and natural resources rather than manufactured goods to the growing Asia region dominated by China.

Economist Erik Reinert, in his book "How Rich Countries Got Rich and Why Poor Countries Stay Poor" pointed out that countries get rich as they turn away from raw material and commodity production to manufacturing, and countries that lose their manufacturing base become poor over time. Buffet's deal may not be a bet on America as much as it is a bet on the growing prominence and perhaps predominance of Asia over the US in time. It's the Asia demand for our raw materials and importation of Asian manufacturing goods that will make money for Burlington Northern, but that profitable trasnaction (that Buffet hopes to profit from) is in effect a "bet against America."

Nov 06 10:52 AM