What Warren Buffett knows
 
 
The Ottawa CitizenDecember 2, 2009Be the first to post a comment
 
 

Much has been made of Warren Buffett's $34-billion purchase of the railway concern Burlington Northern Santa Fe Corporation.

The purchase strained the resources of Buffett's holding company, Berkshire Hathaway, quite an accomplishment given that Buffett is one of the richest men in the world and his holding company one of the biggest. It's worth remembering that Buffett got rich being right. His gamble on Burlington Northern tells us something about Buffett, but also something about the future of the economy.

Buffett likes big, stable companies. Because his pool of money is so large, he can't jump in and out of stocks as easily as the wealthy barber on the corner. Quite often, when he makes a purchase, Buffett ends up owning the company. He doesn't run the company, just sits back and lets good management do the right thing. Buffett buys for the next decade, not next month.

Buffett likes companies that have a dominant position in their market. If investing were a baseball game, he'd pick the New York Yankees over the Kansas City Royals every time. To duplicate the infrastructure of Burlington Northern would cost billions of dollars, and no one is prepared to do it. Burlington Northern has already built up its own infrastructure (though there is upkeep), so the company has a huge competitive advantage -- probably insurmountable.

Because railways transport goods, they rise and fall with the economy. If no goods are being produced and sold, no need to transport them. Buffett is betting that the U.S. and global economies are going to come roaring back to life. He's also betting that food production -- corn and other bulk commodities that ship well by train -- will do well in the future. His investment is also a bet on continuing demand for coal to produce electricity.

Buffett recognizes that railways are highly efficient users of fuel. He has noted that rail, for an equal quantity of energy, can move the same amount of cargo as 120 trucks. What this means is that one of the smartest investors in the world is predicting an inevitable increase in the cost of fuel to the point that trains displace trucks as the dominant means of shipping. Buffett is buying Burlington Northern because he foresees the same kind of world that economists such as Jeff Rubin and urbanists such as Richard Florida predict: a world of high-cost oil.

At the same time, it's worth noting that Buffett is not running to cash in his assets for fear that escalating oil prices are going to cause a collapse anytime soon. He's retaining his holdings, while positioning himself for the future. Indeed, a list of Berkshire Hathaway holdings is a who's who of the biggest and best in the U.S.: American Express, Bank of America, Coca Cola, Comcast, ConocoPhillips, Costco, Exxon and Gannett. Buffett is betting that companies that have done well in the past will be also be able to position themselves for the future.

There's no reason that the traditional economy cannot adjust to new circumstances. And sometimes what seems new is not really so new. After all, Burlington Northern may be the hot new thing for Warren Buffett, but it represents an industry that has been around for a while.