Tuesday, November 3, 2009

Berkshire & Burlington

Warren Buffett recently announced a (rather) characteristic investment decision; Assumption of $10 Bn of debt & $26 Bn in Stock / Cash of Berkshire for Burlington Northern Railroad.
I call it characteristic based on what I have read about him, especially through my second read of the Snowball. $26 Bn (Cash/ Stock = 60/40) is huge money, even for Berkshire. He has explained the decision as "... an all-in wager on the economic future of the United States".
He also spoke about rising fuel prices and how the rise in fuel prices is 3 times more negative for road transport than it is for railroad transport.

It got me thinking, is that what it is really about? And my reasoning is this...
I too believe that fuel costs are going to go out of control.
I also believe that the world as we have known it for the last 60 years or so, is going to change. The shift in currency flows and stocks ought to have a huge bearing on the global economy - particularly for the US. In addition, there is something propelling the Chinese story which is unseen by people yet.
However, I see that the basic assumption behind Warren's bet is that American consumerism shall return. What makes America so different is simply its multi-ethnicity and dynamism, strong political will and legal controls.
There shall be large-scale destabilization but America shall bounce back somehow.

The other thought that just came to my head was Warren's trade-offs whenever he makes decisions - that amongst margin of safety, large moats and sound businesses. He could possibly see information that people cannot.

Another thought was, that the railroad industry, even through a potential armageddon, shall be valued at a higher premium to other industries.
May be he wants to deploy cash before he retires or before he dies.
Another plausible argument is that going forward, this railroad shall earn a paltry return relative to current investments, but for the long run it may outrun other businesses that may falter. It's all about the long run baby!

Of course, the last option is always there.
He made a wrong decision!

I will end this note with something he had once said, possible 32 years ago (1977).
Quoting from the Snowball:

41 - And Then What?
"Giving stock in exchange .. was saying that they thought it would earn more in the future than whatever share of Berkshire, Buffett swapped for it. Paying with stock showed a sort of contempt for your own business versus whatever it was that you were buying - that is unless you were paying with stock that had gotten wildly overpriced."

So may be, he believes that BRK is wildly overpriced.
For the record, current share price of BRK-A $100,220.00

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