Berkshire Hathaway CEO Warren Buffett is buying into the future, by investing in the past – but don’t confuse his latest acquisition for an eccentric billionaire’s bid on nostalgia. There’s more going on here than meets the eye. Buffett, one of the world’s most successful investors, isn’t an eccentric – having proven his near-uncanny financial savvy even in the midst of an ongoing, worldwide recession. While it may seem counter-intuitive on the surface, Berkshire’s new (as of early November) ownership of railroad giant Burlington Northern Santa Fe (BNI) could ignite renewed investor confidence in the American economy – and jump-start a renaissance of one of the country’s most historic icons.
At $26 billion, the purchase of the 131-year old, Fort Worth-based company marks the largest single acquisition in Berkshire Hathaway history – but for those that follow the minutiae of the Oracle of Omaha’s investment philosophies, this latest development is not wholly unexpected. In a widely-read October ’08 Op-Ed piece for the New York Times, Buffett couched his reflections of the financial crisis with a simple, two sentence maxim – ‘Buy American. I am.’ And it’s hard to get more American than a railroad investment. Rail transportation was an essential player in the late 1800′s push to settle the Western states, and although it has fallen out of vogue in the century since (due to the public embrace of automobiles and aviation), it still plays a crucial role in transporting goods across the country.
Coal, auto parts, consumer goods, agricultural and industrial products carried by rail add up to over 25% of the yearly US freight haul – a number that Buffett expects to rise in future decades as public demand for more cost-effective, environmentally-conscious business practices increases. Freight by rail offers numerous green benefits over other transport methods, such as the ubiquitous 18-wheel trucks now commonly used. Able to travel up to 470 miles on a single gallon of diesel, one freight train can supplant 280 trucks on the country’s highways – reducing our dependence on oil as a primary transportation energy source. This latest move proves that much like his investment in electric car company BYD, Buffett is banking on a green future.
But it’s not all philanthropy – railroads may be an eco-responsible solution to a potential energy crisis, but the purchase of BNI is a sound business maneuver as well. Much like Buffet, BNI has proven their resilience in a down market – reducing labor costs and total expenses (cut by nearly 1/3 in the last quarter) as the demand for freight dropped, while simultaneously investing in developing new technologies to improve the speed and efficiency of their fleet. These conservative management tactics have carried the company through the recession with a minimum of damage, putting them at an advantage when the economy rebounds.
“Never invest in a company you don’t understand.”
- Warren Buffett
For most mid-Western residents, the railroad is as much a part of everyday life as the miles upon miles of farm land. From the Union Pacific headquarters in Omaha, to the busy freight depots of St. Louis and Chicago, it’s hard to get anywhere without crossing the tracks. Given the visibility, it’s only a wonder that this type of large-scale investment hasn’t happened sooner (something that even Buffett finds puzzling). Rail may not have the market appeal of new tech start-ups or celebrity-endorsed automobiles, but Berkshire Hathaway isn’t interested in a flash in the pan. Buffett predicts steady growth over decades, not years – an example of his belief in stable, reliable long-term investments. By ‘buying in the trough’, Buffett is showing confidence in the future of the country’s economy – a move that will hopefully inspire other investors that the worst recession in recent memory is finally coming to an end.