In Defense of Warren

Readers must make up their own mind. I still don't think the deal makes out that sense. Time will tell. A few emails.

Talked to ___ today and his friend who works for ____ claimed that the railroad industry will be a 25% roe industry, he had 30% of his net worth in BNI and thinks that Warrren stole it, and it’s worth 175-200. Didn’t get any details really, other than he just thought margins would rise substantially as we moved from trucking to rail.

and

Couple comments -

Part of the reason Buffett has invested in railroads is bc he has realized the economics and value proposition have for the industry has improved in the last 5 years.

As energy prices have increased, rail has become more competitive (my understanding). So if inflation comes, yes the energy costs will increase putting a headwind on Burlington margins/profits but doesn't that just make their value proposition more compelling? I think it could be viewed as this:

Prices double which is a good thing mainly bc several other big costs (like depr / PPE) is fixed so you'll see operating leverage but more importantly rail becomes more competitive which means volume spikes as people switch from truck to rail?

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Interesting. I dont have all the answers either of course. I was
surprised he used Berk stock though......to me all the evidence laying
around the scene points to him thinking BNI is worth a lot more than he
paid for it due to the price paid, his enormous enthusiasm, 40% stock
used of Berk which Berk itself may not be cheap but is not expensive
either, and again his enormous enthusiasm! The way he explained how
the deal unfolded makes me think he has been licking his chops on this
one for quite sometime, again though that is just my own biased
speculation.

Whether he is right or not on doing the deal (it being "accretive over
time" sort of speak) is another matter.....but he is almost never
wrong. Especially on a deal of this size....he has been wrong in the
past but generally on smaller deals.....this one is a biggie.

We all know he thinks very long term......so the short term reasons are
meaningless in my view (trying to jump out of dollars quickly,
etc......I find those to be additional factors but he bought it for one
reason...bc he thinks the after tax return on his capital will be
attractive in comparison to everything else he see's plus considering
the massive amount of capital he can put to work in this deal and the
control received). In the end, it is a bet on increasing prosperity in
America over time, just as he states. People can dig into and come up
with all kinds of theories as to why....and they will find the one's
that best suit their viewpoint of the world through their own bearish,
bullish, or neutral lenses.......but in the end the bet is that
royalties on transported goods will be a good business in the USA.

You miss the most important of all Berk stock deals in his post
though.....the big shoe acquisition (HH Brown, Dexter, etc.). That was
done with mostly stock as I recall and was a large
disaster.....probably the biggest mistake Buffett has ever made.

This is very interesting. The whole thing is fascinating. From Bloomberg:

Warren Buffett called Berkshire Hathaway Inc.’s deal to buy the part of Burlington Northern Santa Fe Corp. that it doesn’t already own an “all-in wager on the economic future of the United States.”

If so, it’s a survivalist bet. The railroad business is never going away, but it’s not going to lead the economy out of recession, either. Buffett has spent a lot of time in the last year burnishing his legacy by tackling Franklin Roosevelt’s role as the verbal antidepressant for this wretched economy. As I have said before, though, Buffett isn’t as bullish as he sounds.

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On CNBC Whitney Tilson made a case why it was a good deal. I thought his argument on cost of capital was very weak and heavy on rationalization. He is accurate that the cost of capital is really low but Buffett has never been about doing marginal deals because of that reason. It was that case five years ago (probably even more so because so many competitors were not getting financed from the government).