Buffet’s Buying Railroad Stock

Warren Buffet is the second richest man in America, and he got that position by investing wisely. His rules are pretty simple. He doesn’t invest in anything he doesn’t understand. He doesn’t invest if he thinks the stock is already fairly valued. He doesn’t invest for a quick profit. When a man worth multi-billions makes an investment move, his decision often offers others a lesson. The pilot fish feeds best when it watches what the shark does. Mr. Buffet is now buying US railroad stocks.

Mr. Buffet’s investment vehicle, his Berkshire Hathaway insurance company, has increased its holding of Burlington Northern Santa Fe Corp. to 39 million shares from about 37.4 million, according to recent SEC filings. That gives Berkshire Hathaway just under 11% of BNSF. Berkshire Hathaway paid between $81.18 to $81.80 a share for the 1.6 million share purchase which was executed on April 4 and 5.

Shortly after this news hit the media, a Berkshire Hathaway spokeswoman confirmed to Reuters that the company was also investing nearly $1.4 billion in two other railroad groups. The names of those groups aren’t known outside of Berkshire Hathaway, but the fact that Mr. Buffet is buying trains has helped the entire North American railroad sector. The sector has been the subject of takeover and buyout speculation for some time as the companies composing it are relatively debt-free with good cash flows and the rival trucking industry is more susceptible to rising fuel costs.

Indeed, one of the things BNSF does in large amounts is ship coal. As oil prices rise, coal becomes more and more attractive to those consumers who are able to switch (mainly utilities and manufacturing entities) from oil to coal. North America’s coal is located at some distance from a great many of these entities, and so, demand for BNSF transportation increases as oil prices rise.

Of course, smaller investors can’t always replicate the investment strategies of the big boys. The Berkshire Hathaway portfolio has a great many other stocks making is extremely well diversified. Also, Mr. Buffet’s pockets are very deep. He can handle losses that others cannot. By the same token, it’s a lesson in how to profit from rising oil prices without buying oil stocks. One can make a solid investment (and one presumes Mr. Buffet has done that based solely on his past record rather than on any detailed examination of BNSF’s books) indirectly as well as directly.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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