Buffett’s crisis bets outrunning his freight train

March 1, 2010

Warren Buffett’s annual missive to Berkshire Hathaway’s  shareholders is out. Among the usual folksy nuggets, the Sage of Omaha notes that he funded Goldman Sachs, General Electric and others at the height of the crisis.

The $21 billion invested is now worth a quarter more and yields 10 percent annually. Short term at least, that’s more than Buffett’s bet on railroad Burlington Northern Santa Fe is likely to deliver.

Berkshire has deployed a similar amount of cash to buy BNSF — some $22 billion. It has also issued stock. That’s why Buffett’s latest letter is partly a primer for the 65,000 new shareholders the deal added to the half million or so that Berkshire already had.

Even Buffett, though, admits that the decision to buy BNSF in November was a “close one”. The generous $34 billion price tag for the rail company’s equity looked even higher from Buffett’s point of view because he paid partly in stock. He and his investing partner Charlie Munger like issuing shares “about as much as we relish prepping for a colonoscopy”, the 79-year-old Buffett writes.

It’s an expensive, long-term punt on a capital-intensive industry: Buffett at the time described it as “an all-in wager on the economic future of the United States.”

Meantime the $21.1 billion invested in the past 18 months in Dow Chemical, GE, Goldman, Swiss Re and Wrigley — a combination of confidence-building injections and pre-agreed investments — has delivered more instant gratification.

Those holdings are now on the books at $26 billion, and they throw off $2.1 billion of interest and dividends annually.

Of course, as Buffett notes in his letter, crisis opportunities don’t come up that often. And Buffett made some of those deals knowing their success depended on the U.S. government bailing out the financial sector — which happened. That makes his comments about Berkshire not depending on “the kindness of strangers” a little disingenuous, especially given the firm’s big holdings in financial firms like Wells Fargo.

On the other hand, Buffett is justified in claiming that Berkshire’s financial conservatism — only marginally compromised by the BNSF deal — did make him one of the few suppliers of liquidity during the crisis. He took advantage, and for now those investments are shinier for his shareholders than his trains.

Comments

Goldman is a criminal enterprise and Buffett is a criminal by association.

Posted by Woltmann | Report as abusive
 

Not wishing to decry entirely a seeming earlier ability to “call” the markets correctly, the basis for which said ability I cannot with any certainty ascertain as being either skill or just luck, I must therefore revert to the common disclaimer that “past results do not imply or constitute a guarantee of future performance or profit” as a means whereby I can launch a critique of the venerable gentleman in question.
Warren Buffet has not only, to use his own phrase “taken an all in wager on the resilience of the US economy” via the Berkshire acquisition of Burlington, he has also placed a massive bet on the future prosperity and economic stability of China, which is not really the same game of roulette in my opinion.
I just hope for his and the Berkshire shareholders sake it turns out better than his earlier punt at shorting the US dollar a couple of years ago.
He seems to have missed the earlier lesson of his short dollar trade and has again ignored the fact that markets have a tendency to be “irrational” a lot longer than he can ever hope to remain solvent.

Posted by Shortsqueeze | Report as abusive
 

Warren Buffett likes trains – which isn’t a bad thing – and his pal Bill Gates is the single largest shareholder in Canadian National Railways, so it’s hardly surprising the sage of Omaha bought himself a shiny new electric train set to run under the tree at Christmastime. People nowadays look down on railroads: too much capital, too much labour, too much history, too much TOO MUCH. Mr. Buffett isn’t stupid, nor is Mr. Gates. Consider their investments in rail as something to emulate.

Posted by Gotthardbahn | Report as abusive
 

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