A different take on Buffett’s new bet

November 3, 2009

Michael Mandel of BW doesn’t think the Oracle’s purchase of Burlington Northern Santa Fe should be interpreted as a positive economic sign:

Let’s take a look at what Burlington Northern carries. Its major freight revenues (as of 2008) come from coal (23% of revenues); agricultural products (20%); international intermodal shipments of consumer products, which is probably mostly imports (16%); construction and building products (14%); and petroleum products (4%).

In essence, Buffett is betting that the next ten years will look a lot like the last ten: A lot of growth in imports, construction, energy and agricultural products. If he thought that innovation was going to be the driver of the next ten years—biotech, energy, and infotech—he wouldn’t be buying Burlington Northern.

I’m not saying that Buffett is wrong. His skepticism about the tech sector in the late 1990s, and innovation in general, turned out to be right on the mark. Berkshire Hathaway stock over the past decade has risen by 84%, whil the S&P 500 is down by 18%.

But his “all-in wager on the economic future of the United States” paints a remarkably gloomy picture of where we are heading.

4 comments

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I generally like your stuff, but interpreting Buffet’s action as painting a gloomy picture of where we’re headed is so goofy it’s not even in the ballpark.

Why would transporting imports, agricultural construction, energy etc products be indicative of a gloomy future? We’ll still be building houses, driving cars, eating dinners etc and we’ll need the means to transport thoses goods to market. So Buffet bought a RR business that will do that, a nice boring investment that has the potential for steady returns over time — typical Buffet.

The fact that he chose not to invest in Apple or Intel or Microsoft etc is no suggestion that firms of that ilk will not continue to innovate and prosper and help our economy grow. Buying a RR instead says more about Buffet’s personal investing style than it does about any ‘gloom’ going forward.

Posted by Bill, Fairfax, VA | Report as abusive

It is just as much a bet that the future will require just as much transportation of products as the past. If fuel prices surge for whatever reason the rails benefit, if cap and trade hammers the coal business it is likely to be offset for the rails by the same energy efficiency. If the future is with fuels such as Natural Gas, the rails have a greater ability to use all alternative fuels than trucking, because they are not subject to weight cost from the lower power density of the fuels. And of course there is always the already developed ability to be powered by electricity, if that proves to be the most economical method in the future.

Posted by John Beaulieu | Report as abusive

You are wrong when you say “In essence, Buffett is betting that the next ten years will look a lot like the last ten: A lot of growth in imports, construction, energy and agricultural products.” In fact, he is betting the exact opposite. He is betting on a Chinese economic recovery and the fact that, while he cannot control the coal mining industry itself, he can control its method of transportation. He is betting, quite correctly, that the US economy is effectively dead and has no future. There will indeed be an immense demand for coal, but it won’t be here. We are destroying coal-fired energy plants as fast as we can, while China is building them like there is no tomorrow. It is people like him who are the genuine danger for this country. We need to quit idolizing the wealthy and do something about it.

Posted by Gordon | Report as abusive

I think Buffett and GS are co-conspirators to make money by deception. Why the anouncement today ? The market was going to tank. Also GS longed Burlington couple of days ago and Buffett is in it.
Remember when he lobbied Obama to approve TARP? It was a stunt to make his holding in GS pays off.
That old fart is becoming a GS hit man.

Posted by Dr Georgy | Report as abusive