What in the World Is Warren Buffett Thinking?

The new Form 13Fs are here! The new Form 13Fs are here!

Yes, Fools, it's that most wonderful time of the year (times four). The time Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) releases its quarterly report of changes in stock holdings. This is our chance to sneak a peek within the mind of the world's most famous investor, and catch a glimpse of what he's thinking -- and Buffett didn't disappoint.

On Tuesday, Berkshire filed its quarterly Form 13F-HR with the SEC, revealing a multitude of tweaks and fine-tunings to the Master's portfolio. In it, we see that Buffett is ...

  • Continuing to sell down stakes in CarMax and ConocoPhillips.
  • Paring back his holdings in Exxon Mobil (NYSE: XOM  ) , WellPoint (NYSE: WLP  ) , and Procter & Gamble (NYSE: PG  ) .
  • Closing out his positions in Norfolk Southern and Union Pacific entirely.

So … does Warren Buffett hate railroads?
Hardly. As you've no doubt heard by now, Berkshire is actually swallowing rival railroad Burlington Northern Santa Fe (NYSE: BNI  ) whole -- Buffett's biggest acquisition ever by a long mile.

This being the case, I suspect shareholders of Norfolk Southern and Union Pacific needn't worry that Buffett sees something wrong with their stocks. The more logical conclusion is that since he's placed his biggest bet on Burlington, he sees a conflict of interest in owning its rivals as well and that perhaps the Feds would, too. Or perhaps he simply believes that if the railroad he already owns is best-of-breed, there's little logic in diluting his success in owning it, by also placing bets on the railroads that he thought less worthy of his money.

You can make a related argument about Buffett's several non-railroad sales. Take the sales at Procter & Gamble for instance. Buffett's on record praising Procter & Gamble's purchase of Gillette. If he's selling down his stake in the stock, this could be happening out of a simple desire to raise cash, so that Berkshire need not take on more debt than necessary to fund the Burlington buyout

And yet, if Buffett's only purpose in selling off these stocks was to free up cash for the Burlington acquisition … that still wouldn't explain why he decided to increase his position in Wells Fargo (NYSE: WFC  ) and Wal-Mart (NYSE: WMT  ) -- or double his stakes in Iron Mountain and Republic Services. All of which he's done over the past three months. So clearly, raising cash wasn't the sole reason for Buffett's shifting his portfolio around.

And what about the oil?
That's the really interesting question this week. Buffett's sales of Exxon Mobil and ConocoPhillips stock do seem to suggest a bearish view on the near-term prospects for big oil. In fact, Buffett admitted last year that he made a mistake in buying Conoco at the top of the oil boom. It's curious, therefore, that with oil now trading in the $80-a-barrel range, Buffett's still a net seller of oil stocks.

Putting it all together
So here's where Mr. Buffett's trading activity has me puzzled: What, I ask you, is the key reason for buying railroad stocks?

I submit to you that you buy a railroad for one of two reasons: Either (a) you believe the U.S. economy is ready to rebound, that the need to move goods from place to place will increase, and that this will benefit the railroads, or (b) you believe that the economy is ready to rebound, driving oil higher and increasing the relative competitiveness and efficiency of rail, or (c) both.

Yet here we see Buffett buying a big railroad at the same time as he sells two of the biggest names in Big Oil.

What in the world is Warren Buffett thinking?
And this is what has me flummoxed. It's been nearly six months now since Warren Buffett told investors that the recession was over, that the economy had "sort of plateaued at the bottom," and was bound to rise again. But while his lips say "yes," the stocks Buffett's eyeing seem to say "no, I'm not convinced it's really over yet." Now Buffett has explained his sales of Conoco as a move to harvest tax losses, but is that all his sales amount to?

Do you see method in Warren Buffett's apparent investment madness? If so, we're all ears. Scroll down, and post your thoughts below.

Berkshire Hathaway, CarMax, WellPoint, and Wal-Mart are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Stock Advisor selection. Procter & Gamble and Republic Services are Income Investor choices. The Fool owns shares of Berkshire Hathaway and Procter & Gamble.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2010, at 4:00 PM, Melaschasm wrote:

    Some sort of carbon tax scheme would result in better performance for railroads and worse performance for oil companies.

    It is also possible that Buffet has decided he is not good at investing in oil companies, and will slowly get out of that industry forever.

  • Report this Comment On February 18, 2010, at 4:11 PM, denniscc wrote:

    perhaps its time to go green once the economy rebounds. perhaps oil does not have a chance to reach $140 a barrel again.

    i like the buy of the railroads.

    GO GREEN.

  • Report this Comment On February 18, 2010, at 4:59 PM, police12345 wrote:

    Perhaps WB is buying a major oil co. that will be the sole provider for his oil guzzling railroad. Someone once asked why he'd ever buy BNI - he's a kid at heart and he has a train set bigger than any other kid on the block.

    While teamsters may not like it, rail is the most cost effective method of transporting freight, oil, LNG (?) long distances. One train keeps 100 - 150 trucks off the interstate - less road damage due to weight - and fuel/operator costs are significantly less. RR tracks used to go to almost every major rural/urban community. Why not now? Let trucks pu/deliver freight shipments from RR freight hubs.

  • Report this Comment On February 18, 2010, at 5:53 PM, TMFDitty wrote:

    Good thoughts so far, folks. Thanks for sharing.

    Here's another (I'll be chewing over this conundrum for weeks):

    Perhaps the Burlington purchase is a long-term bet on the economic recovery (and agnostic on when it happens); and in contrast, the exit from oil is a short-term bet that the recovery may take longer to arrive than we think?

    In this way, it's a sort of bifurcated bet -- long railroads for the long-term, but short oil in the short-term.

    --TMFDitty, chipping in another $0.02

  • Report this Comment On February 18, 2010, at 5:57 PM, MagerMarketing wrote:

    We know that oil is not going down anytime soon, as the largest oil drilling company, NABORS INDUSTRIES (NBR), along with other large oil companies, (BP, STO, SLB), have begun negototiating with the Iraq government (who is strapped for cash), in order to make use of their abundant oil source. However, Buffett may be thinking of possibly making a merger with one of these companies, (not Exxon or ConocoPhillips, of course, thus the need to sell them), and therefore have a controlling stake within the Railroad/Transportation industry. He would not have a monopoly, obviously, but with such power, his stocks would be sure to rise, making him even richer.

    Just something to think about.

  • Report this Comment On February 18, 2010, at 5:58 PM, MagerMarketing wrote:

    We know that oil is not going down anytime soon, as the largest oil drilling company, NABORS INDUSTRIES (NBR), along with other large oil companies, (BP, STO, SLB), have begun negototiating with the Iraq government (who is strapped for cash), in order to make use of their abundant oil source. However, Buffett may be thinking of possibly making a merger with one of these companies, (not Exxon or ConocoPhillips, of course, thus the need to sell them), and therefore have a controlling stake within the Railroad/Transportation industry. He would not have a monopoly, obviously, but with such power, his stocks would be sure to rise, making him even richer.

    Just something to think about.

  • Report this Comment On February 18, 2010, at 7:42 PM, telfair wrote:

    Question? Does his railroad control mineral rights

    in certain areas and within range of his railroads.

    They own them out west so I was just thinking?

  • Report this Comment On February 18, 2010, at 9:03 PM, olehere wrote:

    I had a seance the other day and Warren's passed away alter ego came to pass... of course the alter ego died destitute so take his thoughts with a grain of ash. Remember, these are Warren's alter ego comments, they will not be kind, but they will be real:

    Warren got into hot water, actually boiling oil with his big petro investments. About the time that he had time to sit back and admire his oil, he realized that oil equals tech... me bad. The natural gas lateral fracing bonanza has changed everything. Everything that Warren knew dissolved - his face flushed and he realized that oil is a world he no longer knows.

    Warren bought a railroad - he bought some of each, talked with his buddy Bill, that bought into rail much earlier (and like his buddy that suggested buying Costco, he heeded Bill's advice) and decided that Burlington and Mr. Rose was the one he wanted to support. There is nothing wrong with railroads - it solves alot of problems. What you say? Well it gets rid of all the cash that I need to bury. Railroads are truly moatable, jeepers I thought oil was too... ugh.

    Another added benefit. A word in the right private meeting and I can get the stock split. I know what Warren has said about stock splits, but in reality he has changed his mind. He has not changed his public discussion. However, the BNI purchase has remedied that problem. The stock has split - that BNI board was relentless - Warren was happy, the board was happy, the market was happy and best of all, Warren's stockholders, those loving, long lasting fans get their due: a short term appreciated stock. Long term: who knows?

    What other questions did I have the alter ego???

    Hmmm... could only think of one more.

    Does Becky Quick have pretty legs?

    Yup.

  • Report this Comment On February 18, 2010, at 9:28 PM, eurotrash01 wrote:

    "And this is what has me flummoxed. It's been nearly six months now since Warren Buffett told investors that the recession was over, that the economy had "sort of plateaued at the bottom," and was bound to rise again. But while his lips say "yes," the stocks Buffett's eyeing seem to say "no, I'm not convinced it's really over yet." Now Buffett has explained his sales of Conoco as a move to harvest tax losses, but is that all his sales amount to?"

    Buffett did a nice job of explaining some seemingly contradictory things. Yes, the COP sales were tax related and the funds were placed back in investments which have advanced. Blah blah blah. But the key point I think you missed is that stock prices and where we are in the economic cycle have little to do with each other. I remember him pointing out that 1953 (54?) was a horrible year in for the economy, but the market had its best year in the past 60. He invests into big macro themes that play out over decades. Price is never cheap once the economy starts to improve, so he invests early. He needed to make some sales this quarter to make room for BNI, otherwise he'd have to issue more debt, further damaging the credit rating of the parent. The easier alternative is to ease off some equity positions and take heat from TMF writers for doing so. :)

  • Report this Comment On February 19, 2010, at 12:47 AM, fatkid19 wrote:

    Listen up; all you robber barons that think you know so much about making money, Buffet has made billons by having a product to sale. I am not surprise you guys haven’t figured it out yet. The reason that you haven’t come up with the very simple explanation to Buffet’s purchase is because you made your money on the work of others.

    Since I have kicked you enough, now I will give you a hint to the answer that you are so curious about. If you investigate history; what has railroads always provided? Obviously you were taking the fat kid’s milk money when that history lesson was being taught in elementary school. I will provide you two words so you can do some work for once in your life and figure it out.

    • Communications

    • Transportation

    If you still can figure it out post a response to the posting leave your name and number and I will get back to you with the answer for a price.

  • Report this Comment On February 19, 2010, at 9:06 AM, DrRoberts1 wrote:

    I find it hilarious that since Rich Smith can't figure out the Oracle of Omaha's strategy, Mr. Buffett must be losing it. Rich? Rich who?

  • Report this Comment On February 19, 2010, at 10:58 AM, thku4grace wrote:

    I find it hilarious so many still genuflect at the altar of Warren Buffet. Yes, he has had great success over an extended period of time. But if you listen to him long enough you will hear him speak of trades he's bungled over the years. I think this is another bungled series of trades. I believe Buffet has bought into the carbon tax and trade hook, line, and sinker. His error was investing where his heart was and not his brain. He simply overpaid for Burlington Northern and sold off Exxon and Conoco because they weren't green enough for cap and tax.

  • Report this Comment On February 19, 2010, at 11:27 AM, mikes234 wrote:

    I think the key to the interest in railroad stocks is just the predictable longevity of their business model. Is there any other business you can look at and say, "that company still going to be in business making a profit 80 or 100 years from now". I think the railroad companies fit that statement better than any other company you can think of. Wells Fargo is another company that should be around for a long time too.

    So, I think a lot of the moves Buffet is currently making are setting up Berkshire for the long term, long after he'll be gone. He knows that his time at the helm is coming to the end and he's making safe bets that will be paying dividends for a long time.

  • Report this Comment On February 19, 2010, at 12:58 PM, PositiveMojo wrote:

    Perhaps you should look at the decisions that Buffett is making from a global perspective. Oil and the dollar are tied at the hip. If the dollar strengthens, the demand for oil by foreign governments is going to slide.

    Nobody has a crystal ball and can tell what is going to happen to the dollar, including Warren Buffett. However, Buffett does NOT like uncertainty and the political environment in Europe and the U.S. is packed with uncertainty which directly impacts the dollar and oil. I think he is dumping oil because he doesn't like the risk in the current environment.

    Railroads are a safe bet. With BNI you have an asset with loads of real estate that is extremely stable with 2009 revenue almost the same as 2007. The property, plant and equipment went from $29B in 2007 to $32B in 2009. That shows expansion of their infrastructure during a deep recession - how's that for stable? Maybe someone is taking advantage of that cheap real estate? Hmmm...

    Also - Buffett loves retained earnings - which went from $11B in 2007 to almost $14B in 2009. Not shabby.

    And last but not least - if everything collapses Buffett can always hitch a ride on BNI back to Omaha :-). He likes trains.

  • Report this Comment On February 20, 2010, at 11:31 AM, readyever123 wrote:

    He grew up in a town that depended on trains. Seeing trains all of his life he feels he knows that industry better than most. With that feeling and knowing that people have a tendency to invest in things they like. Buffett is investing just like the rest of us. Buying things he likes selling things he doesn't like. Thus you end up with KO, Dairy Queen, Burlington, and Newspaper stock.. If you notice he seems to buy common sense stuff.

    People drink coke. "I think i'll invest in coke"

    People eat. "I think i'll invest in Kraft"

    People read newspaper" I think i'll buy into a newspaper"

    People ship products" I think i'll invest in railroad?

  • Report this Comment On February 20, 2010, at 6:03 PM, EdT102 wrote:

    Selling XOM and COP was a smoke. He is probably the biggest buyer of them now.

  • Report this Comment On January 28, 2011, at 5:30 AM, HoldenCaughfield wrote:

    I would consider vinyl the most secure investment within the collapsing western world.

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