The Truth Behind Warren Buffett's Billion-Dollar Railroad Bet

Warren Buffett had Berkshire Hathaway buy a railroad in the depths of the financial crisis. And exactly why he made this move will stun you.

Jun 22, 2014 at 11:35AM


Railroads break down. They cost billions to maintain. Questions about their future abound.

Burlingtion Northern Sante Fe Bnsf By Greg Gjerdingen

Source: Flickr / Greg Gjerdingen.

Yet in 2009 Warren Buffett decided to make an "all-in wager on the economic future of the United States," as Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) acquired railway Burlington Northern Santa Fe (BNSF) for $44 billion.

And in this major move we can see one critical truth that is often undiscussed when we consider where Warren puts his money.

The massive costs
Take a step back and consider in 2007 Buffett revealed his "dream business," See's Candy, required investments worth $32 million in total over the previous 35 years. But in "the meantime" its earnings came in at $1.4 billion. He went on to say:

It's far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

BNSF touts last year it made "a record $4 billion" in capital investments and it expects to make another $5 billion this year.

You'd be hard-pressed to say $9 billion spent over two years would describe a business as having "virtually no major capital requirements."

So has Buffett contradicted himself? Has he lost his touch?

The answer, of course, to both of these questions, is no. As it turns out, Buffett's billion-dollar bet in BNSF has been a stroke of pure genius, and the quote in the picture above from his mentor Benjamin Graham helps explain why Berkshire Hathaway is poised to reap billions from its investment. 

The intelligent investment
Let's revisit the words of Buffett's mentor, which Buffett reminded us of this year:

Investment is most intelligent when it is most businesslike.

Buffett loves cheap stocks, but he has also said, the price is simply "what you pay."


There are always stocks which are deemed to be trading at discount. For example at the end of 2005, Radio Shack (NYSE:RSHCQ) was trading at a staggeringly low 9.4 price-to-earnings ratio whereas the S&P 500 ratio nearly doubled it, hovering at 18. A simple glance would say it's a worthwhile buy when considering only the relative price. 

Yet since then, even with the Great Recession, the S&P 500 has delivered a total return of nearly 90%, but the price of Radio Shack has plummeted nearly 95%, from $17.78 to $1.38. Radio Shack offered a compelling price, but the underlying business was bound to fail.

Price was surely a consideration when Berkshire Hathaway bought BNSF, what Buffett really clung to was the business prospects offered by the railway. In 2010, Buffett described why he and Charlie Munger were excited about the future of BNSF, noting:

Both of us are enthusiastic about BNSF's future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year, BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That's three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.

Buffett didn't make the investment simply because the price was attractive. In fact, there's no mention of it. Instead, he saw the business offered by BNSF both was, and is incredibly valuable. 

Since 2011, its revenue has grown by 13% to $22 billion. And its net earnings growth is even more impressive, rising by nearly 30% to $3.8 billion.


But it isn't just the bottom and topline results which are eye-opening. Buffett also noted in the 2010 letter; "A little math will tell you that more than 11% of all inter-city ton-miles of freight in the U.S. is transported by BNSF. Given the shift of population to the West, our share may well inch higher."

And this year, he revealed he was exactly correct about its market share being able to "inch higher," as it stood at nearly 15% of all inter-city freight.

The price was compelling, but clearly the business -- like that offered by See's Candy -- was even more captivating.

The key takeaways
Does this mean Buffett suggests we should blindly make an investment simply because a company has a great businesses? Of course not, for Buffett himself has said, "a business with terrific economics can be a bad investment if the price paid is excessive."

What we must see when we make an investment, it that we shouldn't think we're simply buying a stock, but instead a business. And we must try to determine the relative value of both.

In Buffett's own words:

In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two. 

Ultimately, we're buying businesses. Not stocks.

Warren Buffett just bought nearly 9 million shares of this company
We can't buy shares of BNSF. But we can buy into a business Warren Buffett loves. Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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