"Goldman Sachs is an exceptional institution ... It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."
So declared the Oracle of Omaha, Berkshire Hathaway
A little bit of history
As the financial world imploded, Buffett placed multiple multibillion-dollar bets on the belief that the world would not, despite all reports to the contrary, end. He purchased stakes in such firms as General Electric
As it turned out, Buffett was right about Goldman. The megabanker pulled out of its dive, threaded its way through the Great Recession and thrived, in fact. The company now sports a $170 share price -- 48% higher than the exercise price on Buffett's warrants.
And that fact should scare Berkshire shareholders silly.
Huh?
I'll explain. Buying Goldman stock wasn't just a smart bet on Buffett's part. It was also a bet on smartness. Buffett knew these guys were clever -- he said so himself. Yet as we saw last week, these very smart bankers at Goldman Sachs are taking a position diametrically opposed to the one Buffett himself advocates on railroads.
Unless you've been living under a rock, you've undoubtedly heard by now that Warren Buffett has bought himself a railroad -- Burlington Northern. Personally, I think it was a bum deal for Berkshire shareholders, but clearly, Buffett has a plan here. He thinks railroads have a future, and he's betting his reputation (and the fortunes of Berkshire shareholders) on the belief that railroads are destined to outperform.
Problem is, Buffett's star pupils, the folks with all the "intellectual capital" over at Goldman, appear to disagree with him. Initiating coverage on a raft of transportation stocks last week, Goldman dismissed the rail sector as an industry deserving only "neutral" coverage. Reviewing the sector, Goldman said it thought only Canadian Pacific worth buying, dispatched Kansas City Southern, Norfolk Southern, and Union Pacific with neutral ratings and a curt reference to "regulatory overhang," and tarred CSX with the dreaded "sell" label.
Rather than invest in railroads, Goldman argues, investors are better advised to set their sights higher, and buy into the air freight industry, which offers "international growth prospects, and faces relatively few significant regulatory headwinds." Goldman rates FedEx
Gushes Goldman: "We believe express package is poised to benefit from accelerating volumes, an improved pricing environment, margin expansion, and growing exposure to Asia." (In contrast, relatively few rail lines run from Sacramento to Shanghai.)
Surprises and ... not so much
Are you surprised to see two of the greatest minds in investing -- the genius Buffett, and the collective genius of Goldman -- diverging on their opinions in rail? If so, you shouldn't. The answer here is actually pretty simple.
A little more than three months ago, when Goldman was busy marking up its price target on Amazon.com
To my mind, Mr. Buffett's objectives these days are both less immediate, and offer less prospect for profit for Berkshire shareholders. As I argued last month, Buffett's primary objective at this stage of his life is "legacy preservation" -- ensuring that after his departure, Berkshire remains intact, does not fall apart, or have its wealth frittered away. All of these are admirable goals, and admirably accomplished by investing large sums of cash in safe, low-competition -- but low-growth -- industries like utilities and railroads.
Foolish takeaway
As far as preserving the legacy, and preserving capital, goes, I expect Buffett's railroad investments will do the trick. Just don't expect to see Berkshire post significant outperformance on these types of investments going forward. As Goldman suggests, that's not a smart bet.
