Warren Buffett and trains

Berkshire Hathaway, Inc–Warren Buffett’s investment machine–recently announced plans to buy out Burlington Northern Santa Fe Corp for $26 billion. The web has been in a flurry: clearly this means that a) the economy is getting better and/or b) railroads are the future.

Buffett is fanning the speculation with his comments:

“It’s an all-in wager on the economic future of the United States,” Buffett, who has been building up his rail holdings for several years, said in a statement. “I love these bets.”

Maybe this is just sour grapes, but I lost my shirt betting on Burlington Northern during the early 1990s; I’m less sanguine. While timing is important in markets, nothing about the existing economy suggests to me that Buffett is going to get back the 31.5 percent over closing that he spent to get it, and while rail freight operations are better than they were, they still aren’t great, and there are infrastructure bottlenecks that keep the US companies from growing anymore. Burlington Northern already does a lot of trailer on flatcar (TOFC) shipping, and while it may be possible to capture more of that comparatively profitable market, one of the key questions will be how much more.

Matt Kahn suggests that Buffett is betting not on railroads but on higher energy pricing through carbon taxes. One of the commenters notes that the coal-rail connection will look a lot different with carbon taxes than the rail looks alone. This point is also made by John Kemp at Reuters: the marginal boost to rail freight could be easily offset by a marginal hit down on coal. Does anybody besides me wonder how big a carbon tax would have to be in order to prompt major shifts? I’m thinking big-ish.

In the end, I rather agree with Andrew Leonard at Salon Buffett likes to play with trains. I think it’s rather more than that. I suspect that Buffett understands and takes seriously his role as a financial thought leader. He is almost 80 years old (good for him). He wants to use his position as a thought leader to inspire hope, as he knows that perceptions matter more than reality in many aspects of investments and markets, and so he is throwing his weight and resources behind what he thinks are meritorious businesses: land in a dying Midwest city, freight associated with a lower carbon footprint industry that has struggled to turn a consistent yield, etc. on the hope that a turnaround will make these undervalued assets more productive again.