Wednesday, November 18, 2009

Warren Buffett: Railroads a “100- or 200-year” opportunity

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Warren Buffett, chairman and CEO of Berkshire Hathaway and arguably the world’s most respected investor, recently appeared on The Charlie Rose Show on PBS. In a lengthy interview, Buffett talked mostly about his $26 billion acquisition of Burlington Northern and Santa Fe Corp. He exhibited a profound understanding of the railroad business, how it works, and what he, as an investor, expects, long-term. Following are excerpts.

warren-buffet-charlie-rose-.jpgOn why he bought BNSF: “I felt it was an opportunity to buy a business that is going to be around for 100 or 200 years, that’s interwoven with the American economy in a way that if the American economy prospers, the business will prosper. It is the most efficient way of moving goods in the country. It is the most environmentally friendly way of moving goods, and both those things are going to be very important. But the biggest thing is the United States is going to do well. I mean, we can’t move the railroad to China or India. They haven’t figured out how to do that. So you know, it’s sort of like if you remember that song about New York—we have to make it here or we can’t make it anywhere.”

warrenbuffettcharlierose-2.jpgOn the railroad industry being capital-intensive and regulated: “You spend money in this business regularly every day. You’re spending a lot of money to repair track, add rolling stock, whatever it may be. So it’s capital-intensive, and it is regulated, and it will continue to be capital-intensive and regulated. The service provided by railroads is so important in many ways. It’s the right way to move goods around the country to the extent that you can do it. And it’s far, far more attractive in terms of global warming than using trucks, for example. So it will be here, and if we get a reasonable return on the added capital investment—because it will take added capital investment—we’ll do OK.

On what he considers a good return on investment: “A reasonable return is good warren_charlie_rose3.jpgenough. Fifty years ago, I was looking for spectacular returns, but I can’t get them. We have $8 billion or $10 billion to invest every year. And we’re in the utility business, and it’s the same thing there. When we build electric generation or something of the sort, we shouldn’t expect a spectacular return. We’re building things that are essential to society, and people need our services. They really don’t have any choice in the case of the electric utilities, for example, and sometimes in the case of rail. And we should get a decent return on that—enough to encourage us to keep putting money into the business, but we’re not entitled to spectacular returns.

On the importance of coal to the rail industry: “We will wean ourselves off coal over time, [but] we can’t change the 40% of warrenrose-4.jpgelectricity generation that comes from coal next week or next month or next year. There will be more grain to move, and there will be more of all kinds—chemicals—or whatever it may be. There will be more things moving around this country 10 or 20 or 30 years from now.”

On the inherent efficiencies of railroads:
“Take a railroad like BNSF. They’re moving far more ton-miles of product with less in the way of people, less in the way of fuel. Railroads have become far more efficient over the years. There were a million and a half people employed in the rail industry after World War II. Now there are [fewer] than 200,000 in the United States, and they’re moving far more goods. So it’s really become efficient. You watch those 130-unit trains double stacked.”

On why he sold all his shares in Union Pacific and Norfolk Southern:
“I’ve done that just to facilitate the [BNSF] transaction. I think they’re good investments, and I would have held them if [the BNSF transaction] hadn’t happened.”
On why he invested in a major asset like BNSF: “Cash is always a bad investment. When people said cash is king a year ago, that [was] crazy. Cash wasn’t producing anything, and it was sure to go down in value over time. And then you always want to be sure you have enough. It’s like—like oxygen—you want to be sure it’s around, you know. But you don’t need to have excessive amounts of it around. We will always have enough cash around. But anytime we have surplus cash around, I’m unhappy. And we found a chance in the last year, thereabouts, to deploy [it]. We came in with something over $40 billion in cash. We have got about $20 billion now, and we’ve had some earnings. So, we’ve put a lot of cash to work. And I like that. I’d much rather own a good business than have cash. . . . [BNSF] is not a bargain, but it’s a good asset for Berkshire to own over the next century.”

Was the investment a hedge against the dollar? “You can say all assets are a hedge against the dollar. All you know is that the dollar is going to be worth less 10, 20, 30 years from now. I say "worth less." Not worthless. You want to watch that. [It’s] true of almost every currency I can think of. The question is how much it depreciates in value. But cash is not a place. We’ll print more of [it] in relation to the amount of goods that are moving. If we dropped a million dollars of cash into every household in the United States today, everybody would feel very good except the people that invested in things that were denominated in dollars.”

On his love of railroads and the model railway in his attic:
“I hope they don’t make me sell it for antitrust reasons.”

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