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EScroogeJr (< 20)

Can I disagree with Buffett?



August 14, 2007 – Comments (7)

Usually I appload Buffet's decisions. Now, there is one exception. Railroads.

Here is the chart for BNI. 

What do we see? A very poor investment, if we remove the oil spike of 2004-2007. If oil did not cost $70 today, this stock would still languish as helplessly as it did from 1980 to 2003. If oil falls tomorrow, the reversion to the mean will put a very ugly red spot on Buffett's scorecard. It appears that the only investment thesis going for BNI in particular, and for railroads in general is that oil will stay above $50 forever.

Railroads have always hated by investors, including WB, and for a good reason. A railroad company has to pay for its roads. A trucking company gets its roads free from the government. Why play against a competitor who enjoys government support?

And now WB suddenly reverses his position. He says his research convinced him that BNI is a fabulous investment, so much so that he doesn't even mind buying it on the peak. A quote from Munger:

"WB and I hated railroads -- capital intensive, tough unions, heavily regulated, competitors (truckers) who have an advantaged position. It was a terrible business. We did change our mind last year and went in (with Burlington Northern Sante Fe Corp.). However, we did it too late. Man is too soon old and too late smart. We have now realized that they have huge competitive advantages versus truckers."

Sorry, Mr. Munger, how about formal logic? If truckers have an advantaged position vs. railroads, then railroads cannot have "huge competetive advantages" vs. truckes. Or, if you and Mr. Buffett were whong for these 40 years, and railroads do have these huge competetive advantages vs. truckers, how come they remained such a poor investment for so long? Is it just conceivable that you might be wrong now?

What I think really happened here is Berkshire has made a bet on the price of a commodity - oil. Some analist told them that the days of cheap oil are gone, and they came to believe that it will be totally different this time around - the same belief thay ridiculed so frequently during the bubble years. An indirect supporting evidence is Buffet's reluctance to part with PTR - apparently, he doesn't think it's a cyclical.

Berkshire investors should watch carefully if Buffett continues to go against Buffett's principles. 


7 Comments – Post Your Own

#1) On August 14, 2007 at 5:27 PM, leohaas (30.08) wrote:

"It appears that the only investment thesis going for BNI in particular, and for railroads in general is that oil will stay above $50 forever."

What is the indication that oil will drop below $50? A surge in supply? A huge drop in demand? I don't see it. Maybe Buffett is on to something!

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#2) On August 14, 2007 at 5:44 PM, ikkyu2 (98.21) wrote:

I think in the reading I've done about Warren Buffett, there's only one core principle he's always followed:  "Never lose money."  That's a pretty good one and I wish I were as good at following it as he is.


If Buffett's making a bet on a commodity price - and I don't agree with you that he is, necessarily - I might look real hard before I took the other side of that bet.

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#3) On August 14, 2007 at 5:52 PM, StockSpreadsheet (67.73) wrote:

Different times, different scenarios.  Truckers have the advantage of flexability, (they can go whereever roads go).  Railroads have the advantage of cost, (they cost less per ton of freight moved, even without oil at $70 a barrel).  In the past, (those 40 years you are referring to), cheap oil made the flexability of truckers an overriding concern.  I would think that now, with expensive oil, that the cost advantage of railroads has widened.  Also, in the past, with cheap oil, then coal wasn't such a hot commodity as it is right now.  With oil being expensive, a lot of utilities are looking into coal-fired power plants as being cheap sources of energy, (like TXU did until shareholder activists threatened to hold up the buyout, so TXU backed down.  If the buyout collapses due to current tight credit conditions, TXU could very well rethink its plan to scrap building all those coal-fired plants.)  Add in all that ethanol that has to be shipped cross country, (since it can't go by pipeline like oil does), and that adds a big new freight possibility for railroads, (since you need to move tons of ethanol from Iowa, (where it is produced), to Texas, (where it is needed for gasoline blends, if current proposed laws go through).  You also have all those shipments of corn from Iowa to California, (where a lot of ethanol plants are being built and where the state is mandating ethanol use in gasoline). 

High oil prices are probably here to stay for at least the next few years.   (The anti-market activities in Russia and Venezuela, the tensions in the Middle East and the rebel problems in Nigeria have lots of opportunities to crimp supply, while the growth of India and China increases demand.)  Same with the need to move tons of ethanol and corn.  With high oil prices, shipping by railroad can be cheaper than shipping by truck, so more freight gets moved through railroads, increasing their profits.  I think a good arguement could be made for railroads under current market conditions, (which is why my investment club recently invested in some railroad stock).   

Now whether or not this is a solid ten-year play, (which is supposed to be Buffett's minimum time horizon), then that I am not so sure about.  But for the next three years or so, I think it is a good investment and follows Buffett's philosophy of buying stocks on the cheap.

Just my opinion.  Time will tell if you are correct in your Buffett challenge or not.  Good luck in your investing.  May all your stocks be winners.


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#4) On August 14, 2007 at 5:57 PM, EScroogeJr (< 20) wrote:

People get used to things. 5 years ago it appeared inconceivable that oil could go up. Now it appears equally inconceivable that oil can go down.

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#5) On August 14, 2007 at 6:07 PM, MakeItSeven (31.67) wrote:

Oil will stay above $50, or most likely above $60, or even above $70, forever  (or until there is no more oil, whichever comes first).

Reason #1: OPEC.  They said last year that oil price around 60's was about right.  That was last year.  This year they think oil price should be over $70 to compensate for the devaluation of the US dollar.  In other words, if the US had been paying for oil using the Euro, then oil price wouldn't seem to increase as much in the last 6 years.  As it is, we can't use the US dollars to buy either gold or oil at cheap prices (like folks in countries without the devaluation).

Reason #2:  Peak oil

World will face oil crunch ‘in five years’

By Javier Blas, Commodities Correspondent

Published: July 9 2007 13:25 | Last updated: July 9 2007 13:25

The world is facing an oil supply “crunch” within five years that
will force up prices to record levels and increase the west’s
dependence on oil cartel Opec, the industrialised countries’
energy watchdog has warned.

In its starkest warning yet on the world’s fuel outlook, the
International Energy Agency said “oil looks extremely tight in
five years time” and there are “prospects of even tighter natural
gas markets at the turn of the decade”.

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#6) On August 14, 2007 at 6:25 PM, EScroogeJr (< 20) wrote:

Very tenuous. Opec? One foreign policy change (aka Saudi Arabia's 180 degree turn in 1982), and there is no OPEC blocking the road.  Supply crunch? A carbon tax on SUVs (after the election of Hillary of course), and we no longer need to import any oil. Or the opening up of Alaskan "never-to-touch" strategic deposits, and America becomes a net exporter, ready to provide oil to Saudis in case they need some extra.

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#7) On August 14, 2007 at 7:41 PM, MakeItSeven (31.67) wrote:

Saudi Arabia is running out of oil.  That's what the peak oil is about.  They can no longer increase oil production.

Gas tax, not just SUV carbon tax, is a good idea.   O'Neille supported the idea back in 2001.  That could have helped a little.

As far as Alaska goes, the last legislation fight was about an area which woud provide enough gas for about 2 weeks, IIRC. 

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