The world’s richest man just loves playing a contrarian-in-chief game, as he proves in his latest, almost-bet-the-farm deal on technology from the early 19th century.
The Oracle of Omaha (some say “Sage”) is a bricks-and-mortar kind of guy. At least that’s what investors in Berkshire Hathaway thought for more than four decades.
The man just kept on investing in the right companies, that made things people wanted and had their feet rooted firmly to the ground. But it seems Warren Buffett’s recent tripling of profits to a net $3.2 billion also shows his savvy in markets that he and multi-billionaire financier George Soros generally eschew – with much of the upside due to an unrealised $1.1 billion gain on derivatives from Berkshire Hathaway’s insurance units, as the cost of compensating clients for storm damage fell away. Now some market watchers fear the 79-year-old, who has led his firm for 44 years, may be in the grip of a numerology craze, having just paid $44 billion (his biggest acquisition yet) to buy American rail freight titan Burlington Northern Santa Fe, while selling his much smaller shares in two other railroads, Union Pacific and Norfolk Southern.
Burlington Northern comes armed with 40,000 employees, 6,700 locomotives, and access to hundreds of thousands of freight cars. Basically a good old-fashioned business with real revenues and real assets. But, instead of being impressed, Standard & Poor’s threatened to remove Berkshire Hathaway’s triple-A credit rating, because it fears the buyout will compromise the liquidity and capital adequacy of the company’s insurance operations. This was followed by a Burlington Northern shareholder lawsuit accusing the railway’s directors of rushing the decision to sell, and comes a year after Berkshire’s investors suffered their most calamitous year on record, resulting from the October 2008 market collapse.
Photo: Burlington Northern Santa Fe trains make their way through a rail yard in Cicero, Illinois November 3, 2009. Warren Buffett’s Berkshire Hathaway Inc will pay $26 billion to buy out railroad Burlington Northern Santa Fe Corp in what the billionaire investor called a bet on the U.S. economy. REUTERS/John Gress
Other observers say the railroad is a solid operating investment that turns genuine profits on real cash-flows, and has a real future. Buffett says the acquisition is based on the recovery of the US economy, whereby demand for goods will rise. But the Sage is also betting on economic recovery in China so that, along with the large volume of domestic freight that Burlington Northern controls, adds some big revenues for moving cheap goods from abroad, and China’s need to import bulk coal and corn, which Buffet’s new railway transports to ports that ship to the East.
While Buffett’s new toy is a bet on further global demand, spurred by global population growth and an increase in global wealth, it also affirms that the US will continue importing what the rest of the world manufactures. It sounds just like business as usual before last year’s economic meltdown, so we’re betting the old man has got it right again.
By Mark Allix