Warren Buffet's Berkshire Hathaway Buys over 10% of BNSF

[Bergie]

Here's a request directed to Michael & greyhound as well as LC & FM...

First, be respectful of one another. Stop the personal attacks.

Next, at some point you're going to have to agree to disagree on certain subjects. This beating a dead horse routine is really getting old, and I'm sure I'm not the only person who feels that way. It's very tiresome.

Please, try to get along.

Thanks - Bergie

[AnthonyV]

Michael:

I fail to see any nuance in your position at all.

My take from the discussion is as follows:

The position of some of the other guys is that Buffet sees the BNSF as a sound investment outright over other stocks due to the positive things the railroad is doing..

Your position is that the positive things that the railroad is doing were always there and that Buffet is buying the stock at a price the already reflects the positives, so there must be another reason. That reason is he expecting a downturn in the economy, and BNSF performance will improve because the loss of traffic will lead to higher profitability due to the whole operating curve phenomenon.

I apologize in advance if I misrepresented your or anyone else's position.

I am a numbers man like you are, and independent of anyone's position, the questions that naturally enter my mind after reading the material in this thread are as follows:

What number of trains are operating per day on the main lines on BNSF and other railroads?

How many main line tracks are there?

Where are the RR's operating currently relative to the economic optimum?

How many tracks would be needed to reach the economic optimum point?

Or, what reduction in the number of trains, tonnage, and gross revenue would be required to reach the optimum point? How about in terms of percentages?

What would prohibit Buffet & BNSF deciding to operate at the economic optimum point rather than waiting for a downturn?

I was hoping that cumulative knowledge all those who participate could shed some light on this.

I'm sorry if I offended you.

Good day.

Anthony V.

[MidlandPacific]

This raises a question (in my mind, at any rate): is it possible to simply price discriminate?  Or is the nature of a lot of the carried loads (coal, for example) such that a slight rise in price would cause a significant drop in the loads carried, producing a lower total profit? 

[MichaelSol]

Is Buffett betting on a downturn? Well, I think he has to be.

Maybe I'm wierd, but whenever I bet on something I usually hope it happens.

Anthony V.

This is why I see no point in repeating myself. To take the time to look up my comment, see what it says, and then spin it differently anyway seems to be a pervasive hobby on these threads. Good day.

 

[AnthonyV]

Is Buffett betting on a downturn? Well, I think he has to be.

Maybe I'm wierd, but whenever I bet on something I usually hope it happens.

Anthony V.

[MichaelSol]

However, while others were praising Buffet's purchase of BNSF as a signal he sees something positive as to where the railroad was headed, your position (maybe I'm mistaken) was that Buffet was probably betting on a downturn in the economy to reduce low-margin trafiic and congestion, resulting in moving the railroad closer to the economic optimum.

And my point was that certain strong points offered were in place quite some time ago, and if those were the specific motivating factors, Buffett was pretty late to the game. I don't happen to think he was. That does not say the factors were not strong points nor that Buffett does not know what he is doing, nor that he did not make a gadgillion dollars from investing, nor that Charlie Munger isn't a smart guy. It says the opposite, and somehow, as usual, "nuance" seems to be missing from these threads, foreclosing reasonable discussion.

Your response was that "they are pretty much doing now what they need to do now" to "relieve congestion and improve profitability."

I could see that was what you wanted to hear, and your response confirmed it.

Conceptually I understand whe Buffet might hope for a downturn BNSF wasn't doing anything to relieve congestion.  However, I don't understand why Buffet would hope there is downturn if in fact they are already making the investments to relieve congestion and improve profitability, as you stated.

I didn't say he was "hoping" for a downturn. I said there was good reason for him to expect that BNSF would be a good performer in a downturn. There is no point in repeating what I have already stated in some detail only to offer some new way of misinterpreting and distorting it.

 

[AnthonyV]

All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back.  My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.

Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now.

 

 

 I guess Greyhounds and the other guys are right - Buffet is on to something positive about the BNSF.

Anthony V.

Since no one said there wasn't "something positive", I had already gathered you weren't really interested in gaining "some insight", but were looking for something to argue about unless you heard what you wanted to hear.

And sure enough ...

Michael:

Sorry, but I didn't mean my previous post to be taken that way.  Somehow things normally said in a face-to-face conversation seem more confrontational when in writing.

I found your and Bob's comments regarding capacity and traffic facinating.  I was surprised at the low number of trains needed for maximum profitablility. 

However, while others were praising Buffet's purchase of BNSF as a signal he sees something positive as to where the railroad was headed, your position (maybe I'm mistaken) was that Buffet was probably betting on a downturn in the economy to reduce low-margin trafiic and congestion, resulting in moving the railroad closer to the economic optimum.

I have no idea how many trains actually run on the transon tracks or how many tracks there actually are. I am always receptive to discussions about railroad operations, so I was curious as to where the railroad is now vs the economic optimum and what would needed to be done to get BNSF closer to it, in terms of reducing trains or adding track.

Your response was that "they are pretty much doing now what they need to do now" to "relieve congestion and improve profitability."

Conceptually I understand whe Buffet might hope for a downturn BNSF wasn't doing anything to relieve congestion.  However, I don't understand why Buffet would hope there is downturn if in fact they are already making the investments to relieve congestion and improve profitability, as you stated.

Thanks

Anthony V.

 

 

[MichaelSol]

All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back.  My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.

Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now.

 

 I guess Greyhounds and the other guys are right - Buffet is on to something positive about the BNSF.

Anthony V.

Since no one said there wasn't "something positive", I had already gathered you weren't really interested in gaining "some insight", but were looking for something to argue about unless you heard what you wanted to hear.

And sure enough ...

 

 

[AnthonyV]

All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back.  My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.

Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now.

 

 I guess Greyhounds and the other guys are right - Buffet is on to something positive about the BNSF.

Anthony V.

[MichaelSol]

All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back.  My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.

Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now.

 

[AnthonyV]

Well, common carrier means they have to provide a rate. The key there is "a rate."

Like all businesses, railroads operate in a political environment. A railroad can't just up and announce, "we are not going to carry coal anymore" or something like that, or set a rate too high for it to be realistically carried.

It doesn't have to be draconian - can't the railroad announce gradual service cuts over time, 20 trains to 19 to 18 to 17 etc.?

Don't common carriers make service cuts and other adjustments to their service all the time?

Is a bus company a common carrier (e.g., Greyhound etc.)?  If so does a bus company have to provide me a bus if I show up to the bus terminal and the next scheduled bus is full?  Or do they tell me to wait for the next bus?

All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back.  My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.

Thanks

Anthony V.

 

[MichaelSol]

Well, common carrier means they have to provide a rate. The key there is "a rate."

Like all businesses, railroads operate in a political environment. A railroad can't just up and announce, "we are not going to carry coal anymore" or something like that, or set a rate too high for it to be realistically carried.

[AnthonyV]

If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be? 

Over capacity is not beyond economic optimum; capacity is a physical measurement under a specific set of parameters. It is not related to an economic measurement.

And economic optimum is not necessarily an ideal under all circumstances -- simply that economic risk increases beyond economic optimum (or below it for that matter), and there can be reasons to take risk, intelligently made.

Michael:

I meant to ask about reducing traffic, not capacity, in my earlier post.

As far as being a common carrier, what doses this actually mean?  Does this force the railroad to accept any and all traffic in such a way that the RR has to run say 20 trains per day over a line when it would prefer to run say only 16?  Could the RR tell the shippers we are only going to run our at economic optimum of 16 trains per day rather than our previous 20 and therefore your shipment will take longer to get wherever it's going?  Does being a common carrier remove any decision making regarding trains per day on a given line from the railroad?

Thanks

Anthony V.

 

 

[cordon]

Yikes!  I was thinking of buying a couple.  I know that's very inefficient, but I'm a BNSF fan.  And I'd be able to say they work for me when "Resource Protection" calls and reminds me about their strict no trespassing rules. 

Now the price has shot up. 

[AnthonyV]

If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be? 

Over capacity is not beyond economic optimum; capacity is a physical measurement under a specific set of parameters. It is not related to an economic measurement.

And economic optimum is not necessarily an ideal under all circumstances -- simply that economic risk increases beyond economic optimum (or below it for that matter), and there can be reasons to take risk, intelligently made.

????

Thanks

Anthony V.

[MichaelSol]

If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be? 

Over capacity is not beyond economic optimum; capacity is a physical measurement under a specific set of parameters. It is not related to an economic measurement.

And economic optimum is not necessarily an ideal under all circumstances -- simply that economic risk increases beyond economic optimum (or below it for that matter), and there can be reasons to take risk, intelligently made.

[AnthonyV]

Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?

BNSF is a common carrier.

So BNSF or any other railroad has to accept any and all traffic? 

Thanks

Anthony V.

[MichaelSol]

Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?

BNSF is a common carrier.

[Anonymous]

What CTL does is to transfer the burden of CO2 management from easy-to-regulate point sources to not-so-easy-to-regulate non-point sources, e.g. from one smokestack to a multitude of tailpipes.  In a power plant, all the carbon is combusted and sent up the smokestack.  In a CTL plant, most of the carbon is converted to liquid form, thus not a major source of CO2 until it is combusted in the vehicles. 

One cannot sequester CO2 in vehicles.  You can only try to make your vehicle more efficient in it's use of fuel.

Aha a glimmer of light, you are correct it will drive more fuel efficiency. Let me ask you this how do you think that the Feds and States collect their Gas Tax? Not at the pumps for sure, that's too hard, they collect it at the refinery or pipeline terminal. It would be similar with a Carbon Tax, it doesn't matter whether the fuel came from Oil or Coal.

I worked in petroleum retail for a few years, and yes the feds and states collect the fuel tax at the retail level.  There are a few states that have started collecting fuel taxes from the distributors in reaction to some Indian tribes that decided (with the federal courts' blessing) they no longer need to collect the state tax at tribal gas stations.

 

And despite the pollyanna-ish outlook that a CO2 tax will cause a transfer of modal choice from trucks and autos to trains, the reality is that people will continue to drive their own cars despite the added costs, and it still takes trucks to get the goods from dock to dock.  Remember?  US railroads have all but stopped serving retail outlets.  Do you really concieve of a future where railroads go back to the days of mostly carload consists?  For that matter, do you really expect a capacity constrained industry to forgo the import intermodal in deference to more TOFC?

I don't expect much more passenger traffic on the rails in say the next 20 years. Some, but not large amounts. If you believe that coal will disappear from the rails then there will be additional capacity on the rails for other items, mostly containers, TOFC is Carbon inefficient too much tare.

Let us not put so-called "carbon efficiency" ahead of overall supply chain efficiency!  The buck literally stops at the latter.

TOFC is more efficient than COFC or bi-modal, if it is the one way to get trucking outfits to ship their boxes by rail.  Sure, JB Hunt and a few other outfits are big into the domestic container, but most trucking outfits prefer the dry van.  If the railroads want their business, they need to cater it in a way the customer perfers, not how the railroad beancounters prefer.

That is real efficiency!

 

More than likely, a demand for greater trucking efficiency will lead to more liberal GVW allowances.

That doesn't help much, more tires on the ground add to friction, it improves the tons per driver ratio, but that won't be the biggest concern. Lowering speeds will help, whether that happens depends on exactly what the speed premium is in dollars. When the speed premium gets too high the shippers will mitigate by other means.

Again, if it improves ton/mile efficiency, it does help very much.  And per my comments on real efficiency, lowering speeds will end up hurting the economy.  We live in a time sensitive economy, "just in time" is the primary driving force in the consumer market.

Again, try not to think in terms of throwing the economic baby out with the carbonated bath water.

 

And of course, the most spectorial outlook for railroads from CO2 regulation is a reduction in coal hauling as the Eco Gestapo forces coal fired power plants to shut down.  And what coal is produced for CTL will come from more readily available local sources currently out of vogue due to sulfer content.  Gasification eliminates sulfer concerns, so there'd be less PRB coal and more Illinois coal used for these plants.

Actually if Europe is an example the big power companies will close a few of the least efficient plants and then buy credits, passing the cost on to their customers. 

You are aware that the average European electric bill is larger than that for the American equivalent?  Again, what is gained by all these cost increases?  How is that "greater efficiency"?  It cannot be quantified on the positive side, only on the negative side.  I think most average folks equate "greater efficiency" with lower costs, yet all the examples you've put forth so far go in the opposite direction.  Eventually the average joes are gonna figure it out......

 

Coal is currently the lifeblood of the rail industry, accouting for 40% of the business and much of the higher R/VC ratio's.  Thus there is an inherent contradiction for an investor to both desire greater CO2 regulation and put much of his egg collection in the railroad basket.  The two ends do not mesh.

After all is said and done, Buffett's BNI involvement is more likely to mirror his Coca Cola experience than his insurance successes.

There you go again, here are the correct percentages to the nearest whole percent based on 2006 Revenues.

BNSF    20%

UP        20%

NS        25%

CSX      25%

Interesting that the Eastern Roads are more dependant on coal the the Western Roads. I don't think the Ag or Chemical shippers or UPS, share your view that coal is the most profitable for the rails. 

Coal represents 21% of revenues and 44% of ton miles.  On BNSF it represents 57% of ton miles.  Your claim that intermodal can replace coal misses out on a few important points, mainly that the coal lines are removed from the main intermodal corridors.  We also have seen BNSF's investor reports - coal and ag are the biggest money makers, import intermodal the

[MP173]

"In that particular instance, a blind follower of Buffett would have done OK..."

Yes, plenty of investments did "OK".  

I am not sure here what you are trying to say, nor am I putting words in your mouth.  If we are still splitting hairs over Coke vs Pepsi...then I am moving on.  Also done defending WB and BH here...he certainly doesnt need me...

ed

[AnthonyV]

Thanks for the tips on the quote feature guys - I'll have to work on it.

Back to Buffet 

If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be? 

Would we advise a cut in capacity and if so how much?

Would we advise construction of new main line tracks and if so how much track and at what cost?

How would these alone or in combination affect the short and long term bottom line quantitatively, not qualitatively?

Maybe Michael could answer this: Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?

I'm not trying to argue here and I don't have any answers.  I have never worked in the railroad industry.  To me, a railroad the size of BNSF is an extremely complex network, one that I couldn't even begin to think about how to optimze. 

Thanks

Anthony V.

 

[MichaelSol]

Lets say you invested $10,000 in BH and $10,000 in Vanguard's S&P500 Index fund.  By the end of 2006 the BH stock would have been worth $284119.  The S&P500 would have been worth $88552.

Whoa there, I was talking about the choices made between Coke and Pepsi; as a "CAUTIONARY" note, not BH's overall returns. I did not, ever, state that BH did not generate good, great, or even phenomenal returns, and I am not sure why you are working so hard to put my remarks in that context, which is completely different than the specific point I made, for which I even used the words, "in that particular instance ...".

[MP173]

Come to think of it...perhaps I am cheerleading.  I like to think of it as admiration and respect, but I might be carrying the pom poms.

ed

[MP173]

 

The Coke Pepsi battle is currently all the rage in business schools as a case study; How did Pepsi win?

 

In that particular instance, a blind follower of Buffett would have done OK (and how many companies did OK over the last 15 years? Tons), or even very well, if the results are not compared with other leaders in that industry.

 

Well, lets see if I can cut and paste a little or if last night was an illusion.  For those of you that dont know, last night was the first time in 4 years that I actually used the quote function correctly.

No doubt the business schools have been busy studying the Pepsi challenge.  My guess is they have also been busy studying the Warren Buffett/Charlie Munger challenge which is how does one investment yield such a high return over such a long time?  Just what is their secret?

I went back and checked how BH did against the S&P500, which is the standard which large cap investments are measured against.  I chose 1988, since that was the year BH purchased KO, but if you want, I can go back to any year.

Lets say you invested $10,000 in BH and $10,000 in Vanguard's S&P500 Index fund.  By the end of 2006 the BH stock would have been worth $284119.  The S&P500 would have been worth $88552.

Look at those numbers again.  $284119 vs $88552.  To say those that invested with Buffett would have done OK is like saying John Wooden did "OK coaching UCLA during the 60's and 70's" . 

I dont know how else to say this.  Buffett/Munger have done a phenominal job.  Moreover, they have done it in an ethical upfront manner. 

BTW, the Vanguard funds are considered the best overall group of mutual funds in the industry based on their low cost indexing principals.  John Bogle and Warren Buffett, while having different styles are two men that changed the entire investment industry for the better.

Now, having said all that...BH future returns are certainly not guaranteed to outperform the market in the future.

ed

[MichaelSol]

I assume that the model is attempting to forecast the effect of changes in volume of traffic to unit cost.  Do you have specific studies that compared the forecast to actual results?

Personally, I've got some CN studies that look at that, but the basic model is taken from Ernest Poole, probably the single most authoritative source on railroad cost analysis, and he in turn does cite studies. As I recall, he was director of Transportation Research at Southern Pacific. His book, "Railroad Cost Analysis," remains useful to this day.

[jeaton]

I assume that the model is attempting to forecast the effect of changes in volume of traffic to unit cost.  Do you have specific studies that compared the forecast to actual results?

[MichaelSol]

Michael's  16 trains per day is a simplified figure, based on directional balance. It assumes fairly long running times between sidings and short sidings.

A sensitivity analysis on the effect of the number of sidings in a 120 mile division (which directly affects the running time between sidings), comparing distances between sidings for 12 miles, 10, 8, 5, and 4 miles shows little change to economic optimums, but there is a substantial correlation to capacity, as one might guess. The sidings exceed the maximum train length in all cases, so the model is a bit on the optimistic side.

I was thinking in comparision to the way that the CP(Soo) now has the former MILW between St. Paul, MN and Portage, WI. 2.5 to 3 mile long sidings, separated by 10-12 mile long single-track sections, trains between 6,000 and 9,000 ft. long. Train speed of 50 for regular freights, 60 mph for IMs, 70 to 79 for Amtrak, subject to curves etc. 

These would be pretty standard for modeling purposes; the speed limits can't be used, as the models incorporate average running speed between sidings. The standard models are pretty close to the truth for something like you describe, since the parameters are reasonably uniform and can be entered without modification. The usual process is to go out with the stopwatch and sample the trains, train size, etc., and come back in with the average time spent on sidings, how long it takes to get out, average speed to the next siding used, etc. and fit those into a specific model built from the specific track profile.

[MichaelSol]

I seriously dont know what happened to KO back in the late 90's.  You did make mention in one of your posts that Buffett left the board.  ...  Granted the stock tanked ...  

The Coke Pepsi battle is currently all the rage in business schools as a case study; How did Pepsi win? Buffet left the Board as Coke fell behind Pepsi, for the first time in history. Why? I don't know. But, Coke was touted by Buffett himself as a buy he was particularly proud of -- to the extent of going on the board. Maybe he got bored.

The question it raised for me is not whether Coke "did good," but that selection of companies for value necessarily compares each company with other companies in the same market, presumably with the idea of selecting the "best" company.

It took Pepsi 20 years, but it did it. It did a better job than Coke. Coke was punished in the stock market, yes. The stock market reflects value appreciation, or depreciation as the case may be.

That doesn't mean it didn't make money; it means that there was a better choice, or Pepsico did something better. And Buffett was in the management at the other place.

In that particular instance, a blind follower of Buffett would have done OK (and how many companies did OK over the last 15 years? Tons), or even very well, if the results are not compared with other leaders in that industry. But that's not really the measure of astute investing, is it?

And the point was simply cautionary. To assume every move is brilliant, and to thereupon ascribe each reader's pet favorite company strength to Buffett's decision making process, may not always overestimate Buffett, but it can in fact overestimate the company involved because, in essence, he is attempting to predict the future, and he would be the last to claim infallability.

You mention above that it's so easy to use hindsight. Buffett uses past performance to try and predict the future and he is one of the most rigorous analysts of past performance.

I don't think analysis of past performance is easy, but I do believe that measured hindsight is crucial to the outcome of the investing process.

 

 

 

[beaulieu]

Michael's  16 trains per day is a simplified figure, based on directional balance. It assumes fairly long running times between sidings and short sidings.

A sensitivity analysis on the effect of the number of sidings in a 120 mile division (which directly affects the running time between sidings), comparing distances between sidings for 12 miles, 10, 8, 5, and 4 miles shows little change to economic optimums, but there is a substantial correlation to capacity, as one might guess. The sidings exceed the maximum train length in all cases, so the model is a bit on the optimistic side.

I was thinking in comparision to the way that the CP(Soo) now has the former MILW between St. Paul, MN and Portage, WI. 2.5 to 3 mile long sidings, separated by 10-12 mile long single-track sections, trains between 6,000 and 9,000 ft. long. Train speed of 50 for regular freights, 60 mph for IMs, 70 to 79 for Amtrak, subject to curves etc.