The seduction of Warren Buffett

Posted by Fred Frailey
on Thursday, November 5, 2009

I’ve been puzzled by the buyout of Burlington Northern Santa Fe. Warren Buffet has said many times that railroads make lousy long-term investments. “It [railroading] will never be a fabulous business,” he said once again last year. “It’s too capital intensive.” Then the chief executive of Berkshire Hathaway turns around and makes the biggest investment of his life by buying the 77 percent of BNSF (parent of BNSF Railway) that Berkshire doesn’t already own. What’s gives here?
I think Matt Rose got to Buffett, as he has gotten to so many people since replacing Rob Krebs as chief executive of BNSF late in 2000. Rose is simply the best Class I CEO out there today, and one of his distinguishing qualities is dealing with people. He finds good people, enthuses them, gives them a long leash to carry out their responsibilities, and holds them accountable for the results. Other railroad CEOs do this, but none better than Matt Rose, or for a longer period of time. And his latest people-handling feat, most likely, was to cause Warren Buffet to eat his own words and see Matt Rose’s railroad as a good long-term investment, despite everything that Buffett had said to the contrary. What a hat trick!
I’m going to reconstruct a chain of events. We begin on the afternoon of Thursday, Oct. 22. After the stock market closes, BNSF reports, not surprisingly, that earnings for the third quarter of 2009 were 30 percent below those of a year earlier, before the recession had started in earnest. Rose also delivers a not-so-rosy outlook for the rest of 2009. The next day, BNSF’s share price falls $5.50, to $79, a rather severe 6.5 percent drop.
The railroad’s share price had slowly been recovering from a drop off its all-time high of $114, set in June of 2008, reaching above $86 as recently as Oct. 19. But now here it is again in Wall Street’s penalty box. From Oct. 23’s $79, the price in days that followed drifts toward $75.
Rose told reporters this Tuesday that it took only 10 days from the time a buyout of BNSF by Berkshire Hathaway was proposed for it to be approved by the railroad’s board of directors, on Nov. 2. Count back 10 days from Nov. 2, and you go to Friday, Oct. 23, the day of that $5.50-a-share drop.
It seems obvious to me that Rose and Buffett hit it off from the time of Berkshire’s first investment in the railroad in 2007. BNSF never opposed Berkshire’s encroachment, nor did Berkshire try to exert any form of control over the railroad. Rose probably appreciated the frank advice he got from Buffett and enjoyed giving the older man an inside look of how a railroad is run. Rose must also have given Buffett his own vision of what BNSF could become over time. Like I said, Matt Rose has no peer in this business when it comes to getting people to think his way without their realizing it.

So on Oct. 23, what happened? Let’s just imagine. Rose and Buffett meet each other (Buffett was in Fort Worth that day). Well, says Matt, don’t you just love the lack of faith that institutional investors have in us? Buffett replies that big investors always think short term and always will, which is why they make so many mistakes. Buffett then raises the possibility of buying all of BNSF. Rose seizes the thought. Here’s your chance, he tells Buffett, because Wall Street just gave you another 6.5 percent price discount. You like bargains. Wait much longer and the economy will really begin to recover. Then my railroad won’t be so cheap. Your point is well taken, says Buffett; I’ll get back to you. And very shortly afterward, he did.—Fred W. Frailey (



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