Warren Buffett's Testament
November 11, 2009
Alvaro Vargas Llosa
WASHINGTON—Berkshire Hathaway’s Warren Buffett, the fabled investor, has announced the biggest deal of his life: He will acquire the stake he doesn’t already own in Burlington Northern Santa Fe, the railroad operator, for $26.6 billion and assume the company’s $10 billion debt. At $100 per share, he will pay a 30 percent premium on BNSF’s market value—in his words, “an all-in wager on the economic future of the United States.”
Given Buffett’s iconic power, the global recession, and the conjectures on the future of U.S. capitalism, the move has triggered a fascinating debate. Has Buffett (a director of The Washington Post Co.) finally lost his marbles, as some point out, tying his empire to an old-economy, unionized company that transports a lot of politically incorrect coal at a time when people are salivating over smartphones and personal digital assistants (PDAs)?
No, he hasn’t—which is not to say the wisdom of his move is obvious. To get a sense of what the railroad operator might be worth, I looked at the prospects of both BNSF and the rail industry; based on the company’s record, I projected its future cash flows, discounting them to their present value. I agree with those for whom $100 per share looks expensive. At best, that value will be justified many years from now. So what is going on?
Buffett comes from the school of value investing started by Benjamin Graham and practiced with magic results by the likes of Phil Fisher, Walter Schloss, John Templeton and, more recently, Prem Watsa. The idea is that you focus on intrinsic value, not on the market’s latest fad, and buy a company if it is undervalued. “While enthusiasm may be necessary for great accomplishments elsewhere,” wrote Graham, “on Wall Street it almost invariably leads to disaster.” Which is why value investors buy with the expectation of selling—in Fisher’s words—“almost never.”
In BNSF, Buffett has clearly valued the protection the company enjoys thanks to the huge costs of entry into such a capital-intensive industry and also because, in the age of environmentalism, railroad operators, which are three times more fuel-efficient than shipping by truck, can hope for a long life. True, the Environmental Protection Agency has placed mandates for lower-polluting locomotives on railroad operators too, but the agency itself admits that those engines will not be fully adopted before 2030.
Since freight railroads will still be a fact of life in a big country that will continue to trade with itself, with China and with the rest of the world, Buffett is saying: However long the recession lasts, BNSF stock should do well for decades to come.
This deal, then, is Buffett’s testament of sorts. For years, people have speculated about the succession at Berkshire Hathaway, whose market capitalization is worth more than the GDP of one-third of the countries of the world. At 79, Buffett’s response has come in the form of the mother of all deals.
There is no short-term prospect of the deal enriching Berkshire Hathaway shareholders. Even if the perspective is the next 10 years, the price is expensive. But Buffett doesn’t think like mere mortals. Looking at least 25 years on, he is placing in the hands of his successor a legacy that will preserve and expand at a reasonable pace the wealth he has built over the last 44.
In a global economy dominated by change, Buffett is telling us, certain old-fashioned industries adapt just enough to maintain their “moat,” as he likes to call long-term competitive advantages, and survive the many businesses that capitalism’s “creative destruction” kills so that others are born.
The Financial Times’ John Gapper missed the point when he wrote that “as a judgment on the strength and prospects of the U.S. economy” the deal is not promising. Buffett is not saying that only 19th-century industries will prosper in the U.S. economy of the future, but that in a world characterized by uncertainty, in which the U.S. will continue to produce and trade, and therefore to ship freight, he has found a way to safeguard his investing legacy.
In an era of crazy bets, colossal hubris and unethical shenanigans on Wall Street, the world’s greatest investor has sent a message of humility, steadiness and responsibility—regardless of his political views. Most of us would not have paid $100 a share for Burlington Northern Santa Fe. But Buffett has proved everybody wrong for the last 44 years. I suspect he will do so again.
Alvaro Vargas Llosais Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His weekly column is syndicated worldwide by the Washington Post Writers Group, and his Independent Institute books include Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.
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