Training Wheels

Why did Warren Buffet pay so much for Burlington Northern?

Buffett’s price locks him into a 5% return on equity, half of his normal target. He does get a lot of previously invested capital, and a solid energy-efficient freight transport business. He didn’t invest in some pipe-dream high-speed passenger rail system guaranteed to lose money.

But it’s fascinating to consider the personal issues.

When Warren was a kid, he longed for a multi-track Lionel train set. He never got it. After he got rich, he persuaded a friend to build him a super-deluxe multi-level diorama HO-model set. It’s still there in his attic.

Certainly, there aren’t a lot more deals left. When you have so much money to put to work, you need a pretty big transaction to move the needle. And in these markets, often the deal you do is the deal you can do. There’s also the issue of Warren’s legacy and his cheerleading the US economy.

Berkshire’s Burlington Northern deal seemed so out-of-character for Buffett that many analysts went scurrying trying to find a justification. Maybe he made so much on his deals last year that he feels that he’s playing with house money. But that’s not the way Warren usually thinks.

It’s just not clear what his thinking is.

Douglas R. Tengdin, CFA
Chief Investment Officer
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