Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) deal to buy Burlington Northern Santa Fe (NYSE: BNI)
isn't the first time Buffett has invested in one of his lifelong
interests. His first childhood business was selling chewing gum, and he
put money into Wrigley last year. His second was selling Coca-Cola (NYSE: KO), and Berkshire Hathaway owns 200 million shares of that company today. Buffett's relationship with the bank Goldman Sachs (NYSE: GS), another investment, began when his father took him to meet the firm's chairman on a 10th birthday trip to New York City.
Does Buffett actually invest out of nostalgia?
Certainly,
he's a sentimental guy who's fond of the tokens of his past. He's also
frequently discussed the importance of a rational temperament in
investing. What, then, is the logic behind his choice to so often
invest in businesses that predate his own father and even his
grandfather?
Let's take railroads as an example. When Buffett was a little boy,
he had only a small, single-oval train set and used to "drool" every
year over the huge, multi-engine railroad diorama that the Brandeis
Department Store set up in the toy department every Christmas. One of
the fondest memories of his childhood was being taken to Chicago on a
train by his grandfather to see a Cubs game.
Buffett's hometown of Omaha was dominated by the railroad business;
trains became inescapably paired with finance in his mind at an early
age. Buffett, as a boy, read biographies of early tycoons like
Cornelius Vanderbilt, James Fisk, and Jay Gould, men who fought
ferociously to control the Erie Railroad's stock.
Another financier who interested Buffett, Jay Cooke, pioneered
modern investment banking and financed the Civil War debt of the Union
government. Cooke was bankrupted by his obsession to build the Northern
Pacific Railway. Buffett also became fascinated by the battle between
E.H. Harriman and J.P. Morgan to corner Northern Pacific's stock, which
caused the market panic of 1901 and is considered the greatest
short-seller squeeze in history.
A lifelong student
Studying stories like
this is one way Buffett has spent a lifetime scraping with his mental
lint brush to pick up every tiny fleck of knowledge about any industry
that attracts him. These are invariably the basic products and services
that many people would find boring, yet to Buffett they are not numbers
on a page, but exciting stories out of history peopled by lively
characters who are engaged in battles of will and struggles to prevail
against powerful economic forces through cycles of innovation, capital
creation, and destruction.
This kind of learning is one means through which Buffett worked out
the larger lessons of the railroad business, which began as a thrilling
new technology that connected disparate parts of the world, evolved
into a network of profitable monopolies, then fell out of favor as
cheap oil and regulators put a lid on pricing power.
When Buffett considered investing in electric and water utilities,
the history of railroads was a point of comparison that helped frame
the decision in his head. When he invested in energy and commodity
stocks, his deep knowledge of railroad economics helped him better
understand energy distribution. All along, Buffett had been studying
utilities and the energy businesses as well, so when he bought an
electric utility and two pipelines for Berkshire, that taught him even
more about railroads.
A simple lesson from railroads
For a
long time, Buffett had invested in railroads only when they were cigar
butts. Then they were deregulated, energy costs began to rise, and
railroads became profitable once again. Berkshire first announced that
it owned 10% of Burlington in April 2007.
Buffett has always said that if he likes a company well enough to
own its stock, it means he likes it well enough to buy the whole thing.
Eighteen months after the first announcement, that's just what he did.
It's interesting that even with an 18-month head start, the rest of us
have been scrambling since the announcement to catch up with the many
factors that influenced his decision.
© 2009 UCLICK L.L.C.
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