Berkshire Hathaway bought another 1.62 million shares of Burlington Northern Santa Fe (BNI) in the past few days, according to a recent filing with the Securities and Exchange Commission. If you recall, Buffett’s company disclosed in April that it had bought 39.03 million shares of BNI, sending the stock some 10% higher.
Months later, BNI regressed back to its low-80s price, right around where Buffett was buying. As you can imagine, he bought more.
There are few things more exciting than buying a stock and watching it run up quickly over the next few days. Then again, there are few things more gut wrenching than watching your stocks drop. That is, of course, unless you are a business owner investor.
What was Buffett thinking back in April-when he had moved some $3 billion into BNI and the stock jumped 10%? I can’t say for sure, but it was probably something like this:
Damn, I could only buy $3 billion worth. Now it’s too expensive.
Wall Street did its thing-it pushed BNI higher for a few weeks, profit takes jumped out of their stock (ignoring the business), and the price dropped back to Warren’s acceptable level. Time to buy a business again.
When the prices of your businesses run up in the short-term, lament it. It usually takes anywhere from 18 months to 3 years for a low-priced business to climb back to or above its value. In the meantime, you should hope that the price drops as low as possible so that you can load up. The lower the price, the more money you’ll make.
What’s the difference between buying BNI at $80 versus $88? If Buffett thinks the business (and hence, the stock price) will be worth $200 in five years (just guessing here), the difference is 2.3% in his average annual return-or roughly $681 million on a $3 billion investment.
Which would you prefer-a quick 10% gain or $681 million? I think we know what Bufett would choose.
Filed under: How to Think About Stock Prices
Related Stocks: BNI
Good evening all,
I am extremely new to investing and have been playing around with some of the fake trading sites. They, in my opinion, are a great way of “playing make believe”. I’m glad I started this way instead of the just jumping in considering what happened as soon as I started playing around.
First off, thank you Joe. Great blog. Second, I have been looking for the downloads talked about on this site (ie Excel files).
In response to this particular posting of “why WB is investing in Burlington northern” I BELIEVE it is for the following reasons. (I am NO WHERE NEAR conceited enough to even mention my name in the same paragraph as WB (and I’m pretty conceited))
BNI is a decent company on paper. Good earnings, looks pretty stable, etc etc. BUT it’s no huge stand out. There are plenty of companies out there with “paper financials”. So, what does the master oracle (WB) see? (hell, yeah I’m a brown nose)
According to my understanding, WB is very cerebral. He starts out thinking about where things will end up in the future. Not predicting stock price, but predicting (according to the progression of world affairs) which companies are likely to profit most. In the case of BNI, what the @#$ does a company with 19th century reminiscence have to do with today? (yes, ….I drank a pot of coffee).
Everyone knows that the world oil market is evaporating and that alternative energy is coming into it’s own. There’s no way to determine which company will be THE energy company to rule the future. BUT what happens to airplanes and trucks with the higher and higher transportation costs. NOT good things.
(I’m not even going to get into semi-conductors, mag-lev, etc). Trains, believe or not, are a very adaptable and economical way to transport goods. Regardless of which energy source comes to the fore a train can be adapted to use it. (massive solar panels, train sized batteries, ethanol, hydrogen fuel cells, cold fusion). The train, therefore, will benefit VERY nicely from alternative fuels.
I know everyone notices the investment of WB in BNI, and it’s a long position, but he also is buying Union Pacific railroads.
SO, before we pick up the calculator and figure out the value according to what the current state of the world is, lets think about the future.
Criteria that have been met for investment:
1. As previously stated on your site- RR have a huge moat which is established and profitable, not likely to be usurped, and not likely to be adversely affected by emerging technology.
2. RR are currently not even out of favor with the market….they are ignored, so people once again think WB is crazy.
3. RR are used in the transportation of everything regardless of the way the future goes. Basic materials, humans, produce, clothing, ….whatever.
4. RR appear to be safe and profitable, with an insurmountable moat, are profitable NOW with an antagonistic environment……imagine what will happen when businesses revert using them.
5. The current land dependent modalities will mostly disappear. It simply won’t be profitable to move goods with planes. Trucks, a massive industry, use way to much fuel as well.
In conclusion, this is the best I can do at this moment to introduce a hypothesis about the future profitability of RR according to a POSSIBLE WB way of thinking.
We all know WB hates risk, is highly successful, thinks well before he acts, and acts when everyone calls him crazy.
That also why he is just now investing in foreign stock. He said it himself. America is just as safe as the rest of the world now. And we know which countries will explode. (China and India) Now “what would Warren do?”
( REPLY )
I get an intrinsic value for BNI of $60.15. Has anyone else plugged in the numbers and computed an intrinsic value? I am trying to figure out if I have an error somewhere since obviously Warren Buffet must be coming up with a much higher intrinsic value than I am.
( REPLY )