More on BNI

Erin would like more on the Burlington-Northern deal. (Refer here to Bloomberg column on this subject.) The BNI strikes me as a classic Buffett way to solve a group of unrelated problems with one stroke. Uses capital in a way that will earn steady predictable returns more or less forever. Some people have described it as a bullish bet on the economy -- I disagree and think that Buffett is, rightly, making a bearish bet on the economy (although BNI will do fine either way). This is a company that will grow at the rate of U.S. economy plus. The plus in my view comes from continued trade deficit.

A lot of people have commented elsewhere on BNI's business mix relative to energy costs in various fuel types as being a competitive advantage. I agree to some extent. But if we get more nuclear plants, for example, as Obama suggested last night, or cheap fuel of any other type, the clean coal, oil, truck vs. rail argument becomes a lot less important. Clean energy has become an imperative. Berkshire is betting on electric cars. I don't think narrower considerations about which type of today's "dirty" energy is relatively cleaner is a fundamental reason for the BNI deal nor will it be the driver of BNI's economics. Energy may even become a risk factor some years out.

The deal ties up BRK's cash and borrowing capacity. If Buffett is hit by truck tomorrow his successor can't go wild and wreck the company through a bad acquisition (unless done with stock - which is something no one can control). This was probably, or almost certainly, not the primary thinking behind the deal but is a little added plus.

I have seen some analysis on the Internet by people who study railroad industry closely of BNI business mix, financials. Some of this analysis is very interesting and enlightening. I do think people in some instances are looking all the positives that are specific to BNI without considering negative scenarios for U.S. economy as fully as they should.

Buffett is complaining that the deal is expensive. Why? Two reasons. First, if he says that something is expensive, he's raising his public margin of safety. (This resembles the way he has spent decades downplaying Berkshire's prospects.) Number two, and this is more important, Buffett always considers trailing earnings in pricing a stock or business.  A lot of people value ONLY in terms of forecasted numbers. A good lesson from him is to make sure you are grounded in reality by pricing based on normalized trailing earnings. Comparing that to value based on forecasts can be revealing. (The past few years were not normal, which makes this task harder.) It may account for some differences of opinion that would cause him to be conservative. You can get to the same place by simply imposing a huge (somewhat arbitrary) margin of safety. Either way, he always takes a conservative view of the future.