Issue of the week: The Sage is in a spending mood

last updated 8 January 2015

Warren Buffett is going on safari, said Dennis Berman in The Wall Street Journal. His prey: “big, industrial businesses with near-monopoly positions and solid sales growth.” Pretax annual income of at least $75 million and a market value of $5 billion to $20 billion are also musts. And because, in Buffett’s words, “America’s best days lie ahead,” U.S. companies get priority. The 80-year-old CEO of Berkshire Hathaway announced his acquisitive mood in his eagerly anticipated annual letter to shareholders. He also shared the glad tidings that Berkshire’s fourth-quarter earnings jumped 43 percent, to $4.38 billion, thanks largely to profits from Burlington Northern Santa Fe, America’s second-biggest railroad, which Berkshire bought in 2010 for $27 billion. America’s retail investors, who revere Buffett as “the Sage of Omaha,” are poring over the letter in the hope of profiting by following his lead.

They’re in for a disappointment, said Jack Hough in Marketâ€‹Watch.com. Unlike Berkshire, they don’t have $38 billion in cash. Nor do they have Buffett’s access to private deals. In the 27 pages (including attachments) of his letter, “Buffett spends only about four paragraphs on ordinary stocks,” primarily two he already owns: Wells Fargo and Coca-Cola. He then proceeds to write enviously of the freedom from investor scrutiny that private companies enjoy. And he “gushes” over the preferred stock he bought from General Electric and Goldman Sachs. Those were private deals unavailable to Main Street investors. Nor, for that matter, can they profit from Buffett’s favorite investment, Burlington Northern. He bought the railroad outright, making “the Berkshire purchase look less like a stock market endorsement than a means of escaping the stock market’s restraints.” Buffett obviously loves America. But he doesn’t seem to care for its public stock markets.

What does he see in railroads? asked Annie Lowrey in Slate.com. True, they’re “a 19th-century technology” burdened with “clunking machinery and crumbling infrastructure.” But they are also “dramatic engines of growth.” Freight trains are three times more fuel-efficient than trucks, and with track scarce and freight loads forecast to nearly double by 2035, railroads are ripe for the kind of investment that a financial powerhouse like Berkshire can make. Every dollar Berkshire invests in new track today will pay off in added sales in the future. And though Burlington is now private, other well-run rail operators are still available, said Joseph Lazzaro in BloggingStocks.com. Canadian Pacific should benefit from the same long-term trends lifting Burlington, and it’s also riding the global commodity boom, shipping coal and potash from Canada’s interior to its ports. “Look for the pace to quicken in 2011.” So even if you can’t invest like Buffett, you can think like him.