Buffett's big railroad purchase may be yet another success

There has been more than a little puzzlement in much immediate media reaction to the biggest gamble yet by the low-key “Sage of Omaha.” In an age when high-tech industries often dominate business reporting, rail seems old-fashioned. Yet Buffett often invests in very traditional companies, complementing his image.

Old-fashioned rail moves freight with unique effectiveness. Buffett estimates the average freight train carries the load of 280 eighteen-wheeler trucks. A Burlington train moves a ton of goods 470 miles on a gallon of diesel fuel. Enormous capital investment and firmly established rights-of-way provide railroads with steady and reliable cash.

Buffett favors very big deals, and this is the biggest by far for him, substantially larger than his previous peak of US$17.8 billion for insurer General Re in 1998. Buying the railroad is also congruent with his announced decision during the recession to emphasize investing in America. Last year, he committed US$5 billion and US$3 billion respectively to Goldman Sachs and General Electric.

Railroads, which encompassed an enormous percentage of the total national workforce at the start of the 20th century, employ only a small proportion today. However, rail jobs are expected to expand steadily in the future.

The railroad workforce is markedly older than the overall national labor force, a point dramatically demonstrated in the research of Pasi Lautala, a scholar at Michigan Technological University. He notes that specialized programs in rail management and maintenance are almost nonexistent at U.S. colleges and universities today. Meanwhile, an aging U.S. population, auto congestion, and high gas prices are helping to fuel a return to passenger rail.

With the passage of time, economic evolution, and fundamental political reforms pressed in particular by Theodore Roosevelt, the early often deserved public reputation of railroad leaders as robber-barons has faded. In the 20th century other industries, in particular oil companies, generally replaced the railroads as primary focus of populist ire.

Today, expansion of freight rail is consistent with a steadily more global United States economy. Chicago is now the fifth largest container port in the world, after Hong Kong, Singapore, Shanghai and Shenzhen, China. Exceptional integration of rail with truck, ship and air transport explains the remarkable success of the Midwestern U.S. city.

Railroads in America are also historically rooted in dimensions reaching well beyond pure commerce. Abraham Lincoln, like Warren Buffett, projected a homespun down-to-earth image, but he was also an enormously successful corporate railroad lawyer. President Lincoln found time early in the Civil War to initiate the Transcontinental Railroad. He also emphasized rail transport of troops and supplies, primarily to help compensate for initial Confederate advantages of shorter interior supply lines and exceptional ground combat effectiveness.

The latest Berkshire Hathaway investment may also be part of a subtle succession plan, as Liam Denning has noted in The Wall Street Journal. Buffett is now 79 years old. All strong leaders are hard acts to follow, but his genius for spotting unrealized value may well be unique. A solid, substantial railroad asset may mitigate the uncertainty sure to follow his departure from Berkshire Hathaway.

Arthur I. Cyr is Director of the Clausen Center for World Business at Carthage College in Kenosha and author of “After the Cold War.” He can be reached at acyr@carthage.edu.

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