Buffett Watch

Warren Buffett: 'Reasonable Return is Good Enough' for Long-Haul Railroad Ride

Warren Buffett says he's not expecting, and isn't entitled to, "spectacular" returns on Berkshire Hathaway's planned acquisition of the Burlington Northern Santa Fe freight railroad.

In a broadcast interview with Charlie Rose on PBS and Bloomberg, Buffett says a "reasonable return is good enough" and acknowledges that BNSF was "not a bargain" at $26 billion.

The railroad business is also regulated, capital-intensive, and unionized.

Despite those negatives, Buffett tells Rose that with "more people" in the U.S. moving "more goods" over the coming decades, energy-efficient railroads will "prosper" along with the American economy.  They're also protected from overseas competition.  "It was an opportunity to buy a business that is going to be around for 100 or 200 years."

Here's a transcript of Buffett's comments about the BNSF deal as broadcast on November 13, 2009, from an SEC filing last night by Berkshire Hathaway.  (The full video and transcript of the full almost hour-long conversation is available on the Charlie Rose Show web site.)

CHARLIE ROSE: You made some investments during [the period from the middle of 2008 to the middle of 2009].


CHARLIE ROSE: General Electric, Goldman Sachs.

WARREN BUFFETT: Goldman Sachs.

CHARLIE ROSE: But you just pulled out the big elephant gun (for Burlington Northern Santa Fe).

WARREN BUFFETT: Well, we may have used most of our powder on that one.


CHARLIE ROSE: You said I stretched to the last nickel for this one.


CHARLIE ROSE: Why did you do it?

WARREN BUFFETT: Well, I felt it was an opportunity to buy a business that is going to be around for 100 or 200 years, that’s interwoven with the American economy in a way that if the American economy prospers, the business will prosper. It is the most efficient way of moving goods in the country. It is the most environmentally friendly way of moving goods, and both those things are going to be very important.

But the biggest thing is the United States is going to do well. I mean, we can’t move the railroad to China or India. They haven’t figured out how to do that. So you know, it’s sort of like if you remember that song about New York— we have to make it here or we can’t make it anywhere.

CHARLIE ROSE: Frank Sinatra.


WARREN BUFFETT: But it does move 400 — it moves a ton of goods 470 miles on one gallon of diesel. It replaces — a train replaces 280 trucks on the road. It emits far less into the atmosphere that’s damaging than trucking, and it moves— I’m talking about the whole rail industry— it moves 40 percent of the goods.

CHARLIE ROSE: And you have new ports of entry like Houston that are bringing a lot of goods. . .


CHARLIE ROSE: . . . through the Panama canal.

WARREN BUFFETT: And we’re going to have more people in this country and they’re going to be using more goods over time. And sure, there’s a bad year from time to time. In the next 100 years, there will probably be 15 bad years, and I don’t know what order they’ll appear, but I also know the railroads will be essential to the country.

CHARLIE ROSE: Now, when you called Charlie Munger and said I’m thinking about this, did he say right on, Warren? Or did he say, how about this?

WARREN BUFFETT: Well, if Charlie said “right on, Warren,” I would figure I had the wrong number. No, that would be a wrong number.

CHARLIE ROSE: That’s not the likely reply.

WARREN BUFFETT: That might be my wife or my, you know — but Charlie gave kind of a low-level grumble, and that is a real endorsement from Charlie.

CHARLIE ROSE: But I mean, he also pointed out, it is said, that, you know, there was— this was a regulated industry.


CHARLIE ROSE: This was an industry that was capital-intensive.

WARREN BUFFETT: Very capital-intensive.

CHARLIE ROSE: This was an industry. . .

WARREN BUFFETT: You spend money. . .

CHARLIE ROSE: That was unionized.

WARREN BUFFETT: It was unionized. You spend money in this business regularly every day. You’re spending a lot of money to repair track, add rolling stock, whatever it may be. So it’s capital-intensive, and it is regulated, and it will continue to be regulated, and it will continue to be capital-intensive.

I think that what the service provided by railroads is so important in many ways. I mean, it’s the right way to move goods around the country to the extent that you can do it. And it’s far, far more attractive in terms of global warming than using trucks, for example. So it will be here, and if we get a reasonable return on the added capital investment— because it will take added capital investment— we’ll do OK.

CHARLIE ROSE: Reasonable return is good enough?

WARREN BUFFETT: Reasonable return is good enough, Charlie. I mean, 50 years ago, I was looking for spectacular returns, but I can’t— I can’t get them. We have— we have eight or $10 billion to invest every year. And we’re in the utility business, and it’s the same thing there. When we build electric generation or something of the sort, we shouldn’t expect a spectacular return. We’re building things that are essential to society, and people need our services. They really don’t have any choice in the case of the electric utilities, for example, and sometimes in case of rail. And we should get a decent return on that. Enough to encourage us to keep putting money into the business, but we’re not entitled to spectacular returns.

CHARLIE ROSE: You carry coal?

WARREN BUFFETT: Well, that’s a big one in terms of tonnage, yes.

CHARLIE ROSE: And if, in fact, we wean ourselves off coal, is that a big problem?

WARREN BUFFETT: Well, we will wean ourselves off coal over time. We can’t change 40 percent of electric generation that goes— that comes from coal. We can’t change that next week or next month or next year, but we will reduce it over times, and we should reduce it over time.

CHARLIE ROSE: And you can add other things to carry and changes will be. . .

WARREN BUFFETT: There will be more grain to move, and there will be more all kinds — chemicals— or whatever it may be. There will be more things moving around this country 10 or 20 or 30 years from now.

CHARLIE ROSE: Knowing your idea about moats, is it a pleasing idea that no one is likely to get into the railroad business?

WARREN BUFFETT: If they wanted to reproduce the Burlington Northern Santa Fe, it might take $100 billion or so.

CHARLIE ROSE: And 100 billion years.

WARREN BUFFETT: They’d have to be a real sport.


CHARLIE ROSE: And they are also modernized today, are they not?

WARREN BUFFETT: Enormously. Enormously. The railroads— take a railroad like BNSF. They’re moving far more ton miles of product with less in the way of people, less in the way of fuel. Railroads have become far more efficient over the years. There were a million and a half people employed in the rail industry after World War II. Now there are about— less than 200,000 in the United States, and they’re moving far more goods. So it’s really become efficient. You watch those 130-unit trains double stacked. . .

CHARLIE ROSE: You had other railroad companies in your portfolio.


CHARLIE ROSE: You’re selling them?

WARREN BUFFETT: I’ve already sold them. Yes. I’ve done that just to facilitate the transaction. I think they’re good investments, but I would have held them if this hadn’t happened.


CHARLIE ROSE: So if you look at Burlington Northern, is that— that was a big—that was a big sum.

WARREN BUFFETT: Yeah. And you don’t get bargains on things like that. It’s not cheap.

CHARLIE ROSE: But that was a bargain?

WARREN BUFFETT: No, it’s not a bargain.

CHARLIE ROSE: I didn’t think so. That’s what I’m asking you.

WARREN BUFFETT: No, but it’s a good asset to own for Berkshire over the next century.

CHARLIE ROSE: But does it restrict how many — suppose tomorrow a great thing came along that you didn’t know. Would you say, “oh, my God. . .”

WARREN BUFFETT: Well, it could happen. I mean, if the Union Pacific came along at half the price—you know, but I don’t worry about that sort of thing at all, Charlie.

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