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Comment by johnohara | Hacker News Reader

BNSF has the best end-to-end rail network in the country. They spent big $$ improving infrastructure when others like the CSX were dawdling with their logistical systems (does anyone remember the backlogs and delays in TX and AL during the early 2000's that required federal intervention?)

The hidden gem in this deal is the investment BNSF made in laying 24cnt fiber next to their track in continuous 4" pvc. I've always felt the decision to do that was a reflection on just how well-run the BN was as a company.

Large-scale packets on the rails, small-scale packets in the pipe.

Berkshire Hathaway doesn't just invest in well-run companies. It invests heavily in the management of well-run companies.

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Buffett's bet is not on management, its on the dollar losing value b/c its being printed like mad to meet gov't obligations and it losing its place as the reserve currency.

Railroads can haul a ton of goods about 400 miles with one gallon of diesel. When the dollar devalues and gas goes to $5-$10+ per gallon, we will be reminded once again why he is the Oracle of Omaha.

Buffett has talked about coming inflation in his last two or three annual letters to shareholders. When we start having 10% annual inflation, the p/e on this deal will get better and better.

"The Green Back Effect" by Warren Buffett, NYT, 8/18/09 - http://www.google.com/search?hl=en&rlz=1C1GGLS_enUS346US.... (sorry for the indirect Google link, NYT redirects direct links to a tease subscriber only page)

I have to disagree, Buffett doesn't trade macro--he trades value. The (alleged) dollar devaluation may have been included in his analysis, but that's not the underlying rationale behind the trade.

At the most recent annual shareholders meeting:

Question: What is your latest outlook on the dollar given what's been thrown up in the air in the last 6 months?

Buffett: It's pretty unpredictable. I guarantee you the dollar will buy less 10-20 years from now. But we are doing things that will hurt the purchasing power of the dollar. On the other hand the same thing is happening in different countries around the world. The British will run a deficit of 12 and a fraction percent of GDP. Even the Germans will run a deficit of 6 and a fraction GDP. You've got governments around the world all electing to run very material deficits. Electiing to do that to offset the contraction demand. How that plays out in relative exchange rates - I can't tell you. In terms of currency's purchasing power in the future - it's going to cause units of currency to buy a lot less.That isn't gonna happen in the next year or two. Doesn't mean markets won't start anticipating it at some point. We are doing things that we havne't seen in the past. And policy makers do not know the outcome and I don't know the outcome. You do know it will have consequences and you can bet on inflation.

Munger: I remember the 2 cent first-class stamp and the 5 cent hamburger. In my life I think I've had the most privileged era to live. The trick is to avoid runaway inflation.

[http://j.mp/3z6gpr]

As I understand it, most economists (certainly, most economists whose opinions matter to central bankers) believe that a small rate of inflation, perhaps 1-2% annually, is a Good Thing, since it encourages savers to invest in productive companies rather than just stuffing greenbacks under their mattresses.

So "I guarantee you the dollar will buy less 10-20 years from now" is a pretty safe bet, regardless of the general political and economic situation.

actually it is sort of a myth that buffett ignores the macro.

he engages in a lot of macro trades if you look back.

here are some examples: berkshire's silver trade executed by Commodity trader Andrew Hall of Phibro, going long the brazilian Real, investing in Petro China, his past investments in more than one railroad... these are all investments that correlate with a kind of macro theme. they might not be the only factor, but definitely A factor in his investment.

No-one ignores the macro :) It's just that he loves to repeat he is not the macro guy.

When the dollar devalues and gas goes to $5-$10+ per gallon, we will be reminded once again why he is the Oracle of Omaha.

If he thinks that's going to happen, he should buy OIL ETFs, not railroads...

Wasn't the fibre next to track the way Qwest (original) was started?

That was Sprint (as in Southern Pacific Railway.)

This discussion prompeted a memory of this article from 1998 in Wired:

http://www.wired.com/wired/archive/6.05/qwest.html

Regarding the origin of the Qwest network: "Philip Anschutz, who owns more than 86 percent of Qwest - 55 percent of a combined Qwest-LCI - previously owned the Southern Pacific Railroad. When he sold the railroad to Union Pacific in 1996, he negotiated to buy the rights of way alongside the tracks of both railroads. Combined, they represent the cable route of a significant portion of the network. The rest of the cable is run along lines for which Qwest leases the right of way for up to 50 years, or along interstate highways, where it leases rights of way from transportation authorities for 20 or 25 years. Eighty-five percent of the Qwest network is strung along railroads."

The story I heard years ago is that SPRINT originally was an acronym for Southern Pacific Railroad Internal NeTwork.

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