Buffett's railroad investment shows long-term vision

WASHINGTON — Berkshire Hathaway's Warren Buffett, the fabled investor, has announced the biggest deal of his life: He will acquire the stake he doesn't already own in Burlington Northern Santa Fe, the railroad operator, for $26.6 billion and assume the company's $10 billion debt. At $100 per share, he will pay a 30 percent premium on BNSF's market value — in his words, "an all-in wager on the economic future of the United States."

Given Buffett's iconic power, the global recession and the conjectures on the future of U.S. capitalism, the move has triggered a fascinating debate. Has Buffett finally lost his marbles, as some point out, tying his empire to an old-economy, unionized company that transports a lot of politically incorrect coal at a time when people are salivating over smartphones and personal digital assistants?

No, he hasn't. To get a sense of what the railroad operator might be worth, I looked at the prospects of both BNSF and the rail industry; based on the company's record, I projected its future cash flows, discounting them to their present value. I agree with those for whom $100 per share looks expensive. At best, that value will be justified many years from now. So what is going on?

Buffett comes from the school of value investing started by Benjamin Graham and practiced with magical results by the likes of Phil Fisher, Walter Schloss, John Templeton and, more recently, Prem Watsa. The idea is that you focus on intrinsic value, not on the market's latest fad, and buy a company if it is undervalued. "While enthusiasm may be necessary for great accomplishments elsewhere," wrote Graham, "on Wall Street it almost invariably leads to disaster." Which is why value investors buy with the expectation of selling — in Fisher's words — "almost never."

In BNSF, Buffett has clearly valued the protection the company enjoys thanks to the huge costs of entry into such a capital-intensive industry and also because, in the age of environmentalism, railroad operators, which are three times more fuel-efficient than shipping by truck, can hope for a long life. True, the Environmental Protection Agency has placed mandates for lower-polluting locomotives on railroad operators, too, but the agency itself admits that those engines will not be fully adopted before 2030.

Since freight railroads will still be a fact of life in a big country that will continue to trade with itself, with China and with the rest of the world, Buffett is saying: However long the recession lasts, BNSF stock should do well for decades to come.