Warren Buffett: A strong rail system is key to US growth

Buffett believes in rail

Well I wouldn't bet against him. Warren Buffett, American investor and business mogul, who has purchased the US's second biggest railroad believes that the rail system is the key to the country's future.

When high-speed rail and mass transit are being fervently debated in the US, it is interesting to see one of the richest men on the planet declare that his "all-in wager on the economic future of the United States" (for the $34 billion purchase of Burlington Northern Santa Fe (BNSF), the US's second highest-grossing freight railway company) is essentially investing in a 200 year old technology.

While Warren Buffett has been dubbed as the 'Sage of Omaha' in investment circles, due to his amazing successful track record, there are those that think he's clearly gone off the deep end with his heavy investment in the railroad system, especially as it has suffered big drops in shipping and revenue during and in the wake of the recession.

When it comes to operating railways, the rationale is clear - a country's prosperity is dependant on an efficient rail system, but at the same time the country must prosper for the railways to do well. Without one, the other can't succeed.

So what is Buffett thinking?

The road to the future?

Speaking to USA Today, Buffett dismisses any idea that the 'Oracle' can no longer see and states that railroads represent the future.

They're, he states, best-positioned to haul the raw material and finished goods for a nation and economy that he insists are bound to grow. Unlike trucks, trains don't have to compete on congested highways nor do they have to depend on strapped governments to maintain infrastructure.

"They don't need the government to build them new highways and airports," he says in the interview.

"They've already invested heavily in their infrastructure and technology, and they plan to invest more to keep up with the growing demand.

"They're the only mode of freight transportation that can handle growth. What's not to like about that?"

Despite stimulus packages been put into the country's infrastructure in the wake of the recession, rail networks have suffered with Congress accused of ignoring requests for investment. All this is on top of figures from the US Department of Transportation that rail freight tonnage will rise 88 percent by 2035.

In 2007, the Association of American Railroads released a report stating that the industry would require investments of $148 billion for infrastructure expansion over the next 25 years to keep pace with the forecast demand. About $96 billion of those funds could come from private railroads.

With rail being an essential requirement for the near future, perhaps Buffett is on to something. In November when the purchase was announced, Buffett was quoted as saying, "Berkshire's $34 billion investment in BNSF is a huge bet on that company, chief executive Matt Rose and his team and the railroad industry."

"Most important of all, however, it's an all-in wager on the economic future of the United States. I love these bets," he said in a statement.

Buffett has previously slammed the state of the US economy, saying that it had "fallen off a cliff". However, with a host of stimulus packages from the Obama administration, the US economy appears to be clawing itself out of the depths... at least well enough for Buffett to have confidence in its recovery.

Over its long history, Burlington Northern has absorbed some 390 different railway lines  and now has over 51,000 kilometres of track, 40,000 employees, 6700 trains and 22,000 freight cars. It is one of the oldest US railway companies in the US, after being founded in Texas in 1839.

Relevant articles:

Warren Buffett: Investor Extraordinaire | L.A.'s mass transit failure | High-speed rail: Interview with Yoav Hagler

Timon Singh

Timon Singh is a graduate of Liverpool University where he received a degree in Social and Economic History. He has previously worked for BBC Magazines on BBC Who Do You Think You Are? Magazine, the publication for the popular genealogy show.

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