All investors are equal 20 SEP 2013

All investors are equal; some are more equal than others. In order to restore the common man’s faith in the stock market after the 1929 Stock market Crash, laws were passed to prevent insider trading. Insider trading is the trading of a company’s stock based on someone having access to non-public info about that company. The laws were meant to make all investors equal on what info they all had, otherwise why would Joe Public want to join in the competition. An investor’s edge would come from his or her analytical skills. The SEC was to monitor such things, so for instance, when trading was done when Texas Gulf discovered rich mineral ore, & it wasn’t public knowledge, we got the lawsuit SEC v. Texas Gulf Sulphur Co.
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I have seen inside knowledge of industry & property developments allow the rich insiders to make investments long before the rest of us know what is going to happen. Perhaps you have too. And you have probably seen people scrambling for tips, unfortunately much of the mass media’s tips are bogus & provide an investor with no info advantage although there are always little people suckered in. So the following story is rather interesting in illustrating how the rich get richer. Warren Buffett is said by the World to be the best investor. He sat on tens of billions of dollars from 2005 to 2007 held by his Berkshire Hathaway holding companies (BRK/A & BRK/B) without investing it. His tens of billions of dollars were not making money, & using your money to make more money is the easiest way to make money. Then in ’09-10 he bought the second largest freight railroad in America, the BNSF, for $44 billion for its remaining stock shares. (By the way, he also invested in Goldman Sachs.) He’d previously already acquired some BNSF stock. (BNSF is now its official name; the initials come from Burlington Northern & Santa Fe, a merger I think dating to ’61.) At the time, knowledgeable people around him said this was “crazy”, for instance, Bruce Greenwald said, “It’s a crazy deal. It’s an insane deal…Burlington Northern’s profitability is much lower than it looks…at $100 per share we think he has lost his mind.” Ask about his purchase of the railroad Buffett said, “It’s not natural for me.” Since when was Buffett interested in an old railroad enough to make BRK/A’s biggest deal of 4 decades?
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The BNSF railroad has basically a monopoly in areas of the Midwest for rail transport. It operates 1,000 trains per day. It transports Wyoming coal to coal burning power plants, & it ships grain for 1,500 grain elevators in the Midwest. Evidently, Buffett knew something else… that BNSF would soon get to transport crude oil!! North Dakota has been increasingly producing light crude oil and is the no. 2 oil producing state behind Texas. The ND Bakken & Three Forks shale formations are shipping out 600,000 barrels of crude oil per day. Before Buffett took over the BNSF the crude was going by pipeline. After he took it over, some pipelines were shut down, some more were built, but the big change was that his BNSF began hauling 68% of this crude oil to refineries on the coasts. Now bear in mind, the profits didn’t exactly fall in his lap… Buffett had to invest billions to improve the rail system & increase the railroad’s oil shipping capacity. In 2013, it was reported that he will invest $4.3 billion to improve the rail system, and $400 million (in 18 mo.) to increase his oil shipping capacity. In 2007 for the Williston Basin Crude Oil in ND there was 230,000 barrels per day piping capacity and no rail shipping capacity. The railroad began building up their oil transport capacity, so that BNSF by 2013 had 865,000 barrels per day rail transport capacity for Williston. Who would have guessed?
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When interviewed by Charlie Rose about why he bought BNSF, Buffett dodged mentioning about his oil transport profits (like over $5 billion before taxes–$3.37 after taxes in 2012), making me wonder why he wasn’t upfront about it all. He mentioned how a train equals 280 trucks & runs on a small amount of diesel. Sure, if one is competing against trucks, but his big money is being made replacing pipelines. Buffett says a railroad is a good asset to own in the 21st century…which suggests that perhaps there will be a decrease in truck hauling also. When Berkshire Hathaway Inc. acquired BNSF they had to pay a premium of $8.1 billion. They passed this expense on to the captive rail customers. However, captive rail customers have a legal right to challenge rates, and they didn’t like helping BRK/A pay for their purchase of BNSF, so they challenged the rate hikes to the U.S. Surface Transportation Board. The captive rail customers lost.
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Enbridge Energy wants to build a 600 miles pipeline to transport ND crude to Superior, Wisconsin. If the plans go thru it might be built by 2016 & would carry 20% of the crude. Buffett will still be carrying crude oil on his BNSF. All investors are equal; some are more equal than others!