Quote of the Day - April 16th

"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."- Warren Buffett on June 25, 1999 (Business Week)

Article: Buffett's new love (BNI)

from SmartMoney.com

Buffett's BNI Investment Is Worth Piggy-Backing

By James B. Stewart |James B. Stewart Archive |Published: April 10, 2007

WARREN BUFFETT ENDED THE suspense, disclosing in an SEC filing that one of the mystery companies in which he's been accumulating shares is Burlington Northern Santa Fe (BNI: 87.75, -0.24, -0.3%). Although this isn't one of the two companies — Deere (DE: 108.28, -0.62, -0.6%) and Caterpillar (CAT: 66.31, -0.64, -1.0%) — that I picked for him a few weeks ago, I can readily understand his reasoning, and it's not far off from the thinking that led me to the equipment makers.

Burlington certainly fits Buffett's stated profile. It's:

a) large (a market cap of almost $30 billion) b) with consistent earnings (five-year earnings growth at an annualized 22%) c) with a high return on equity (last year it was 19%) and low debt (long term debt is just $7 billion) d) in a business (railroads) that anyone can understand and e) enjoys high-quality management (its track record speaks for itself)

Of course these are characteristics shared by numerous large-cap companies. I suspect other criteria embraced by Buffett were similar to ones that influenced my thinking on Deere and Caterpillar — namely, that there aren't many competitors (after years of consolidation, railroads are pretty much an oligopoly) and large economies of scale which deter new competitors. Buffett has shown his fondness for oligopolies (and aversion to price competition) with his investments in Coca-Cola (KO: 49.92, -0.16, -0.3%) and Anheuser-Busch (BUD: 51.99, -0.10, -0.2%). Deere and Caterpillar also operate in markets with similar structures. Burlington doesn't quite boast the brand names that Caterpillar and Deere have, but both Burlington and Santa Fe have been around a long time and have wide recognition. (Footnote to history: Burlington began as the Chicago, Burlington and Quincy, or CB&Q — the latter being my hometown.)

What I really like about the Burlington choice, however, is the potential for growth based on long-term trends, specifically high energy costs and growth in the agricultural sector, both of which I've mentioned in this column. Buffett has a ringside seat for both, given his headquarters in Omaha in the heart of the corn belt. Railroads are both an energy-efficient method of transport and they haul the two biggest oil alternatives, coal and corn (and other agricultural products).

Railroads' main source of competition is the trucking industry, which has had limited pricing power thanks to high fuel costs, much of which they pass on to their customers. Burlington's net profit margins were at 12.5% last year, as high gas prices worked their way through the system. Even a small further increase would yield impressive results on the bottom line.

Burlington Northern's route system is well positioned to capitalize on the surge in corn production expected this year. That could lead to further revenue gains, which also fall impressively to the bottom line given the railroads' high fixed costs and economies of scale. Yet Burlington trades at a price-to-earnings ratio of just under 15 (based on 2007 estimates).

What's not to like? Many analysts have been fretting about the housing slowdown and a decline in lumber shipments. Others have worried that Burlington in particular and railroads in general are cyclical and that the economy is due to turn against it (they make the same arguments about DE and CAT). To me, that's missing the forest for the trees.

Railroads may be the embodiment of a "mature" industry, given how long they've been around. You're not going to find the dazzle and sizzle or explosive growth of a technology start-up, but that's not sustainable long-term nor is it the kind of company Buffett looks for. I think the Oracle is onto something here, and that this is an investment worth piggy-backing. Burlington Northern stock jumped on news of Buffett's interest, so I'd let the excitement cool off before buying. Other railroads to consider are CSX (CSX: 41.85, -0.11, -0.3%), Kansas City Southern (KSU: 36.76, -0.33, -0.9%), Norfolk Southern (NSC: 52.37, -0.37, -0.7%) and Union Pacific (UNP: 106.60, -0.91, -0.9%), one of which may be Buffett's other target.

Another Fool.com article on the Oracle...

Warren Buffett's Priceless Investment Advice

By John Reeves (TMF Bane)

April 7, 2007

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over a period of more than 50 years. Why try anything else?

Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. During the period from 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that same period, Berkshire Hathaway's average annual return from its stock portfolio outperformed the index by 12.24 percentage points. The efficient market theory predicts this is impossible, but the theory is clearly wrong in this case -- and as Casey Stengel said, "You can look it up."

Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Coca-Cola (NYSE: KO), Gillette (now owned by Procter & Gamble (NYSE: PG)), and Wells Fargo (NYSE: WFC). Indeed, his investment in Coke grew more than tenfold from 1989 to 1999, and his investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from soft drinks and razors?

The devil is in the details
So buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies and determining what constitutes a reasonable price. Buffett recommends that investors look for companies that deliver outstanding return on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands, like Coca-Cola, alongside consistent or improving profit margins and returns on capital.

How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true value of your undervalued shares, you begin to earn solid returns.

Do-it-yourself outperformance
Beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values before they'll be able to capture Buffett-like returns. In the meantime, one place to look for stock ideas might be among Berkshire's own holdings. According to The New York Times, the company has recently disclosed "its sizable new holdings" in ConocoPhillips (NYSE: COP) and Johnson & Johnson (NYSE: JNJ). Berkshire has also increased its positions in Moody's and American Express (NYSE: AXP). At the very least, you might consider taking a closer look at some of these stocks.

Found on The Motley Fool

Buffett's Berkshire buys big Burlington stake

Courtesy of CNN/Money

April 7 2007: 2:09 PM EDT

NEW YORK (CNNMoney.com) -- Warren Buffett's Berkshire Hathaway Inc. has bought a stake of more than 10 percent in railroad operator Burlington Northern Santa Fe Corp. that's worth about $3.2 billion, according to a filing with regulators.

The legendary investor's firm and its subsidiaries have acquired about 39 million shares of the Texas-based railroad, Berkshire Hathaway (Charts) said in an S-4 filing with the Securities and Exchange Commission late Friday.

Buffett is perhaps the world's most widely imitated investor.

Burlington Northern (Charts), based in Fort Worth, Texas, has about 358 million shares outstanding. The company's stock closed at $82.72, up about 1.3 percent, on the New York Stock Exchange Thursday. The stock market was closed for Good Friday.

The acquisition of Burlington stock is believed to be the first time that Buffett's firm has bought a stake in a railroad.

His other holdings include or have included American Express (Charts), Coca-Cola (Charts), Wells Fargo (Charts) and Chinese oil company PetroChina (Charts).

Buffett, 76, said in Berkshire's annual report released last month that he plans to hire a younger person - or perhaps more than one - to understudy him in managing Berkshire's investments.

Buffett said he will be helped in his search by Lou Simpson, 70, who has managed the investments of Berkshire subsidiary GEICO for more than 25 years, and by Berkshire's vice-chairman, Charles Munger.

At the end of 2006, Berkshire had $61 billion in equity investments; $28 billion in fixed-income securities; and cash holdings of $43 billion.

Air travel confirmed!

Awesome day today!!

With most of the securities-related issues being solved, I decided to purchase my ticket to fly to Omaha for the Berkshire Hathaway Shareowners' Convention. Northwest Airlines no longer offered me their low fare so I went with Continental for ~$300. I am very excited as it seems that everything is coming together for me to accomplish my dream and hopefully meet Mr Buffet.

Wells Fargo shareholder services returned my call and said that I had to go through my broker, Monex, in order to get my meeting credentials. Monex has called Berkshire and they have confirmed that I can attend!!!!!! I only need to show my brokerage statement and my id to get up to 4 passes! Anybody wants to go with me? The only information missing is the details to get into the international shareholder event for which I need special credentials. If Monex cant get them I will have to do it myself in Omaha. I know I can do this, besides I am a shareholder even if I only own 3618/167,380,000,000ths of the company. (0.000002%). I am a proud owner! wohoooo.

QOTD

“Risk comes from not knowing what you're doing.” -WB

A proud shareholder!

Mark the date: April 2, 2007. I have bought a share of Berkshire Hathaway BRK.B and now Mr Warren Buffett officially works for me :). I am very excited to have made such a progress in my dream. I made my reservation for the shareholders' dinner at Gorat's and will be purchasing my flight ticket tonight.

I had not experience such a passion for something since back in my early teens when soccer meant everything. I went on throughout high school without really looking forward, and even though I did really good, this lack of focus led me to some stupid years in college. I am very excited to have found what I had been looking for and to have the time to read and study more about it. I enjoy finance and investing very much. I have been buying and enjoying many classic investing books such as Graham's "The Intelligent Investor" and Lynch's "One up on Wall Street" among many others which I think I will be reviewing here for my future pleasure.

Back to Berkshire and my visit to the Oracle of Omaha, I think that I need to register with whoever is in charge of the shareholder services department, I am frustrated that there is so little information in the Berkshire website. I will continue working towards achieving my dream and will keep posting!

QOTD: “The investor of today does not profit from yesterday's growth.” - WB

BTW I Found a nice blog, The Intelligent Investor Club, it has a collection of the Chairman's letters, it is definitely worth a visit.