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Warren Buffett’s Large Acquisition (BNI, BRK.A, BRK.B)

warren_buffett

Warren Buffet

Warren Buffett has picked up one of the stocks I have championed before on this blog, railroad stock Burlington Northern Santa Fe (BNI).  Berkshire Hathaway (BRK.A, BRK.B) had previously acquired a sizable minority position in BNI, and Mr. Buffett must have liked it a lot because he decided to buy the rest of the company at a price of $100 per share (about a 30% premium from the previous days close).

In addition to the announcement of his largest acquisition ever, Buffet announced a 50-to-1 split of the Baby Berkshire shares, his class B tranche (BRK.B).  This announcement, he said, was so that he could offer the small investors some BRK shares, whereas before they couldn’t afford the high prices (somewhat of a contradiction to what he said a few years ago about how a stock split was stupid and would allow inferior investors to own its’ stock…).

This puts BRKB on the radar of both Mike and myself.  Previously, we both had looked at BRK as a favorable investment, especially during March when it had reached such a low level, however, the price was cos prohibitive. Now, Warren has offered me the chance to either accept $100 in cash for my shares of BNI, or some of his new, cut price, BRK.B shares.  And I am unsure how to act.

On the one hand, BRK is a one stop diversification stop.  It has exposure to banks, insurers, manufacturing, transportation, and a host of others.  It has a proven track record of providing its investors with outsized gains, and excellent capital preservation.  And it is the best way to ride the coattails of the one who is considered the world’s greatest investor.

On the other hand, Mr. Buffett is not a young man anymore.  I am aware that there are several remarkably smart people waiting in the wings at Berkshire, but it is a huge risk to assume that the company can continue its remarkable run without its point man at the helm.  His deal with Goldman Sachs (GS) during the height of the financial crisis was inspired and hugely profitable, but his similar timing with a similar deal with General Electric (GE) was less so, with the warrants he acquired remaining worthless.  Finally, BRK is highly leveraged to the US economy.  With this deal, Warren openly admits that he is taking a huge risk on the future of America, which he is undyingly positive about. Add to this his other positions and you have a company which is leveraged to a country with anemic growth, a declining currency, and a government with a huge debt load.

During the course of writing that last paragraph, I have convinced myself that I will take Warren’s offer of cash to the bank.  There are too many variables involved in Berkshire, especially as Mr. Buffett gets older.  I respect him hugely as an investor, I just think I can achieve a superior Sharpe ratio investing elsewhere.

Disclosure: Long GE, GS and BNI (pending the buyout)

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