The Warren Buffett Bounce

(See here) an MSN Money piece that reports:

Warren Buffett has been working on the railroads -- a good sign that you might want to, as well.

Now that the word is out, that the stock market investment genius has staked a large claim in Burlington Northern Santa Fe, we can watch for the "Warren Buffett Bounce" as others try to jump on the bandwagon. After the bounce, Warren Buffett would not even need to continue holding the stock. He could sell out and realize a nice tidy profit.

I seemed to notice just such an occurrence once previously. There was a company that I was interested in investing in except that I didn't have any money available at the time. I based my decision on things I can notice at a loading dock. For example, why would a customer, that normally has a smooth shipping department suddenly have a hard time getting trucks loaded? Nowadays, if they keep trucks waiting they face detention charges, so what would motivate them to pay these charges that impact the bottom line? Ask a few questions on the loading dock and you can find out a lot. Perhaps it was a change in management and it was not a change for the good. Or perhaps it is because of increased demand for the company's products and the company is finding it hard to keep up with the demand. If it is increased demand, problems meeting this demand (and increased detention charges etc) might dampen profits in the short term, but once the company adjusts to the new demand and returns to being a well oiled machine? Well I sometimes smell opportunity.

Anyway, I had identified one such company that I would have been interested in if I had the money. Evidently Warren Buffett decided (probably for other reasons) that the company was worth staking a claim in as well. Once word spread thst Warren Buffett had bought into the company, the value of the stock shot up. However something interesting then happened. Within a couple weeks word got out that Warren Buffett had jumped ship and sold all of his holdings.

Why did Warren Buffett jump ship? Had something changed that threatened the long term profitability of the company? Here's what I decided was the explanation. Warren bought into the stock based upon the price it was available at when he made his decision. Warren normally buys large stakes in companies, and it is probably pretty hard to keep such large investment movements a secret. Once word started leaking that Warren was getting in, other investment gurus within the loop started taking a look and following suit. The value of the stock started to rise. Then word hits the street, becomes common knowledge, and the price shoots up even more.

Now what about ole Mr Buffett? He identified a long term investment opportunity. However, due to his reputation, he is able to reap long term profits in the short term. Once the value of the stock (in the short term) reaches a price that he feels it should have been capable of reaching in the long term, he can sell his holdings and realize a nice tidy profit without having to wait. Nowadays there is not even a need for him to hold on for a minimum level of time in order for his profits to qualify for the long term capital gains tax rate. Even if his profits are realized quickly, they qualify for the current Dubyah Bush 15% tax rate on capital gains profits that are realized in the short term.

Warren Buffett almost seems to have the Midas touch, every investment decision he makes turns to gold. Kinda like a self fulfilling prophecy. He's got such a reputation for success that once he decides an investment choice is a good one, it becomes one.

I do take issue with one aspect of Michael Brush's (the author of the MSN Money piece) analysis of the prospects of competition from the truck industry. Michael states:

High fuel costs and new limits on how much time truck drivers can spend behind the wheel are hurting truckers, the railroads' chief competition.

First let's analyze the high fuel costs. Most truckers are now getting a fuel surcharge. The method of figuring the fuel surcharge varies a little bit, but most often it is based on so many cents per mile factored on a) one average or another of current fuel prices (sometimes national, sometimes regional, average price) and b) an average fuel economy for a large truck, most often the industry average which is about 6 miles per gallon. Now this surcharge is paid only on loaded miles not on miles traveled between customers while empty (commonly referred to as deadhead miles) so not every mile covered receives a surcharge. Also, if a trucker needs to take a longer route due to weather or something, no surcharge is paid on the "out of route" miles unless agreed to in advance. However, at least in my own case, I am able to significantly beat the "industry average" fuel economy so that with every increase in the price of fuel, I see a small increase in profits. My fuel economy is good enough that it covers my deadhead and out of route miles and still leave me with a modest increase in profits. Now I do not cheer about increased fuel prices. My family back home still has to pay the increased prices for gasoline like everyone else. However increased fuel prices do not impact the profitability of my business.

Some truckers, who insist on idling their trucks all night long even when the temperature outside is 67 degrees, who insist on driving a "pretty" truck like a Kenworth W900 that is 90% looks and 10% streamlined, who insist on driving 75 miles per hour when the speed limit allows it even though it only means they are going to have to sit a couple extra hours in the truckstop before they can deliver, well... yeah, these type of truckers are going to find it hard to compete.

Now, the increased fuel surcharges might affect the decision of the fellah in charge of deciding whether to ship by rail or over the road. However it is my understanding that the rail companies have followed the lead of the trucking industry and they now assess a fuel surcharge of their own. Those big diesel locomotives run on diesel fuel as well and they consume diesel at an awesome rate. Rail companies probably can beat trucking companies when it comes to price, however they can not come near to offering the dock plate to dock plate certainty of speedy, on time, reliable service. Back during the Clinton economy when freight was moving like gangbusters, and trucking companies found it impossible to meet freight demands, many customers were motivated to try and "go rail". The result? The railroads found it impossible to keep up with demand and freight was sitting loaded on box cars not getting moved. When too much freight starts moving by rail, it bogs the entire rail system down and NONE of the freight is moved efficiently.

What about the "new hours of service" regulations for the trucking industry? What is the impact? First let me state that my own experience is based upon being contracted with an outfit that already was doing a pretty good job on enforcing safe and "reasonably" legal operations. This is one of the reasons I stuck with the outfit I am contracted with for as many years as I have. It didn't take me too long driving a truck to come to the realization that there are not too many things harder then trying to drive a truck while tired. I wanted an outfit that I could make a good living with that also offered a good nights sleep with regularity. I found such an outfit and I stuck with them. It is important to note that the new safety regulations do not limit the number of hours truckers can drive on the road. The total number of hours driven is the same. What has had to change is increased efficiency in getting trucks loaded and unloaded so as to keep the freight moving. Well the changes are being made and the results are that life is getting easier being a trucker. Did the trucking companies have to change? Yes they did, however it is easier for a trucking company that was already motivated to operate safely to adjust then for one who insisted on operating as an "outlaw outfit". My own experience is that if I have experienced any decrease in the number of miles I can cover every week, and this is with almost UNREASONABLE enforcement of the new regulations, the decrease has been extremely minimal. I still get my 3,000 to 4,000 miles per week (depending on the freight I haul, shorter runs mean less miles but more profit per mile) because my outfit has adjusted.

*** In order to not sound like a hypocrite, I wish to point out that I still have a piece I am motivated to write where I will attempt to make the point that "unreasonable" enforcement of safety regulations actually results in less safe trucking. My opinion is also only based upon my understanding of what the Department of Transportation is CURRENTLY trying to do, not what they might be forced to do by the courts. More on this in my separate piece which is forthcoming.***

I will concede that the new trucking regulations, and enforcement, do make it difficult to get freight in and out of certain areas. Most often these are the large urban areas where environmental regulations are extremely restrictive and property values are unreasonable. The problem is for a trucker to find a place to park at night before he makes delivery the next morning. In some areas, I have noted that some of the truckstop companies, those that currently are motivated to expand to increase their profits, have actually been selling their property so that malls and condos can be built where the truckstop once stood. Not only are new truckstops not opening, truckstops that are expanding elsewhere are retreating from these areas. Perhaps the most difficult nut to crack under this concern is the New England area.

Perhaps the New England area does offer an area for railroads to expand into. However the economics do not favor the railroads even here. Railroad expansion into New England would be extremely expensive. However there is nothing ailing the New England market that a few new, strategically located, truckstops would not cure. The big truckstop firms are itching to get into the New England market. Once freight rates climb into unreasonable levels, New England corporations, and the employees who's jobs depend on the corporations, are going to demand solutions. While part of the solution might be railroads, that solution is going to require unreasonable levels of capitol. Meanwhile to solve the trucking problem the cost of investment is rather cheap with only a few truckstops, that could be operated at a profit, required. Do you think the railroad companies are going to be willing to invest hundreds of millions into New England when all the trucking industry needs to do is open a few truckstops to steal their freight from them?

My advice to Warren Buffett? Get out of rail while the getting is good. If things get too crazy in the freight business, he will still be competing with the private entrepreneur who can always buy a truck, put his name on the side, and provide more reasonable levels of service at a more reasonable rate then can the rail companies. It might be expensive to get into rail, but the "American Way", based upon a hope and a dream, still fuels the trucking industry.