Wow. That was fast. Back in March, I urged you to get into BNI at anything in the $60’s and below and I
hope you did because Warren Buffett just bought the whole thing for $100 (assuming the deal goes through.) The stock shot up 20% two days ago to $97. If you bought it when I said to buy it, you should sell it now. Your return on investment from March to November (7 months) is anywhere from 50% to 80%. Time to take the money.
I hardly ever urge people to invest in a particular stock at a particular price but Burlington Northern Santa Fe Railroad (BNI) was a special case of a monopoly going on sale. It doesn’t happen often. Usually monopolies are pretty obvious to the Big Guys and they bid them up. This is what accounts for the difficulty of buying a utility like Southern on sale, for instance. When it does happen, good investors pull the trigger and invest. So how did this rare event transpire?
BNI revenues are dependent on asian manufactured goods shipping into LA and the demand for Wyoming coal. The asian goods are predominantly retail. The retail market hit the skids so less shipping for BNI. The Big Guys, the fund managers, (short term thinkers all driven by fear of your withdrawals) bailed. Simultaneously, oil prices dropped like a stone and the demand for coal decreased. This decreased BNI shipping out of Wyoming and the Big Guys bailed some more. The double whammy of retail and commodities dropping resulted in the Big Guys bailing so hard that BNI dropped to well below 50% off its retail value. Monopoly on sale. Time to load up the truck.
By the way, the reason you should sell now is that today the upside potential for BNI is the difference between the price Buffet will buy it at, $100, and the price its at today, $97. That’s $3. About 3% potential increase. And if the deal doesn’t go for some strange reason, the stock will likely return to its pre-offer price in the mid-70’s, down $20 or about 20% lower than today. So look at the risk/reward ratio. If the investment goes good, you make 3%. If it goes bad, you lose 20%. Why would you risk 20% to make 3%? I have no idea. So we use a bit of short-term thinking and apply it to this situation and make a simple decision to sell. This is investing with Rule #1 in mind: Don’t lose money.
Now go play.
Phil Town
