Berkshire Hathaway (BRK.A) likely bought Burlington Northern Railroad due to the likelihood of extended depreciation of fiat money, and though it is starting ownership with an initial yield of only 4%, BRK.A will see the company retain value thanks to its capacity to pass down input-cost increases, says Christopher P. Bloomstran, President and CIO of Semper Augustus Investments Group LLC.
“Berkshire basically bought the rail at twice capital, a business that had earned 11% on capital in its best year…Berkshire has a track record of earning almost 20% return. So why would you start with a 4% returning asset? Well, it’s a business that if energy prices go up, if diesel fuel prices go up, they can pass through those costs immediately to customers with surcharges,” Bloomstran said.
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On reinvested capital, Berkshire will make north of 8% returns, and the company is in a position to think long term and invest in businesses and assets that will retain value in case of continued decline in global currencies, reflecting BRK.A‘s strategy of investing in solid, resistant companies, Bloomstran says.
“You are basically looking for things that consumers will consume regardless of the price, for businesses that are well-capitalized, properly profitable and well-run,” Bloomstran said. “Berkshire Hathaway is a collection of outstanding businesses that are largely unleveraged that are trading far below replacement or intrinsic value…It’s a collection of businesses that generate substantial amounts of free cash.”
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