2016: How much of BNSF's weakness is cyclical vs secular?

JONATHAN BRANDT: Testing. The railroad industry seems, right now, to be suffering from exposure to some of the weakest parts of the economy, with volume declines of varying magnitudes in coal, oil, sand, and metals. Even intermodal, usually a steady source of growth, has been relatively weak of late.

How much of the weakness is cyclical, how much is secular?

In the last 15 months, the other western railroad’s market capitalization is down by 30 — 35 percent — as projections of future growth have come down.

Is your estimate of BNSF’s intrinsic value down by a material amount during the same period, or is your view of the value of BNSF’s irreplaceable network unaffected by these short-term wiggles?

WARREN BUFFETT: Well, I would — certainly the decline in coal — which is a very important commodity — it’s about 20 percent of revenues — that’s secular.

Now, there’s other factors that may cause the line of decline to jiggle around. We had a very mild winter, and we went into the winter with utilities carrying unusual amounts of coal.

And ironically, part of the reason for that was that our service the year before had been bad and they’d gotten low on coal, so then they compensated by bringing in more than they needed, just to catch up. And because the weather was mild, electricity use was poor in the winter time. And so they continue, at this point, to have considerably more coal on hand than they would like.

So they are not only — they’re trying to under order what they will be using, and that has a little effect. But the decline in coal, for sure, is secular. And at 20 percent of revenues, that’s a significant factor.

But — and it’s true that the market, generally, got very enthused about railroad stocks a year or two ago, so they sold up a lot. And now that people have seen that car loadings are down and earnings are down, in some places, that equity valuations have come down.

We don’t — we love the fact we own BNSF. We think we bought it at an attractive price. We’d love to be able to buy a second thing exactly like it at that price. We’d do it in a second. We’d even pay a little bit more, probably.

But we don’t mark up, and down, our wholly-owned businesses, based on stock market valuations.

Obviously, stock market valuations are some factor in our thinking, but we are not marking our wholly-owned businesses to market because we know we’re going to hold them forever. And we regard BNSF as a very good business to hold forever.

But it will it will lose coal volume and, you know, it may lose in other areas, but it will gain in other areas. It’s a terrific and valuable asset, and it will learn a lot of money this year, but it won’t earn as much money as it earned last year.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.