This is one of those things youll start to spot when you know the business

This is one of those things youll start to spot when

This preview shows page 106 - 109 out of 263 pages.

This is one of those things you’ll start to spot when you know the business you’re buying. If management is borrowing to build new track, you can decide if you think it’s a good investment. If they’re borrowing to buy companies, maybe they’re using debt to fund acquisitions that produce zero value to the investor but which get them a nice private jet so they can fly in style to visit their new factories. I agree with Warren Buffett that Burlington is building for the future, and I believe we’ll see ROIC rise as the new track and equipment get used. Will it happen in five years? Maybe. Maybe not. But it will happen. We don’t have to know when it will happen if we’re stockpilers. Most of us are net savers and investors for the next twenty years, so we can be patient. We’ll give Burlington a pass on the low ROIC number. But let me warn you: If you’re going to let a low ROIC slide because the ROE is big, you had better know why the ROIC is low. Don’t let a traitor in the CEO seat fool you. The second most important number to examine is the Equity Growth Rate, or Book Value Per Share (BVPS) Growth Rate—same thing. Book Value grows from earnings that don’t have to be spent to maintain the business. Its rate of growth is ultimately reflected in the rate of growth of the stock price, since the stock price will increase with the growth of real owner value. Here’s the page to look at for BVPS:
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You can see it’s nearly doubled in the last nine years. (Growth is calculated from some starting-point year that isn’t counted as a year in the calculations—you have to have a baseline. If there are ten years of data, there are nine years of growth data; 1999 to 2000 is the first year of growth on this chart.) Growing from $17.98 to $32.05 is about an 8 percent growth rate. (See Rule of 72, page 72). And it’s very consistent in a range around 8 percent. I don’t have to run ten-, seven-, five-, three- , and one-year analyses. I want to see how it’s doing over five-year chunks of time. It’s not so important what’s happening in one year. I can run the numbers if I need to, but after some time of doing this, I can just see it. So can you. Look. It’s obvious it’s growing its equity steadily. Good sign of consistency. Even though it’s 2 percent below our usual minimum of 10 percent, consistency is far more important, because consistent earnings in the past are a good indicator of consistent earnings in the future. It turns out there’s a very good reason for that consistency: Burlington shares a monopoly on shipping coal out of Wyoming with Union Pacific. Every day these two businesses load 30 miles of coal cars and haul them east far cheaper than any alternative. A good bet is that energy will cost more tomorrow than it does today. Forever. So Burlington Equity will grow as coal from Wyoming becomes more and more valuable down the road. We can’t say when exactly, but someday for sure. Check. (For the record, BNI is not just about shipping
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coal. In fact, the company transports an enormous variety of goods using its rails. These include consumer, industrial, and agricultural products.)
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  • Spring '20
  • Warren Buffett

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