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Warren Buffett Loves Freight


Like all professional investors, Warren Buffett pays attention to the larger economy and is always looking for clues regarding future economic activity. These clues are known as “leading indicators” and, as it turns out, Buffett’s favorite leading indicator is freight. Specifically, Buffett loves rail freight.

According to Robert P. Miles, author of several books on Warren Buffett’s methods and career, including Warren Buffett Wealth: Principles and Practical Methods Used by the World's Greatest Investor; Warren Buffett is an ardent follower of a railroad industry freight index.

The American Association of Railroads (AAR) publishes the index titled Average Weekly U.S. Rail Carloads: All Commodities, among others. But, this one is particularly interesting to Buffett. It overlays the current year with the prior  three years of weekly activity in addition to showing a trend line for a recent peak year. It provides a quick, aggregate snapshot of the movement of rail freight within the supply chain. This freight represents some of the most fundamental raw materials near the top of any supply chain. To the extent that movement of these raw materials is increasing, one can infer that general economic activity may also be increasing.

So, how is the index doing in 2012? Per the April 2012 numbers, the index is now down for three consecutive months when compared with the same period of 2011. Fortunately, that is not the end of the story. The unusually warm winter has decreased the shipments of coal and a drop in U.S. grain exports has decreased the rail volume relative to grain. When we adjust for these anomalies related to coal and grain, the AAR tells us that rail shipment activity in the U.S. was actually 6.7% higher in April 2012 as compared with the same month in 2011.

Freight matters not just to those of us in logistics and supply chain management, but also to the Oracle of Omaha.

The complete AAR report can be found here: Rail Time Indicators: A Review of Key Economic Trends Shaping Demand for Rail Transportation

 

Posted by Ross Harris at 3:55 PM
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