Billionaires Who Love To Play With Their Trains

trains

Boys love to play with trains and investors are no different.

Billionaire Warren Buffett, the investment guru, and Microsoft founder Bill Gates enjoy playing with their train sets, too.

But theirs are real life railroad stocks.

So what should the dabbling of these two great money men in railways tell you?

One of the tried and tested key indicators of how an economy is growing is how much freight trains are shifting around the country.

Last year, the American railroads moved 2.5% more goods than the previous year, though the latest figure for December is down to 1.1%. Then that’s seasonally adjusted and the festive holiday accounts for a big chunk of non-activity.

Rail traffic sends economic signals

Statistics from the Association of American Railroads is not so reassuring.

The trade body reckons shipments have dropped 10.5% in a year.

The data covers the United States, Canada and Mexico rail cargo traffic.

Buffett snapped up the Burlington Northern Santa Fe Railroad in 2009, at the bottom of the recession, while Gates holds a large shareholding in Canadian National.

The thinking of both seems to be buying into railroads at the bottom of a market makes good sense when the economy starts growing and the money starts rolling in when companies need trains to transport raw materials and finished goods in and out of their factories.

In the US and Canada, rail stocks have posted decent dividends and made gains in diversification.

Why railroads are key economic indicators

When commodities dipped and factories needed less raw materials, car dealers were selling more vehicles and the type of freight simply switched.

Research by the Bank of America supports the view that a decline in railroad freight volumes indicates a recession is on the way, while an increase in freight on the move is more likely to point to a growing economy.

The bank does suggest that rail cargo is falling, but points out that short periods of decline are generally followed by a rally.

At the time Buffett bought Santa Fe, other investors thought he was indulging a passion, but it seems he was really setting up to profit from America’s eventual switch from recession to full steam ahead.

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