- Warren Buffett and Cathie Wood are polar opposites when it comes to their investment styles.
- A sector the two investors can’t agree on is railroads, with Ark naming the sector among its list of “bad ideas.”
- “I’ll venture a rare prediction: BNSF [Railway] will be a key asset for Berkshire and our country a century from now,” Buffett said in his annual letter to shareholders.
It should be no surprise that Berkshire Hathaway’s Warren Buffett and Ark Invest’s Cathie Wood are polar opposites when it comes to their investment styles.
Buffett has a history of successful value-based investing, judging a company by its current fundamentals and profit margins rather than looking far out into the future for big growth. Meanwhile, Wood has found great success by concentrating her investments in disruptive innovation, companies that are laser-focused on growth at the expense of profits.
This dynamic between the two was on full display last week after Berkshire Hathaway released its annual letter to shareholders, which touted a sector that Wood see’s no future in: railroads.
Buffett called his firm’s ownership of the Burlington North Santa Fe Railway one of its “four giants” that has a promising future ahead despite it being an old-economy business that can trace its roots back to 1848.
“BNSF continues to be the number one artery of American commerce, which makes it an indispensable asset for America as well as for Berkshire. If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar,” Buffett said in his annual letter.
BNSF Railway, which is the largest railroad in America by revenue, reported record earnings of $6 billion in 2021. And Buffett expects that record to be continually broken for many years into the future.
“I’ll venture a rare prediction: BNSF will be a key asset for Berkshire and our country a century from now,” Buffett said.
But Wood’s Ark Invest sees the railroad business differently. Ark in its Bad Ideas Report called it a “bad idea” that investors should avoid as it is ripe for disruption.
That disruption, according to Wood, will be driven by the adoption of autonomous electric trucks that will “compete cost-effectively with freight rail and will offer better, more convenient service.”
The potential convenience and cost effectiveness of autonomous electric driving trucks should help reverse the market share gains and pricing power railroad companies have gained from truckers since the early 2000s, according to the report, leading to the potential value destruction of $400 billion in fixed assets.
“The combination of electric and autonomous technology will increase productivity and lower the costs of trucking dramatically,” the report said. Wood expects autonomous semi-trucks to reduce the cost of trucking by 75% to 3 cents per ton-mile, “undercutting rail prices with the help of lower electricity and maintenance.”
Combined with the potential for autonomous vehicles to take different form factors over time like drones and rolling sidewalk robots, “we believe freight rail companies will have trouble competing with antiquated technology tied to dedicated infrastructure assets,” the report said.
“ARK wonders which, if any, freight rail operators will survive.”
Wood expects the transition from rail to autonomous trucks to happen within the next four to nine years, according to the report.
But that timeline may not pan out, given that Tesla’s electric semi-truck, which was revealed in 2017 with a scheduled 2020 rollout, has since been delayed until 2023 at the earliest.
For now, investors seem to be siding with Buffett over Wood based on Berkshire Hathaway’s performance relative to Ark’s flagship fund over the past few years.