Chapter 7 Part 3: Berkshire 2010-2011
The Complete Financial History of Berkshire Hathaway by Adam J. Mead (ISBN 978-0-85719-912-6)
2010 and 2011 are the post-crisis reset. Berkshire swallows a railroad whole. The stock market yawns. Buffett starts hiring successors, buying IBM, and repurchasing shares. One trusted lieutenant falls over a Lubrizol trading scandal. Mead covers the triumph and the reputational dent in the same breath.
2010: BNSF and the bet on America
Book value +13%, trailed S&P by 2.1 points. Second straight year of relative underperformance. Unusual for Berkshire. Buffett pushed back with unusual clarity on value.
Burlington Northern: five times larger than anything before
Closed February 12, 2010. ~$44.5 billion total value including debt. Normal earning power jumped 40% pre-tax, 30%+ after tax.
Why a railroad in a recession? Munger listed the old industry sins: capital intensity, unions, regulation, truck competition. Then the industry consolidated, got efficient, and earned protected returns.
Buffett called it an “all-in wager on the economic future of the United States.” Key logic Mead highlights:
- Moat: nobody rebuilds a western Class I railroad today
- Utility-like regulated returns on massive reinvestment
- Deferred taxes from accelerated depreciation (like MidAmerican)
- Lower borrowing costs without explicit Berkshire guarantee
- Western population and Asia-to-West Coast freight tailwinds
Going-in pre-tax return looked modest (~7% on 2009 depressed earnings, ~9% on 5-year average ROC). Berkshire accepted that for durability and reinvestment runway.
Paid with cash (half borrowed), stock, and rolled existing stake. Issued 94,915 A-share equivalents. 50-for-1 B-share split so BNSF holders could take stock and meet S&P liquidity rules. Berkshire replaced BNSF in the index.
Owned through National Indemnity for regulatory and earnings-smoothing reasons. Railroad earnings offset insurance volatility.
Everything else in 2010
Insurance: $2 billion underwriting profit, float $65.8 billion. GEICO $1.1 billion profit, 8.8% market share. Buffett argued GEICO goodwill undervalues the economic gift.
Todd Combs hired to manage part of the equity portfolio. First visible step toward splitting Buffett’s job into chairman, CEO, and investment managers. Lou Simpson retiring from GEICO made this urgent.
MSR rebounded. Marmon +19% earnings. David Sokol turned NetJets from $711M loss to $207M profit. Building products still 72% below 2006 peak.
Crisis-era preferreds (Goldman, GE, Wrigley, Swiss Re) would redeem soon. Berkshire would lose 12%+ yields with no easy replacement. Buffett flagged the coming income hole.
Buffett estimated normal earning power at $17 billion pre-tax (~$12 billion after tax) including BNSF.
2011: IBM, Lubrizol, buybacks, and Sokol
Beat S&P by 2.5%. Book value +4.6%. Forty-five-year compound fell to 19.8%. Middle-ground year, but strategically loud.
Share repurchases: new tool
Berkshire announced buybacks up to 110% of book. Bought $67 million in two days before price exceeded limit. After forty years of no dividends or repurchases, this was a shift.
Conditions: ample cash (>$20 billion) and stock below conservative intrinsic value. Goal is not high price. Goal is price tracking intrinsic value over time.
Mead’s two-column estimate: intrinsic value ~$168,266 per A share vs market $114,755. Price-to-estimated-value: 0.68x.
Lubrizol and the Sokol scandal
Lubrizol acquired September 2011 for ~$8.7 billion. Specialty chemical additives. Buffett did not need to understand the chemistry. He understood 45% returns on capital and moats built with customers on new engine programs.
David Sokol disaster: bought Lubrizol shares before recommending Berkshire buy it. Resigned. Buffett’s front-page test failed. “We can afford to lose money. We can’t afford to lose reputation.”
Sokol had been a succession candidate. That conversation changed overnight.
Other 2011 moves
Bank of America preferred ($5 billion, 6% dividend, warrants) after Buffett dreamed the idea in the bathtub.
IBM: large stake. Buffett historically avoided tech. IBM looked like a services and lock-in business, not a hardware fad.
Insurance profits fell to $248 million (cats, soft pricing) but float grew to $70.6 billion. Breakeven underwriting still valuable.
Why these two years matter together
2010-2011 completes the crisis arc:
| Crisis phase | Berkshire move |
|---|---|
| 2008-09 lend | Goldman, GE, Wrigley, Swiss Re |
| 2009-10 buy | BNSF permanent asset |
| 2010-11 adapt | Combs hire, IBM, buybacks |
| Always | Reputation enforcement (Sokol) |
Mead’s acquisition math on BNSF and Lubrizol shows Buffett accepting lower initial yields on businesses that can absorb billions in reinvestment at decent returns. That is different from buying Coke in 1988. It is the late-stage conglomerate playbook.
Buffett told the Financial Crisis Inquiry Commission simple truths Mead weaves in: houses track replacement cost, farmland yields matter more than narrative, hedging fuel at BNSF mostly burns friction costs, and Treasuries have no substitute for overnight safety.
The railroad bet plus the Sokol firing back-to-back is the human side of the compounder story. Culture is not soft. It is the constraint that lets you write $5 billion checks in October 2008 without flinching.
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