100 Billion Dollars but nowhere to spend it. This has been one of Warren Buffett’s biggest problems in 2017. For us small investors, we are always scrambling to put as much capital as we can as soon as possible into the appropriate investment vehicles. Our problem is having to little cash relative to investment opportunities as opposed to the opposite scenario for Buffett.
However, on 3rd October 2017, Berkshire Hathaway, Buffet’s holding company went a step ahead in solving their problem by purchasing a stake in Pilot Flying J, their biggest buy since the $37 Billion dollar Precision Cast parts “elephant” sized deal in 2015.
Pilot Flying J is a family owned business which operates a number of truck stops in the United States and Canada at 750 locations. The company is currently owned by the Haslam family and has annual sales of nearly $20 billion. Truck stops are located along highways and offer opportunities to rest, eat, refuel and other services to car and truck drivers. In the UK truck stops are rare but Motorway Service Areas are more ubiquitous and familiar.
Pilot Flying J, based in Knoxville, Tennessee, is the 15th largest private company in the United States. As part of the deal, Berkshire has acquired an initial 38.6% stake in Pilot Flying J and plans to increase this to a majority 80% six years later in 2023. Of course, as with most of Buffett’s other takeovers, the present management will remain in place and left to run the business with no interference. This is definitely a scalable type of business and there is a good chance that with injection of fresh capital, Berkshire will reap big rewards.
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Such long term thinking, after consideration of the business fundamentals, is what fascinates me about Buffett’s approach over the past over half a century. Well run businesses have a lot of potential for solid returns in future. On a personal level, individual investors can emulate this by purchasing units of low cost index funds over time. Initially, progress may be slow or non existent but if you look back five years or more down the line it is more likely that substantial gains will have been made from the funds.
Another important lesson to take from this situation is that investors should not be too concerned about what may or may not happen in the future. With all the current reports in the media about self driving cars and trucks such as the Otto, it is easy to speculate and assume that truck stops such those operated by Pilot Flying J will cease to be profitable soon.
It seems like autonomous vehicles have been coming for a long time but they face several stumbling blocks for example legal, safety and ethics. Always the risk taker, Buffet has again bet on the American economy by making this purchase. It is very conceivable that the truck stops operated by Pilot Flying J can be part of a future backbone for highway infrastructure supporting the movement of electric and or autonomous vehicles.
As electric car revolution approaches, led by models such as the Tesla Model 3 and BMW i series, this can also be exploited here; there could be various electric charging points at these rest stops and other technology such as hubs for advanced communications systems. As charging electric vehicles takes longer than fuelling vehicles, there would be an opportunity to sell more goods and services to travellers at these rest stops. To me this acquisition seems like a win win situation.
Investors should note that it has been proven again and again that the economy will do well despite what soothsayers predict. I have learnt that you should only worry about what you can control such as maintaining a high savings rate and investing sensibly. It all about doing what definitely works today.
100 Billion dollars may be difficult to shift but Berkshire’s efforts show that even for individuals, in the long term it is not ideal to maintain a large hoard of cash. It is better to deploy cash wisely by investing in income producing assets rather than in depreciating liabilities. Cash has benefits of being very liquid therefore should be held in an emergency fund. Do what works for you and it will be hard to go wrong.