Why Warren Buffett is buying a train set

When Warren Buffett shelled out $4.4bn on US rail companies last year, many wondered why he had suddenly fallen in love with the sector. We have the answer - plus two of the best rail investments around.

You would normally associate Warren Buffett with big consumer brands like Coca-Cola and American Express. So when he shelled out $4.4bn on three US rail companies last week, many wondered why he had suddenly fallen in love with the sector. The simple answer is globalisation. With booming demand for commodities from the East and a hunger for cheap foreign goods in the West, the rail companies linking consumer and producer look appealing for the long haul.

The dominant trend is the demand for raw materials and machinery to fuel the construction booms in China and India. US rail firms transport grains and building and construction products for export; US exports to China rose by 32% last year. Railways are a Canadian story too. Just as ships carrying cheap Chinese goods are docking at ports on Canada's west coast, trains are arriving to meet them with CAD75bn worth of copper, lumber and oil to be shipped back across the Pacific. As Christopher Hancock notes in a Penny Sleuth newsletter, it takes about 30 years for an agrarian society to industrialise and China is only about one-third of the way there. So both countries' demand for Canada's natural resources will play into the hands of the freight firms for years to come.

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Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.