NEW YORK (
) - Warren Buffett's cardinal rule of investing is "Don't Lose Money."
To achieve this goal, the Oracle has traditionally invested in boring firms with easy-to-understand business plans. For Buffett these are the qualities of an investment that are certain to return a comfortable profit. While underwear and candy have usually been this investor's bread and butter he has recently made interesting bets on the energy game.
Buffett, however, has not taken a direct approach to investing in this sector. Rather than holding instruments like futures contracts for commodities or ETFs like UNG and USO, Buffett has used some of his more recent investments as indirect ways to play how he expects the future of the world's energy will play out.
However, the investor, who's not keen on the idea of taking any losses, has taken an interesting approach that will likely ensure a sure thing no matter how our energy taste pans out in the years to come.
Last week, Buffett made headlines when he decided to purchase the remaining shares of
Burlington Northern Santa Fe
for over $26 billion. This move, the largest in the history of
, was seen as a strong indication of Buffett's confidence in the United States' economy and the future of coal.
Burlington Northern is a huge player in the U.S. coal industry. According to the firm's Website, the railroad transported 297 million tons of the black rock across the nation last year. The electricity produced from the company's hauls alone fulfills more than 10% of the United States' total demand. In the third quarter of 2009, coal deliveries accounted for 25% of BNI's total revenue.
Environmentalists would have likely had something to say about Buffett's proxy investment in coal through BNI had he not also invested $5 billion in the Chinese car company,
, earlier this year. This firm, famous for introducing the first mass- produced, battery-operated automobile, appears to be the perfect green energy compliment to his railroad investment.
Although the firm's battery making arm, BYD Electronic, has recently faced scrutiny regarding a
charger recall, investing in BYD Co. has earned the Oracle huge profit. Since Buffett's initial investment, share prices have rocketed and the firm's founder and CEO, Wang Chuan-Fu, has become the wealthiest man in China, according to Forbes.
As it turns out, BYD is actually a great energy bet for Buffett for two reasons:
First, by investing in a company on the cutting edge of emissions-free technology, Buffett basically has a play on the eventual switch away from fossil fuels to clean-energy sources. As more nations begin to embrace green energy, demand for electric cars will increase and Buffett, being ahead of the game, will be ready to collect his profit.
Second: Buffett's investment in BYD is yet another strong bet on coal. According to the World Coal Institute, as much as 41% of the world's electricity comes from the coal.Therefore, as demand for electric cars and other electricity-dependent goods increases, so will demand for more coal.
Based on the Energy Information Administration's 2009 International Energy Outlook, in order to fulfill our forecasted energy demand, the world's coal consumption would have to increase by 49% from 2006 to 2030.
By holding both BNI and BYD, Buffett is essentially betting on the present and future strength of coal while remaining conscious of the alternative energy revolution currently taking place. In this sense, he has positioned himself perfectly to ensure that, as usual, he comes out the victor no matter which side of the energy debate wins out.
ETF investors looking to follow Professor Buffett's lead can do so with instruments backed by the same firms he has put his money into. Today, the
iShares Dow Jones Transportation Average Index Fund
(IYT) has nearly 13.5% weighting in BNI while the
Claymore/AlphaShares China Small Cap Index ETF
has nearly 2% weighting in BYD.
While this strategy may give investors a taste of Buffett's game plan, a better way may be to track fossil fuels and alternative energy with ETFs like the
Market Vectors Coal ETF
PowerShares WilderHill Clean Energy Portfolio
(PBW). These funds will expose investors to a number of different sources of energy. Using them in different combinations can better ensure returns no matter what the future holds.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion does not have positions in any stocks mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.