Investment Analysis
GEICO is one of Buffett's most fascinating investment and business case study with mind blowing returns and sustained growth. Anyone interested in active investing should spend a considerable amount of time understanding GEICO deeply on both those dimensions. The table below* of Buffett's investments in GEICO stock shows why that's the case. It's truly remarkable that if one can find an investment like GEICO, there is no need to engage in any more investment activity.
Year Number of Shares Cost Basis Avg.Cost/Share Market Value Price/share
1976 1,294,308 $4,115,670 $3.18 Not provided
1977 1,294,308 $4,115,670 $10,516,000 $8.12
1978 1,294,308 $4,115,670 $9,060,000 $7.08
1979 5,730,114 $28,288,000 $4.94 $68,045,000 $11.87
1980 7,200,000 $47,138,000 $6.55 $105,300,000 $14.63
1981 7,200,000 $47,138,000 $199,800,000 $27.75
1982 7,200,000 $47,138,000 $309,600,000 $43.00
1983 6,850,000 $47,138,000 $6.88 $398,156,000 $58.12
1984 6,850,000 $45,713,000 $6.59 $397,300,000 $58.00
1985 6,850,000 $45,713,000 $595,950,000 $87.00
1986 6,850,000 $45,713,000 $674,725,000 $98.50
1987 6,850,000 $45,713,000 $756,925,000 $110.50
1988 6,850,000 $45,713,000 $849,400,000 $124.00
1989 6,850,000 $45,713,000 $1,044,625,000 $152.50
1990 6,850,000 $45,713,000 $1,110,556,000 $162.12
1991 6,850,000 $45,713,000 $1,363,150,000 $199.00
1992 34,250,000** $45,713,000 $1.33 $2,226,250,000 $65.00
1993 34,250,000 $45,713,000 $1,759,594,000 $51.38
1994 34,250,000 $45,713,000 $1,678,250,000 $49.00
1995 34,250,000 $45,713,000 $2,393,200,000 $69.87
1996 GEICO becomes a wholly-owned subsidiary of Berkshire when Buffett paid $2.3B
for the remaining half of the company
What made GEICO such an outstanding business and an investment home run. After all GEICO was not even a big brand during those days that could command a premium multiple. And auto insurance is a commodity business with big and powerful competitors. Buffett's $45.7M investment in one company was worth $2.4B in 20 years. Berkshire owned 33.3% of its shares by yearend 1980 and did not make any further purchases during the next 15 years. From 1979 to 1995, GEICO's Chief Investment Officer Lou Simpson reduced its shares outstanding from over 34M to fewer than 17M. As a result, Berkshire's 33% ownership of GEICO, purchased for $45.7M grew to 51% by 1996^.
Buffett's first purchases of GEICO stock were in 1951. He came to know about GEICO while attending Columbia University's business school in 1950-51. When he was trying to learn all about his teacher Benjamin Graham in Who's Who in America, he found that Ben was Chairman of Government Employee Insurance Company. Graham-Newman had purchased 50% of the company in 1948 for $720,000. A librarian next referred Buffett to Best's Fire & Casualty insurance manual where he learnt that GEICO was based in Washington, D.C. In Jan 1951, Buffett took the train to Washington to visit GEICO's downtown headquarters and met with Lorimar Davidson, Assistant to the President, to learn all about the company.
One of the key insights Buffett gathered from the discussion that day with Davy was a solid understanding of GEICO's moat. As Davy made clear, GEICO's method of selling - direct marketing - gave it an enormous cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these insurers that it was impossible for them to give it up****. At that time Buffett felt that GEICO possessed an extraordinary business advantage in a very large industry that was going to continue to grow. Since that time they never have lost that advantage - the ability to give the policyholder back in losses a greater percentage of the premium dollar than any other auto insurance company in the country, while still providing a profit to the company***. It's quite extraordinary how true this was at that time and how it prevails even today.
Returning to Omaha after finishing at Columbia, at 21 years of age, Buffett invested 66.5% of his net worth in GEICO at the end of 1951. He had net assets of $19,737, of which $13,125 was in GEICO***. He had earned most of the funds used to buy GEICO shares by delivering The Washington Post.
Purchased GEICO shares on 4 occasions in 1951:
Number of shares: 350
Cost basis: $10,282
Avg. cost per share: $29.38
End of 1951, holding was worth: $13,125
Avg. cost per share: $37.50
Return: 27.6%
Buffett sold 100% of GEICO shares in 1952 for $15,259 which means he sold his 350 shares at $43.60 per share yielding a return of $4977 or 48.4%.
In the early 1970's, after Davy retired, the executives running GEICO made some serious errors in estimating their claims costs, a mistake that led the company to underprice its policies - and that almost caused it to go bankrupt. Almost 24 years later, in 1976, when Jack Byrne came in as CEO and took drastic remedial measures, Berkshire purchased a large interest in the company because Buffett believed both in Jack and in GEICO's fundamental competitive strength noting that the company had not lost its position as a low cost operator.
In his letter to Young*** in 1976, Buffett observed "I always have been attracted to the low cost operator in any business and, when you can find a combination of (i) an extremely large business, (ii) a more or less homogeneous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation. That situation prevailed twenty-five years ago when I first became interested in the company, and it still prevails".
Its quite clear that to achieve investment success one has to clearly understand and accurately identify moats (though it sounds simple, it's not an easy thing to do) and to bet heavily when a great investment opportunity presents itself. As Charlie Munger said "The way to win is to work, work, work, work and hope to have a few insights. And when you get a few, you really load up. It's just that simple". The ultimate key to GEICO's success is its rock-bottom operating costs, which virtually no competitor can match. We will discuss more on the successful application of these insights with our investments.
* BRK Annual Reports
** Stock split 5-1 in 1992
*** Buffett's letter to George Young of National Indemnity Company dated July 22, 1976
**** BRK 1995 Chairman's letter
^ The Warren Buffett CEO - Robert P. Miles Pg. 50
GEICO is one of Buffett's most fascinating investment and business case study with mind blowing returns and sustained growth. Anyone interested in active investing should spend a considerable amount of time understanding GEICO deeply on both those dimensions. The table below* of Buffett's investments in GEICO stock shows why that's the case. It's truly remarkable that if one can find an investment like GEICO, there is no need to engage in any more investment activity.
Year Number of Shares Cost Basis Avg.Cost/Share Market Value Price/share
1976 1,294,308 $4,115,670 $3.18 Not provided
1977 1,294,308 $4,115,670 $10,516,000 $8.12
1978 1,294,308 $4,115,670 $9,060,000 $7.08
1979 5,730,114 $28,288,000 $4.94 $68,045,000 $11.87
1980 7,200,000 $47,138,000 $6.55 $105,300,000 $14.63
1981 7,200,000 $47,138,000 $199,800,000 $27.75
1982 7,200,000 $47,138,000 $309,600,000 $43.00
1983 6,850,000 $47,138,000 $6.88 $398,156,000 $58.12
1984 6,850,000 $45,713,000 $6.59 $397,300,000 $58.00
1985 6,850,000 $45,713,000 $595,950,000 $87.00
1986 6,850,000 $45,713,000 $674,725,000 $98.50
1987 6,850,000 $45,713,000 $756,925,000 $110.50
1988 6,850,000 $45,713,000 $849,400,000 $124.00
1989 6,850,000 $45,713,000 $1,044,625,000 $152.50
1990 6,850,000 $45,713,000 $1,110,556,000 $162.12
1991 6,850,000 $45,713,000 $1,363,150,000 $199.00
1992 34,250,000** $45,713,000 $1.33 $2,226,250,000 $65.00
1993 34,250,000 $45,713,000 $1,759,594,000 $51.38
1994 34,250,000 $45,713,000 $1,678,250,000 $49.00
1995 34,250,000 $45,713,000 $2,393,200,000 $69.87
1996 GEICO becomes a wholly-owned subsidiary of Berkshire when Buffett paid $2.3B
for the remaining half of the company
What made GEICO such an outstanding business and an investment home run. After all GEICO was not even a big brand during those days that could command a premium multiple. And auto insurance is a commodity business with big and powerful competitors. Buffett's $45.7M investment in one company was worth $2.4B in 20 years. Berkshire owned 33.3% of its shares by yearend 1980 and did not make any further purchases during the next 15 years. From 1979 to 1995, GEICO's Chief Investment Officer Lou Simpson reduced its shares outstanding from over 34M to fewer than 17M. As a result, Berkshire's 33% ownership of GEICO, purchased for $45.7M grew to 51% by 1996^.
Buffett's first purchases of GEICO stock were in 1951. He came to know about GEICO while attending Columbia University's business school in 1950-51. When he was trying to learn all about his teacher Benjamin Graham in Who's Who in America, he found that Ben was Chairman of Government Employee Insurance Company. Graham-Newman had purchased 50% of the company in 1948 for $720,000. A librarian next referred Buffett to Best's Fire & Casualty insurance manual where he learnt that GEICO was based in Washington, D.C. In Jan 1951, Buffett took the train to Washington to visit GEICO's downtown headquarters and met with Lorimar Davidson, Assistant to the President, to learn all about the company.
One of the key insights Buffett gathered from the discussion that day with Davy was a solid understanding of GEICO's moat. As Davy made clear, GEICO's method of selling - direct marketing - gave it an enormous cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these insurers that it was impossible for them to give it up****. At that time Buffett felt that GEICO possessed an extraordinary business advantage in a very large industry that was going to continue to grow. Since that time they never have lost that advantage - the ability to give the policyholder back in losses a greater percentage of the premium dollar than any other auto insurance company in the country, while still providing a profit to the company***. It's quite extraordinary how true this was at that time and how it prevails even today.
Returning to Omaha after finishing at Columbia, at 21 years of age, Buffett invested 66.5% of his net worth in GEICO at the end of 1951. He had net assets of $19,737, of which $13,125 was in GEICO***. He had earned most of the funds used to buy GEICO shares by delivering The Washington Post.
Purchased GEICO shares on 4 occasions in 1951:
Number of shares: 350
Cost basis: $10,282
Avg. cost per share: $29.38
End of 1951, holding was worth: $13,125
Avg. cost per share: $37.50
Return: 27.6%
Buffett sold 100% of GEICO shares in 1952 for $15,259 which means he sold his 350 shares at $43.60 per share yielding a return of $4977 or 48.4%.
In the early 1970's, after Davy retired, the executives running GEICO made some serious errors in estimating their claims costs, a mistake that led the company to underprice its policies - and that almost caused it to go bankrupt. Almost 24 years later, in 1976, when Jack Byrne came in as CEO and took drastic remedial measures, Berkshire purchased a large interest in the company because Buffett believed both in Jack and in GEICO's fundamental competitive strength noting that the company had not lost its position as a low cost operator.
In his letter to Young*** in 1976, Buffett observed "I always have been attracted to the low cost operator in any business and, when you can find a combination of (i) an extremely large business, (ii) a more or less homogeneous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation. That situation prevailed twenty-five years ago when I first became interested in the company, and it still prevails".
Its quite clear that to achieve investment success one has to clearly understand and accurately identify moats (though it sounds simple, it's not an easy thing to do) and to bet heavily when a great investment opportunity presents itself. As Charlie Munger said "The way to win is to work, work, work, work and hope to have a few insights. And when you get a few, you really load up. It's just that simple". The ultimate key to GEICO's success is its rock-bottom operating costs, which virtually no competitor can match. We will discuss more on the successful application of these insights with our investments.
* BRK Annual Reports
** Stock split 5-1 in 1992
*** Buffett's letter to George Young of National Indemnity Company dated July 22, 1976
**** BRK 1995 Chairman's letter
^ The Warren Buffett CEO - Robert P. Miles Pg. 50