How Warren Buffett Bought GEICO
"I later realized that GEICO was the embodiment of the 'moat' concept. It had this incredible economic moat" - Warren Buffett
In the canal of investment lore, few stories are as compelling as Warren Buffett's decades-long relationship with the Government Employees Insurance Company, better known as GEICO.
Today, we dive into the fascinating tale of how the "Oracle of Omaha" came to own this insurance giant.
The Humble Beginnings
Buffett's journey with GEICO started in 1951, when he was a 20-year-old student of Benjamin Graham at Columbia University.
On a Saturday, the young Buffett, having learned that his professor was the chairman of GEICO, decided to visit the company's headquarters in Washington, D.C.
Despite the office being closed, a janitor let him in, and he happened to meet Lorimer Davidson, an executive who would later become GEICO's CEO.
Davidson spent hours explaining the insurance business to Buffett.
From that encounter, Buffett was sold on the company's business model and promptly invested his savings into GEICO's stock.
What did Warren See?
Business Model:
GEICO's business model was unique and offered a competitive advantage.
As a direct insurer, GEICO bypassed agents and sold directly to consumers.
This allowed them to offer lower premiums compared to competitors that had to account for agent commissions.
Buffett appreciated the efficiency and long-term sustainability of this model.
Profitability:
Buffett saw that GEICO, when run well, had the potential for high profitability.
Insurance companies collect premiums up front and pay claims later, which allows them to invest that money – known as "float" – in the meantime.
A well-run insurance company like GEICO could both make underwriting profits and generate investment profits from its float.
Understandability:
GEICO operated in an industry Buffett understood very well – insurance.
It was a straightforward business that generated steady cash flow and had the potential for long-term success.
This was in line with Buffett's principle of investing in businesses he understands and feels comfortable with.
Leadership:
Buffett was also impressed by GEICO's leadership, particularly Lorimer Davidson, who he met in his early 20s and who later became the CEO of GEICO. '
Good leadership is a key criterion in Buffett's investment decisions.
Undervaluation:
Buffett is known for finding undervalued companies that have strong fundamentals.
When GEICO faced financial difficulties in the mid-70s, its stock price plummeted.
Buffett recognized that the company’s intrinsic value had not diminished as much as the market believed, leading him to significantly increase his investment in the company.
Buying, Selling, and Buying Again
Fast forward to the mid-1970s, Buffett started aggressively buying GEICO shares for Berkshire Hathaway after the company faced near-bankruptcy due to mispriced policies and rapid expansion.
Buffett saw a diamond in the rough.
He recognized the strength of GEICO's direct selling model, which cut out the middleman and allowed the insurer to offer lower rates than competitors, resulting in a strong competitive advantage.
By 1976, Berkshire Hathaway owned over one-third of GEICO and its investment was integral in helping the insurance company to recover and flourish once again.
The Final Purchase: A Wholly-Owned Subsidiary
In 1995, Berkshire Hathaway announced it would purchase the remaining 49% of GEICO it did not already own, for $2.3 billion.
The deal cemented GEICO as a wholly-owned subsidiary of Berkshire Hathaway.
Buffett stated at the time of the purchase,
"I've been a happy holder of GEICO stock for 40 years, but now I'm even happier to be the complete owner of the best auto insurance company in the country. It’s hard to think of a better service to offer the public."
The Investment That Keeps Giving
Buffett's investment in GEICO has been nothing short of spectacular.
The insurance giant has been a significant contributor to Berkshire Hathaway's earnings. GEICO's low-cost provider status and continuous growth make it a quintessential Buffett company.
In essence, Buffett's investment in GEICO embodies his overall investing philosophy: buying wonderful companies at fair prices and holding onto them for the long term.
His relationship with GEICO demonstrates his profound understanding of the company's business model, his ability to spot a good value investment, and his patience to wait for the company to reach its potential.
In today's investing world, the tale of Warren Buffett and GEICO serves as a timeless lesson in value investing, patience, and the power of deep business understanding.
Wrapping up
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