Читать книгу Concentrated Investing - Carlisle Tobias E. - Страница 6

In 1979, GEICO, an auto insurance company based in Washington, DC, that had been brought close to bankruptcy just three years earlier was searching for a new chief investment officer. The company’s recent near-death experience, and the perception of insurance companies’ investment efforts as hidebound, and highly risk-averse, had made the search difficult. The recruiter, Lee Getz, vice chairman of Russell Reynolds, did find a candidate who later turned it down because his wife refused to move to Washington.6 Lamenting his lack of success in filling the position in over a year, Getz told his friend Lou Simpson about the little insurance company with big problems that no one wanted to tackle. He asked Simpson, the chief executive of California-based investment firm Western Asset Management, if he was interested in the job. Simpson was reluctant.7 Western Asset Management had been a subsidiary of a big California bank holding company. Simpson was sick of politicking within the confines of bank bureaucracy, and didn’t have any great desire to repeat the experience in an insurance company. He also knew that GEICO had almost gone belly up just three years earlier.

As a favor, Getz asked Simpson to interview with the company’s chairman, John “Jack” Byrne Jr., the man who had almost single-handedly pulled GEICO back from the brink of insolvency.8 Simpson agreed if only to help out an old friend. He traveled to Washington to meet with Byrne, who Simpson judged as being “a very, very smart guy,” but also a micro-manager involved in everything GEICO did.9 Simpson found the role interesting, but not compelling. He craved autonomy, and Byrne, who had just saved GEICO, seemed unlikely to grant it. Byrne called Simpson back for a second interview. Though he had reservations he dutifully traveled back to Washington. In the second interview, Byrne told Simpson, “We’re really interested in you. But the one hoop you’re going to have to go through is to meet with Warren Buffett.”10 With about 20 percent of GEICO, Buffett was the largest shareholder through Berkshire Hathaway. Byrne said, “Warren thinks we need a new investment person. The person before was really not up to the job.”11 Though Buffett didn’t yet have a high profile, Simpson had read about the Nebraska-based value investor who was just renewing a longstanding interest in GEICO.

“Unstoppable” GEICO

Buffett has a storied 65-year association with GEICO, beginning in 1951 as a 20-year-old graduate student in Benjamin Graham’s value investing class at Columbia. He recounted the first 45 years of that association in his 1995 Chairman’s Letter following Berkshire’s purchase of the half of GEICO it didn’t own.12 It was then the seventh-largest auto insurer in the United States, with about 3.7 million cars insured (in 2015, it is second, with 12 million policies in force). Buffett attended Columbia University’s graduate business school between 1950 and 1951 because he wanted to study under Graham, the great value investor and investment philosopher, who was a professor there. Seeking to learn all he could about his hero, he found that Graham was the chairman of Government Employees Insurance Company, to Buffett “an unknown company in an unfamiliar industry.”13 A librarian referred him to Best’s Fire and Casualty insurance manual – a large compendium of insurers – where he learned that GEICO was based in Washington, DC.

On a Saturday in January 1951, Buffett took the early train to Washington and headed for GEICO’s downtown headquarters. The building was closed for the weekend, but he frantically pounded on the door until a custodian appeared. He asked the puzzled janitor if there was anyone in the office the young Buffett could talk to. The man said he’d seen one man working on the sixth floor – Lorimer Davidson, assistant to the president and founder, Leo Goodwin, Sr. Buffett knocked on his door and introduced himself. Davidson, a former investment banker who had led a round of funding for GEICO before joining it, spent the afternoon describing to Buffett the intricacies of the insurance industry and the factors that help one insurer succeed over the others.14

Davidson taught Buffett that GEICO was the very model of an insurer built to succeed. Formed in 1936, at the height of the Great Depression by Goodwin and his wife Lillian, GEICO was set up to be low-cost from the get go.15 Goodwin had been an executive at the United Services Automobile Association (USAA), an auto insurer founded to insure military personnel, and a pioneer in the direct marketing of insurance. He had seen data that showed federal government employees and enlisted military officers tended to be financially stable, and also low-risk drivers. Those two attributes, he surmised, would mean that premiums were paid on time, with lower and infrequent claims. Agents were typically used to provide professional advice for more complex business insurance requirements. Auto insurance, though it was mandatory and expensive, was also relatively simple. Most consumers would know what they required in an auto policy.16 Goodwin reasoned that GEICO could cut out the agents and market directly to consumers, thereby minimizing distribution costs, just as USAA had. Those two insights – direct selling that bypassed agents to financially secure, low-risk policyholders – put GEICO in a very favorable cost position relative to its competitors. Later, Buffett would write that there was “nothing esoteric” about its success: its competitive strength flowed directly from its position as the industry low-cost operator.17 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.18 Low costs permitted low prices, low prices attracted and retained good policyholders, and this virtuous cycle drove GEICO’s success.19 GEICO was superbly managed under the Goodwins. It grew volumes rapidly, and did so while maintaining unusually high profitability. When Leo Goodwin retired in 1958, he named Davidson, the man whom the 20-year-old Buffett had met on that Saturday in January 1951, as his successor.20 The transition was a smooth one, and GEICO’s prosperity continued with Davidson in the chief executive role. Volumes grew such that, by 1964, GEICO had more than 1 million policies in force.21 Between its formation in 1936 and 1975, it captured 4 percent of the auto market, and grew to be the nation’s fourth largest auto insurer.22 It looked, in Buffett’s estimation, “unstoppable.”23

But GEICO was struck by a double whammy in the 1970s. First, Davidson retired in 1970, and then both Leo and Lillian Goodwin passed away. Without a rudder, it seemed to stray from the principles that had made it successful.24 When real-time access to computerized driving records became available throughout the United States in 1974, GEICO moved beyond its traditional government employee constituency to begin insuring the general public.25 By 1975, it was clear that it had expanded far too aggressively during a difficult recession.26 Actuaries had also made serious errors in estimating GEICO’s claims costs and reserving for losses. This faulty cost information caused it to underprice its policies, and lose an enormous amount of money.27 Weak management, bad investment choices, and years of rapid expansion took their toll.28 In 1976, GEICO stood on the brink of failure.

It was saved from collapse when Jack Byrne was appointed chief executive in 1976. Byrne took drastic remedial measures.29 He organized a consortium of 45 insurance companies to take over a quarter of GEICO’s policies.30 To pay the remaining claims, he had GEICO undertake a stock offering that severely diluted existing stockholders.31 The stock price was savaged. From its peak, it fell more than 95 percent.32 Believing that Byrne could rescue GEICO, and that, despite its problems, it maintained its fundamental competitive advantage as a low-cost auto insurer, Buffett plunged into the market in the second half of 1976, buying a very large initial interest for Berkshire.33 Byrne put it on a path to insuring only “government employee”-style policyholders from a much wider pool of potential insureds, and improving its reserving and pricing discipline. Though the company shrank significantly in the first few years of Byrne’s tenure, Berkshire kept buying, making purchases at particularly opportune times. By 1979, GEICO had taken a step back from the precipice, but it was only half the size that it had been. While the business maintained its inherent competitive advantage – its rock-bottom operating costs – and Byrne had reserving and pricing under control, it was clear that GEICO needed help on the investment side. After searching for over a year without luck, and being turned down by the first good prospect, Byrne had whittled the field down considerably from the initial candidates. Simpson was one.34 And a meeting with Buffett stood in the way.

On a Saturday morning in the summer of 1979, Simpson traveled to Omaha to meet with Buffett in his office. In the meeting Buffett said, “I think maybe the most important question is, what do you own in your personal portfolio?”35 Simpson told him, but Buffett didn’t give away whether he was impressed or not. After talking for two to three hours, Buffett drove Simpson to the airport where they met Joe Rosenfield. Rosenfield was a good friend of Buffett’s, and an impressive investor in his own right: He would almost single-handedly steer little Grinnell College’s $11 million endowment into a $1 billion behemoth, one of the biggest per student for any private liberal arts school in the country.36 Simpson and Rosenfield discovered they were both big-time Chicago Cubs fans, and spent the time chatting about the team (Rosenfield would go on to acquire 3 percent of the Cubs, and, in his seventies, vowed not to die until they won a World Series).37 After visiting with Buffett and Rosenfield, Simpson flew back to Los Angeles. Evidently Buffett found the stocks in Simpson’s personal portfolio acceptable because he wasted no time. He called Byrne straight after the interview, and told him, “Stop the music. That’s the fella.”38 Byrne called Simpson to offer him the job, and upped the compensation package.39 Though his wife was skeptical about leaving California, Simpson persuaded her, saying, “I think this is an interesting opportunity and I really don’t want to stay where I am.”40 Simpson accepted, and the family began preparing to move to Washington, DC.

An Emerging Value Investor

Lou has never been one to advertise his talents. But I will: Simply put, Lou is one of the investment greats.

– Warren Buffett, “2010 Berkshire Hathaway Letter to Shareholders”

Louis A. Simpson was born in Chicago, Illinois, in 1936. He grew up an only child in the Chicago suburb of Highland Park.41 At the end of his college freshman year at Northwestern University in 1955, he went to see the school guidance counselor. After subjecting Simpson to the usual barrage of tests, the counselor told the 18-year-old that he had an aptitude for numbers and financial concepts.42 Simpson, who had been studying first engineering and then pre-med, transferred to Ohio Wesleyan with a double major in economics and accounting. Three years later he graduated with high honors and was offered a Woodrow Wilson National Fellowship to study labor economics at Princeton. He received his MA from Princeton in two years, and began to work on his doctorate, researching the market for engineers. Simpson was offered the opportunity to teach full time as an instructor of economics, teaching the basic courses of accounting and finance, even though he had never taken a formal course in finance. At the first faculty meeting, the provost told the junior faculty members that only 10 percent would proceed to get tenure. Now married and with his first child, Simpson realized that the very long odds of tenure meant that teaching was an unlikely path to financial security.

While teaching full time, Simpson started writing letters and interviewing for positions in investment management firms and investment banks. He’d always had an interest in investments and managed his own tiny stock portfolio as a teenager, which was unusual at the time. A firm in Chicago, Stein Roe & Farnham – then perhaps the largest independent investment firm between New York, Boston, and the West Coast (today it has disappeared) – had a partner who was a Princeton graduate who conducted the interviews at the campus. He and Simpson hit it off. The deciding factor for Simpson was that Stein Roe was prepared to offer him $100 a month more than any firm in New York. So in 1962, he dropped out of doctoral studies at Princeton University to return to Chicago.43 He was 25, and working in his first full-time job as a portfolio manager at Stein Roe.44

At Stein Roe, Simpson managed separate accounts, beginning with individuals and gradually moving toward institutions. Stein Roe did offer mutual funds, though Simpson did not work on them. The strategy for the separate accounts was narrowly confined. An investment committee created a model portfolio, and the separate accounts were expected to follow it. Simpson followed the model portfolio, but had a tendency to concentrate the managed accounts more than the model portfolio dictated.45 He stayed seven-and-a-half years with Stein Roe, and was made a partner. He was concerned that the partners were much more interested in the size of their slice of the pie than in trying to grow the whole pie.46 He told a good friend from Princeton that he was open to making a change. The friend introduced him to Shareholders Management, a mutual fund management firm in Los Angeles.47 Shareholders Management was headed by “fund wizard” Fred Carr, a darling of the market during the go-go years in the 1960s, when the fad was for performance mutual funds.48 Shareholders Management was one of the hottest. Under Carr’s guidance, Shareholders’ Enterprise Fund had soared 159 percent from 1967 to 1969, and the fund’s assets had ballooned more than fiftyfold, to $1.7 billion.49 Carr was a “gunslinger,” a market timer who dove in and out of the shares of small, rapidly growing stocks.50 A Business Week magazine profile in 1969 said of Carr that he “may just be the best portfolio manager in the U.S.”51 Carr offered Simpson a role not managing the hot mutual funds, but the separate accounts. Simpson would have to take a cut in base salary, but received a substantial option package. He accepted, and so in 1969, he became one of the first partners to leave Stein Roe.52

Simpson moved his family, now with three children, to Los Angeles to join Shareholders Management under Carr. While Shareholders Management had been for several years regarded by the market as an unusually gifted investment team, all was not as it seemed. Carr had bought a lot of “letter stock” – stock not registered with Securities and Exchange Commission (SEC), which cannot be sold to the public, meaning that it is extremely illiquid – for the Enterprise Fund. This strategy had done very well as the market ran up, but the long bull market soon collapsed, and investors in Carr’s Enterprise Fund were slammed, leading to large-scale redemptions. Compounding the problem, there was virtually no market for sales of the unregistered letter stock needed to meet the redemptions. Simpson’s timing was unlucky. He had joined in September 1969, the absolute top of Shareholders Management’s run. One month after his arrival, the losses in the Enterprise Fund were so bad that Carr was forced to resign, and cashed in his equity in the funds as he left.53 Though he had been hired to run managed accounts, Simpson was tasked with managing part of the Enterprise Fund. He quickly found that he didn’t fit into the Shareholders’ culture. “I viewed myself an investor, and they were trading-oriented,” he says.54 At lunch one day, one of the firm’s lawyers asked Simpson, “Do you realize how screwed up this place is? They’ve done things that are not on the up and up, and, if you want to maintain your reputation, it would be a good idea to leave.”55 Simpson resigned shortly after. He had been at Shareholders’ Management for just five months. He was 33, with three children, and he had just moved to Los Angeles. Though he had some opportunities in Chicago, he decided to see what was available on the West Coast.

After a brief search, Simpson settled on United California Bank to help start an investment management business and be second-in-command in the investment area. That new business was eventually spun out into a separate company called Western Asset Management, and became a subsidiary of Western Bank Corporation.56 Simpson stayed at Western Asset Management for nine years as head of portfolio management, and then director of research.57 Western Asset Management was successful, but Simpson found it difficult to operate in a big banking environment. The chairman of Western Bank Corporation wanted to make him CEO of Western Asset Management, but said he would only do it if Simpson promised to stay on. The chairman forced the resignation of the former chief executive, and Simpson was made the new chief executive of Western Asset Management. Though he stayed on for three years, he found the management role chafed him. He yearned to do something entrepreneurial. Friends of his wanted to set up some kind of investment management company with him, but he wasn’t sure.58 The experience with Shareholders Management had a transformative effect on Simpson, wholly changing his perspective on investment.59 Shareholders Management taught him about the importance of business risk, and started him on the road to value investing.60 During his time at Western Asset Management he was able to think, developing his investment philosophy, both on a personal and a company basis. He began to embrace value investing. His philosophy evolved dramatically when he ran the research department and he moved toward a more concentrated value investment approach. And then GEICO came calling.

Big, Concentrated Bets

In the 1970s, most insurance companies held a broad portfolio of bonds, counting on diversification to minimize risk, and little in the way of stocks. They also held a high proportion of the portfolio in government bonds, which, during the period of high inflation in the 1970s, had led to sizable losses for most portfolios.61 Before Simpson arrived in 1979, GEICO was no exception. He would radically change GEICO’s course. The agreement Simpson had struck with Byrne allowed the new investment chief to put up to 30 percent of GEICO’s assets in stocks.62 At the time, most property and casualty insurers limited stock holdings to about 10 percent of assets.63 The agreement also allowed him to hold concentrated positions.64 Simpson went to work as soon as he arrived, slashing the company’s bond holdings and rebuilding the stock portfolio in a limited number of names.65

Wary of Byrne’s reputation for micromanagement, Simpson had made it clear he was to be solely responsible for managing GEICO’s investments. “The more people you have making decisions, the more difficult it is to do well,” he said.66 “You have to satisfy everybody.”67 Neither Buffett nor Byrne were to interfere with the portfolio.68

Simpson’s instincts about Byrne were right. After he had been at GEICO for more than a year, he went away for a week on vacation. Byrne took the opportunity to buy some stocks for the portfolio. When Simpson returned, he immediately sold Byrne’s positions. Byrne asked, “Why would you do that? They were good ideas.”69

Simpson replied, “If I’m going to be responsible for the portfolio, I’m going to make all the decisions.”70 From then on, Simpson made his own decisions, essentially working autonomously.71 Describing the arrangement in 2004, Buffett wrote,

You may be surprised to learn that Lou does not necessarily inform me about what he is doing. When Charlie and I assign responsibility, we truly hand over the baton – and we give it to Lou just as we do to our operating managers. Therefore, I typically learn of Lou’s transactions about ten days after the end of each month. Sometimes, it should be added, I silently disagree with his decisions. But he’s usually right. [emphasis Buffett’s]72

Simpson did, however, regularly speak to Buffett about his investing philosophy. Simpson was impressed by Buffett’s encyclopedic knowledge of businesses and numbers, and his long list of contacts.73 In addition to Buffett’s view on investing, Simpson would also ask Buffett about companies that he thought he knew something about.74 Over time, Simpson and Buffett fell into a routine. Buffett would call Simpson, or Simpson would call Buffett. Initially as often as several times a week, as time went on, the men might let a month or two go by before the two talked, but they always stayed in regular contact.75 Though both operated independently, GEICO and Berkshire did have several common positions. They tended not to overlap because GEICO had a significant size advantage. Where Buffett needed to take positions of more than $1 billion to generate a return meaningful relative to the Berkshire portfolio worth many billions, GEICO could take much smaller positions given its smaller portfolio size. Simpson found several larger ideas he wanted to buy for GEICO, but if he learned Berkshire was already buying the stock, he stood back to allow Berkshire to complete its buying.76

When he first arrived at GEICO, Simpson found a group of investment people who did not share his investment approach but thought he would try to work with them for a while. He asked Buffett to come to GEICO twice a year to spend an hour with the investment team. During one of these talks, Buffett told a story that left an impression on Simpson.77 Buffett said, “Suppose somebody gives you a card with 20 punches, and each time you make an investment move you have to punch the card. Once you have had 20 punches, you’re going to have to sit forever with what you have.”78

The story stuck with Simpson, helping him avoid trading and to focus on developing a long-term investment perspective.79 Simpson says, “I never did a lot of trading but the story really did highlight that you need to have a lot of conviction in what you’re doing because you only have so many shots and you better be confident on the shots that you take.”80 Heeding Buffett’s advice, Simpson gradually concentrated larger and larger sums of money into just a handful of companies. In 1982, GEICO had about $280 million of common stock in 33 companies. Simpson cut it to 20, then to 15, and then, over time, to between 8 and 15 names.81 At the end of 1995, just before Berkshire’s acquisition of GEICO ended separate disclosures of the insurer’s portfolio, Simpson had $1.1 billion invested in just 10 stocks.82 Simpson was willing to concentrate positions in a single sector. At one time GEICO owned five or six electric utilities, which Simpson regarded as a single, big position.83 In the early 1980s, GEICO took a huge bet on three of the “Baby Bells,” the nickname given to the independent regional telephone companies spun out from AT&T, Inc., following the U.S. Department of Justice’s antitrust lawsuit filed in 1974. Simpson also regarded those holdings as one position.84 He took a large position because he assessed the Baby Bells as offering an unusually good risk/reward ratio.85 Admiring Simpson’s bet, Byrne remarked, “It was a very big hit on a very large amount of money.”86

Simpson would take those big bets only when he thought the odds were well in his favor. He regards GEICO’s single biggest winner as the Federal Home Loan Mortgage Corporation, known as “Freddie Mac.”87 Freddie Mac is a government-sponsored enterprise created in 1970 to expand the secondary market for mortgages in the United States. It buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. It operates in a duopoly with the Federal National Mortgage Association, commonly known as “Fannie Mae.” When GEICO bought into Freddie Mac, it was not a public company. While Fannie Mae was then public, Freddie Mac was only semi-public, with a small market in its stock, and the bulk owned by savings and loans associations. Simpson found it trading exceedingly cheaply, between three and four times its earnings. In addition to its manifest cheapness, Simpson was attracted to its franchise, which it owed to its status as a duopoly with Fannie Mae. Buffett had already bought up to his limit, and was restricted by regulation from buying more because Berkshire owned Wesco, which was a Thrift Bank. Simpson thought Freddie Mac was one of the best opportunities he’d ever seen, and in the mid to late 1980s, he took an enormous position for GEICO. He finally sold the position during 2004 and 2005, three years before Freddie Mac ran into trouble. GEICO sold out not because Simpson regarded Freddie Mac stock as being “horribly expensive,” but because he saw the business “taking on more risk, increasing leverage, and buying lower and lower quality mortgages to make the targets set by Wall Street analysts who thought Freddie Mac should be able to compound its earnings 15 percent a year.”88 Simpson says that, while GEICO’s reasons for selling turned out to be correct, he had no idea Freddie Mac would melt down completely. (In 2008, the Federal Housing Finance Agency put both Fannie Mae and Freddie Mac under conservatorship, equivalent to bankruptcy for a privately owned business. The action was described as “one of the most sweeping government interventions in private financial markets in decades.”89 As of the date of writing, they remain in conservatorship.) For GEICO, Freddie Mac was a very successful investment. “After we bought it,” says Simpson, “it went on a very, very big run, returning 10 to 15 times GEICO’s investment.”90

Simpson also invested GEICO in a number of merger arbitrage deals, an investment strategy in which an investor, typically, simultaneously buys and sells the stocks of two merging companies in order to profit when the companies actually merge.91 Simpson, however, chose only to invest on the long side of these deals since he felt he could capture enough of the arbitrage that way. Simpson recalls that the 1980s, with the explosion of contested mergers and acquisition, were a particularly good time for merger arbitrage. GEICO invested in several of the food company takeovers after the deal was announced hoping that another bidder would top the offer. In the heated market, they often did. GEICO’s returns from merger arbitrage were excellent, in line with or even a little bit better than the remainder of the portfolio. As the decade wound on, however, Simpson became increasingly concerned that the takeovers were getting too heated, and he didn’t know if the market could sustain the torrid pace. Simpson believes he got lucky by declaring victory before GEICO had a disaster. After he stopped investing in merger arbitrage, there were many broken mergers in the lead up to the crash of 1987, and “we were darn lucky that we didn’t get a few bum deals.”92 While he disclaims any ability to predict macro factors, he has looked at valuation levels of the market as a whole.93 In 1987, before the crash, he also moved GEICO’s portfolio to approximately 50 percent in cash because he thought the valuation of the market was “outrageous.”94 Simpson says that the huge cash position “helped us for a while and then it hurt us,” because “we probably didn’t get back into the market as fast as we could have.”95

Simpson’s Results at GEICO

[W]e try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.

– Warren Buffett, “1997 Berkshire Hathaway Letter to Shareholders”

In 1980, his first year at the helm of GEICO’s investment portfolio, Simpson returned 23.7 percent.96 A great return in almost any other year, that year it was just below the market average, which returned 32.3 percent. Over the next two years, however, he beat the market handsomely, racking up a 45 percent return in 1983, far above the market’s 21 percent gain. By then, almost a third of GEICO’s portfolio was invested in stocks, up from just 12 percent when Simpson started. Byrne later noted, “We gave him a broad, unfettered pasture to work in, and we allowed him to put an unusual percent of the company’s assets into equities. And Lou just knocked the cover off the ball for us.”97 Simpson was head of investments for GEICO for 31 years from 1979 until his retirement from GEICO in 2010, aged 74, by which time he was president and co-chief executive officer of GEICO Corporation.98 His record over that long period is extraordinary, trouncing market averages and most investment managers’ performance. Simpson says of his time at GEICO, “Over the years we put together a good record. At one time we were hitting on all cylinders and I think there was a period of five, six, seven, eight years where we were outperforming by over 15 percent a year. But over a 25-year period, and this was in the Berkshire Report, our over performance was 6.8 percent a year.”99

Buffett first mentioned Simpson in passing in a letter to the shareholders of Berkshire in 1982, describing him as “the best investment manager in the property-casualty business.”100 From that heady start, he became increasingly effusive about Simpson as time wore on. He detailed Simpson’s record in the 2004 report, writing, “Take a look at the facing page to see why Lou is a cinch to be inducted into the investment Hall of Fame.”101 Under the heading “Portrait of a Disciplined Investor Lou Simpson,” Buffett set out Simpson’s extraordinary record, reproduced here in Table 1.1.

Table 1.1 “Portrait of a Disciplined Investor Lou Simpson” from Buffett’s 2004 Berkshire Hathaway “Chairman’s Letter”

Buffett joked in 2010 that he had since omitted updates to Simpson’s record only because its performance made Buffett’s look bad, quipping, “Who needs that?”102 For his part, Simpson does not crow about GEICO’s performance except to say that “it has been very, very good.”103

The deal Simpson had struck with GEICO after he had been at the company several years paid him handsomely. Detailing the arrangement he and Byrne had made with Simpson, Buffett wrote in 1996, “In Lou’s part of GEICO’s operation, we again tie compensation to investment performance over a four-year period, not to underwriting results nor to the performance of GEICO as a whole. We think it foolish for an insurance company to pay bonuses that are tied to overall corporate results when great work on one side of the business – underwriting or investment – could conceivably be completely neutralized by bad work on the other. If you bat .350 at Berkshire, you can be sure you will get paid commensurately even if the rest of the team bats .200.”104 Simpson was paid big bonuses if GEICO’s investments outperformed the S&P 500 over a sustained period, which he achieved numerous times during his tenure at GEICO. Evidently, Buffett was happy with the arrangement. When Berkshire acquired the remaining half of GEICO, Buffett kept Simpson, and the deal, in place. While the salary package was very lucrative for Simpson, Buffett noted that he “could have left us long ago to manage far greater sums on more advantageous terms. If money alone had been the object, that’s exactly what he would have done. But Lou never considered such a move.”105

Simpson, associates say, has derived great satisfaction from the recognition that Buffett has bestowed upon him.106 Buffett has described him as “the class of the field among insurance investment managers.”107 He was also made a part of the so-called Buffett Group, an inner circle of about 50 who gather with Buffett every other year for days of conversation about value investing, among other subjects.108 David R. Carr Jr., president of Oak Value Capital Management, an investment management company, and a Berkshire shareholder, said, “He’s one of the sainted crowd; he understands and practices value investing.”109 Buffett has noted about Simpson’s returns that they “are not only terrific figures but, fully as important, they have been achieved in the right way. Lou has consistently invested in undervalued common stocks that, individually, were unlikely to present him with a permanent loss and that, collectively, were close to risk-free.”110