Double down on your best ideas | Wealth Builders Pt 1

Bryce: [00:01:24] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett's status. Quite apt after this episode Ren. Our aim is to help break down your barriers from beginning to dividend. Now, while we are licensed, we are not aware of your financial circumstances, so all information on this show is general advice only. With that said, my name is Bryce and as always, I'm joined by my equity body Ren. How are you going? 

Alec: [00:01:51] I'm very good, Bryce. I'm actually a little bit sick. You are? We're sitting on opposite sides of the desk.

Bryce: [00:01:58] Corner. 

Alec: [00:01:58] Diagonally cut out, facing our bodies away from each other. Yeah. So we'll say. 

Bryce: [00:02:04] We've got the fan on. Trying to get those gems away. 

Alec: [00:02:07] Yeah, but look, we must power on because this is a really exciting series for us. For years you've said whether you're approaching Warren Buffett status and we may not be approaching his status, but we are certainly approaching him geographically. We're approaching his location. 

Bryce: [00:02:26] We couldn't get much closer. 

Alec: [00:02:28] We'll be in the same room as him. 

Bryce: [00:02:29] We will be in the same room as him, Ren. By the time this episode, as we will have released our first response episode to the Berkshire Hathaway annual General Meeting, which would have been released on Monday. Yeah, okay. And this is the start of our four part series on some of Warren's most successful and interesting long term investments. 

Alec: [00:02:52] So over the next four Thursday episodes, we're going to be unpacking four of Warren's best investments. And it's not just going to be the staples that you've heard a lot about Coca Cola, Apple, blah, blah, blah. And we're going to talk about what we can learn from them as investors that are looking to build long term wealth as well. Each episode will have a key theme, and we're starting this week with doubling down on your best ideas. 

Bryce: [00:03:20] Doubling down on your best ideas. Warren does that very well. I know we said we wouldn't talk about Apple, but he did do that with Apple.

Alec: [00:03:26] Talking about Apple Break. 

Bryce: [00:03:28] No, today we're talking about. 

Audio Clip: [00:03:30] 18 Million plus customers, more than 40,000 employees, low cost services, several hilarious commercials, a gecko with a love of being in front of the camera and the second largest passenger auto insurance company in the nation. That's the Geico story. Mr. Buffett buys his first GEICO stock because of this chance meeting a stock he later coined the security I like best. Eight years later, in 1959, after 22 years of steady growth, GEICO's new headquarters building opened on the Maryland D.C. border, where you'll see standing tall today. 1976. After all this growth and mounting success, GEICO's underwriting and reserving discipline hits a rough patch, creating financial problems aggravated by a deep recession and a government mandated wage and price freeze. Soon, the company finds itself on the brink of bankruptcy. Warren Buffett makes a second purchase of GEICO stock, which becomes another step in the path of Berkshire Hathaway becoming the majority stockholder. 

Bryce: [00:04:28] GEICO, one of his very first investments and one of, if not arguably his most successful. Warren invested in GEICO back in 1951 as a little junior investor. He reckons this is the investment that changed his life. 

Alec: [00:04:46] Yeah. So you said he first invested in 1951. Quick quiz. When was Warren Buffett born? 

Bryce: [00:04:53] Uh, 37. 

Alec: [00:04:55] 1930. Okay, so he was 21 when he invested in GEICO. 

Bryce: [00:05:00] Pretty impressive.

Alec: [00:05:01] What we were investing in when we were 2? 

Bryce: [00:05:03] Bellamy's. 

Alec: [00:05:05] Oh, that. That was not bad, then it was bad. 

Bryce: [00:05:07] But it certainly wasn't a life changing investment for me. What were you investing?

Alec: [00:05:14] I wasn't investing. 

Bryce: [00:05:15] No, You would have been deep in. You would have been deep in.

Alec: [00:05:19] The sports betting. 

Bryce: [00:05:23] Deep in Your first investment.

Alec: [00:05:25] Slater and Gordon. 

Bryce: [00:05:26] Yeah, we 22.

Alec: [00:05:28] So we. I was at college for three years, and then I lived with Flynn for a year, and then I lived with the for a year. So I was like, I wasn't investing at all.

Bryce: [00:05:38] Yeah, that's true. Wow. You know.

Alec: [00:05:40] I mean, that's why Warren's a billionaire, and I'm not because he invested early. 

Bryce: [00:05:44] We know what ran. Yeah, that's true. Invested early. But the majority of his wealth came When? Well, after he was 75 years old. But anyway, that's the beauty of compound compounding. Anyway, Let's have a look at the story of Geico and the investment. Then we're going to have a bit of a chat about what's the lesson that we take from it and close out with some conversation about where Geico kind of fits today. But it all started with his rating of a book back in the Omaha Public Library at age 11. Ren not 21, age 11.

Alec: [00:06:14] There you go. 

Bryce: [00:06:15] he accidentally bought the book The Intelligent Investor by Benjamin Graham at age 19. And read it and read it and read it and read it. And you often say that it's one of the most recommended books to start investing. I disagree. 

Alec: [00:06:28] Yeah, I disagree as well. Have you read it? 

Bryce: [00:06:30] I have read it. 

Alec: [00:06:30] It's dead. It's very hard.

Bryce: [00:06:32] Do not pick it up as your first investing book. It'll put you off, but it has some great lessons in it. Just do it. A little bit later. 

Alec: [00:06:39] LI took it to a family bake holiday back in the day. I quickly substituted it out for another book. 

Bryce: [00:06:47] So we know that Buffett was a massive fan of Benjamin Graham and he was studying under him at Columbia Business School, and he learnt that Graham was actually the chairman of Government Employees Insurance Company, otherwise known as GEICO, and he wanted to check it out. So back in the day when there's no Internet, there's no ChatGPT. You actually have to go and check out the company. So he got on a bus and went to the headquarters of Geico to start figuring out and understanding a little bit more about the company. And we have a clip here that is Warren explaining his first visit to GEICO. 

Warren: [00:07:25] I was then a student at Columbia University and had gone down to Washington early on a Saturday morning to learn something about a company called Government Employees Insurance. A week earlier. I'd never heard of the company later to be renamed GEICO, but on a visit to the Columbia Library, I learned that my hero, Ben Graham, was a chairman. When I arrived in Washington on that Saturday. I went to GEICO's office and was distressed to find out that the doors were locked. Unlike the Omaha of the 1950s, Saturday wasn't a workday in Washington, but I pounded on the door and finally a janitor let me and directed me to Davey. The only other fellow working that day. Davey had no reason to talk with me, but I told him that I was a student of Graham's and he then spent four or so hours answering unending questions about the insurance industry in general and Geico specifically. Davey couldn't have been more helpful to me that day, and for decades thereafter. It really changed my life. 

Alec: [00:08:21] Fascinating story. Bryce. My biggest takeaway from that security in the 1950s was very different security today. Sure, there is no way you're banging on the door of a major corporation on a weekend and someone's letting you in. 

Bryce: [00:08:35] No, we're doing that for Willie's. 

Alec: [00:08:38] No one's going out to Bella Vista. Did your company research? 

Bryce: [00:08:41] That's true. That's true. But we heard. We heard Buffett there talking. About Davey. But that's actually a guy called Lorimer Davidson who went on to actually become chairman and CEO of Geico, but at the time was just working there, the only guy there on a Saturday. And this is the flip side of the story, Davey explaining how he felt when he first met Warren Buffett. 

Warren: [00:09:03] The meeting took place on a cold Saturday morning in January of 1951. At that time I was the financial vice president of GEICO and Warren was a graduate student at Columbia University. He had a role there so that he could take courses from Professor Ben Graham, who also was chairman of the Board of Government Boys Insurance Company. At that time, when the caretaker brought Warren to my office, he identified himself and he brought up the Graham collection. And I thought he assumed the bills. So I'll give him five months and then I'll find some polite way of getting him to go on his way. So I said, Go ahead. This buffet asked the questions. He was asking me the questions an experienced insurance stock analyst would ask his follow up questions. Well, the questions that an experienced analyst would ask. He knew what information he wanted and he said he obviously want to learn everything he could about Geico. After 4 hours, nearly 5 hours, Warren left asking if he could see me again. I said yes, but next time was like a polite one and please don't come on Saturday mornings. That meeting was a very important meeting. It was the first day of my 47 year friendship with Warren, and that was the day. This was a very fortunate time for Geico and for Berkshire Hathaway. Those two companies, two great, great companies have done things, led some from that meeting, but would never have occurred if it hadn't been for that meeting on the lives of tens of thousands of people and both overall, I feel very proud of all. 

Bryce: [00:11:20] So Ren, great to hear from Davey's side, you know, lifelong friends. Now Lorimer is had actually went on to be CEO and chairman of GEICO. So just great to hear the flip side of that story but the lesson today Ren what we will actually want to unpack is the doubling down nature of his investment. 

Alec: [00:11:38] Yeah, I feel like a lot of investors feel like they need to find the next thing and something that we've heard a few times on the show, something my mentor Andrew Page, has said in one of our sessions, Your best idea is probably already in your portfolio. 

Bryce: [00:11:54] Nice. That's good to know. 

Alec: [00:11:56] Yeah, yeah, yeah. And it's often better to double down on something that, you know, that you've done the research on and then you're confident on. Then trying to find the, you know, the 11th idea or the 20th idea or the 30th idea to add to your portfolio. And Warren Buffett's life and his investing career is a testament to that. And there is nothing clearer than Geico. So that's why we've chosen that one for this lesson. So he first invested in 1951 when he was just 21 years old, before he had taken over the failing textile mills known as Berkshire Hathaway. He takes over them in 64 and his first full year of investing is in 65. There you wouldn't know it, but Geico becomes a big part of Berkshire's portfolio. In the seventies, he buys more. In 1976, he bought a third of GEICO for about $45 million in the eighties, GEICO's facing some financial difficulties, believe it or not. It also buys more. And then in the ultimate act of doubling down on your best ideas in 1996, Buffett says screw it, I'm buying the whole thing. 

Bryce: [00:13:12] So that's it, Ren. He bought the remaining shares in 96. The acquisition was valued at 2.3 billion and was one of the largest acquisitions in the history of Berkshire Hathaway. 

Alec: [00:13:21] At the time. 

Bryce: [00:13:21] At the time. And today, GEICO is still one of Berkshire Hathaway's largest subsidiary companies and is valued at a whopping $50 billion. So bought a third for 45 million back in 76. Today it's it's worth over 50 billion double down on his best ideas.

Alec: [00:13:41] Yeah well that third has gone from. 45 million to 16 billion. Hmm. Not bad. Doubling down on your best ideas as long as they are actually good ideas is a great strategy. 

Bryce: [00:13:53] Sure. True, well, Ren, that's the story. Fascinating to see how early he started his investing and the effort that he went through to go out and speak to this company at age 21 is amazing. On the other side of the break, we're actually going to unpack what it was about the Geico business model that really made Warren fall in love with it and double down on his investment ideas. So stick around for that. 

Warren: [00:14:30] Well, I would say that Geico is a huge plus to Berkshire. Now we own 50% of it before. I mean, we've benefited from our GEICO investment in a big way ever since 1976. So it's not a it's not an entirely new benefit. It's coming and we paid a good price for Geico but it is a terrific company. It has outstanding management, it has a low cost method of distribution, which is very difficult for people. I mean, everybody wants to have that, but very few come close to it. The management is focussed on bringing costs down even further and widening that competitive moat.

Bryce: [00:15:21] So Ren, in second half of the episode. We're looking at GEICO, the GEICO investment by Warren Buffett and the concept of doubling down on your best ideas. And we know that Warren loves a simple, easy to understand business model and this is certainly what he found in GEICO and the insurance company. 

Alec: [00:15:38] And we know what Warren was thinking back when he was 21 because he published a newspaper article, the stock that I love best. 

Bryce: [00:15:46] Is there anything this guy didn't do. His stock that I love best? He must have had a bit of a rep already To be able to publish articles. 

Alec: [00:15:57] Yeah. Not a lot of 21 year olds are going to News Corp these days and saying, I've got a stock tip that I want to write an article about it. 

Bryce: [00:16:03] Maybe we should try. Anyway, a couple of key call outs around the business model. 

Alec: [00:16:09] And this is from the security I like best in 1951. 

Bryce: [00:16:13] This is from his article in 51. So he loves it. 

Alec: [00:16:16] This, which will be included in the show notes. 

Bryce: [00:16:18] Which we will include in the show notes. So he loved the non cyclical nature of insurance by that it's not tied to economic downturns or, you know, volatility. People need insurance year after year and the contracts nature of insurance sort of lends itself to consistent revenue. And, you know, back during the time where a lot of businesses were very much product led manufacturing, he likes the fact that there was no inventory, no products, no equipment that he had to worry about. You know, a lot of other industries had to face equipment going out, becoming obsolete, obsolescent, obsolete, obsolete inventory risk. But with insurance, it's just contracts and away you go. So he likes the simplicity of that. And where Geico really stood out was its low cost method of distribution. They didn't have a franchise model where there was setting up shop in brick and mortar stores. In all the sort of states in the US, they had a very cost effective way of getting their product to their customer base and felt that they had a pretty good growth opportunity across America, but most importantly ran it was their profit margins versus their competitors because they were low cost, because they had a very strong customer base, because they had long term contracts, their profit margins were 27 and a half percent versus the average of six and a half percent of their competitors. So those were some of the key things that led Warren to to invest in GEICO, but it hasn't stopped there. 

Alec: [00:17:49] One other one from the article that I just want to stress, because what 2023, 1951, 72 years later, the reasoning and the lessons are still the same. In this article he writes about management being aligned with shareholders and the ten members of the Board of directors owned about one third of GEICO's shares. So their incentives are aligned with shareholders. And, you know, that's what we look at today. How much does management own? Are they aligned? 

Bryce: [00:18:18] Well, he's been, he's just had drills that home every year. 

Alec: [00:18:21] Yeah yeah. Doesn't change much, companies change the lessons don't. 

Bryce: [00:18:25] Burn out at the top. I said that this has been an investment, that it has really set him up and he defined it as life changing. What is it? What's the actual reason for that? 

Alec: [00:18:35] Because he made billions of dollars. No, I think Geico for Warren Buffett was his first exposure to insurance float. Now for people unfamiliar with that term, there's a time delay between when insurance companies get our money in terms of the premiums that we pay every year. And then when they pay it out, you know, right now we're pre-recording this before we go to the US. Price has booked travel insurance. You've paid, you're looking like you haven't fully covered Bryce will book travel insurance. You pay your 200 bucks before you fly over to the US and then when you pay, when we're partying with Warren in Nebraska and you break your arm trying to do the worm on the desk for trying to execute, you claim that insurance later. And in that time difference, Allianz or whoever your insurer is can invest that money. And if they make money before you make that claim, they keep that money. And for Warren, that has been his superpower over the years, taking that insurance float and investing it, and then the time difference between when people pay their premiums and when they claim on their insurance policy. Warren's use that money, that insurance float to make a few extra bucks himself. 

Bryce: [00:19:54] So is the lesson here actually to buy an insurance company? 

Alec: [00:19:57] The lesson here is to invest with other people's money. 

Bryce: [00:20:03] So, yeah, that is certainly allowed him to build Berkshire into what it is today. And Geico is now still one of the largest auto insurers in the states. As we said, it's a multi-billion dollar company and remains a huge part of Berkshire's portfolio.

Alec: [00:20:19] So there are a couple of key factors that stood out to Buffett back then and sustained through the decades and made Geico such a long term wealth builder. You mentioned in that 1951 article Buffett was writing about their low cost method of distribution, which gave them better profit margins than their competitors. They didn't need sales agents. They went direct to consumer and that was a hallmark of their business throughout the decades. I assume still is. They probably sell online. They were able to reduce costs for customers, but have better margins than their competitors because their costs were so much lower. And that's a classic example of Moat. That's what Buffett always talks about, that long term, sustainable competitive advantage. They had a cost advantage. They kept that cost advantage over the years, and that made it such a long, such a good long term wealth build up. But there is a caveat here. PRICE because we've just done a whole episode on doubling down on your best ideas. But Buffett didn't double down constantly. No, he didn't. Dollar cost averaging to GEICO. 

Bryce: [00:21:32] No, he struck when geico was on its knees. Now we know that price is a very important factor for Warren. And when he bought into the company was when he felt that there was a value opportunity. And so it was either when he felt the market was underestimating or mispricing the moat that you've just spoken about, the long term advantages that the company had, but also when the company was facing financial difficulties, was facing headwinds. He took those moments when most people were probably feeling quite fearful, as he said, he took those moments to double down. So really used prices as an indicator when to double down on his investments. 

Alec: [00:22:22] And that 1976 example where he bought one third of the company is a classic example of that. So the CEO at the time, not your mate Dave, but Norm Giddens, had been growing the company massively in the fifties and sixties and a number of poor underwriting decisions and cost claims were putting the company in pretty bad state. By mid 76, Geico was on the verge of bankruptcy and the share price had dropped to $2 from a high of $61 several years earlier. Hey take that is a that hurts that. 

Bryce: [00:23:00] Yeah they're on their knees.

Alec: [00:23:01] Yeah so Geico was strapped for cash it cut its dividend and it was actually in the market looking for an injection of cash to avoid bankruptcy like you know we're talking about doubling down on your best ideas but your best ideas don't have decades of just uninterrupted blue skies and linear growth. Giddins was fired in 76. The chairman of the board took over as a temporary CEO and things weren't great. And it was at that moment that Buffett doubled down, gave them the injection of cash and buys a third of the company. Yeah. And so I think that's a real reminder that value matters to build Buffett level wealth. 

Bryce: [00:23:45] Absolutely. And so one of the third components is obviously management. Now, as Buffett does with a lot of the companies he invests in, they actually work quite closely with management, making sure that they've got the right CEO in place to get the job done. And so he's been a pretty positive supporter of David Davidson, but works closely with the management team at the time of these investments to ensure financial performance. So in that kind of really does wrap up, it is worth noting, as we've said now, that GEICO's obviously still massive and still, but Buffett talks of it quite fondly and still the float is very advantageous and allows Buffett to keep investing and taking opportunities elsewhere in the market. But it kind of wraps the first episode of our Long term Wealth Builder series brought to you on behalf of Berkshire Hathaway.

Alec: [00:24:34] We'll send them an invoice after this invoice. Next episode, we're going to be talking about one of Buffett's lesser known investments. Did you know he invested in Disney? 

Bryce: [00:24:46] I did know that because we've done the research. So it's an interesting story. And the lesson is actually the perils of selling too early. So we're going to pick that up next week. We will be back on Monday with another live episode from New York. I'm going to be fortunate enough to be speaking to some fund managers over in the States, which I was super excited about and bringing you closer to the action on Wall Street. So stick around for that. But Ren, as always, great to chat stocks. We'll pick it up next week. 

Alec: [00:25:13] It sounds good.