Lou Simpson is largely unknown, even among investors. Yet, he quietly racked up a track record that bested the S&P 500 by 6.8%.
In 1979, GEICO was looking for someone to run its investment portfolio. Part of the hiring process included an interview with some guy named Warren Buffett. After four hours with Simpson, Buffett told GEICO’s CEO to hire the guy.
He would produce a 20.3% return (vs the S&P 500’s 13.5%) for GEICO over the next 25 years! Upon his retirement in 2010, Buffett stated in Berkshire’s 2010 letter, “Simply put, Lou is one of the investment greats.”
Simpson’s philosophy is similar to Buffett’s and Philip Fisher’s. It revolves around a few main tenants and is best described as concentrated, long-term bets in great businesses with great management at reasonable prices. It’s an approach that is easier said than done.
Thanks to a few rare interviews over the years, he’s expanded on those ideas.
We concentrate our holdings in a few companies that meet our investment criteria. Good investment ideas — that is, companies that meet our criteria — are difficult to find. When we think we have found one, we make a large commitment. The five largest holdings at Geico account for more than 50 percent of the stock portfolio.
You can only know so many companies. If you’re managing 50 or 100 positions, the chances that you can add value are much, much lower… The point is just to be very careful with each decision you make. The more decisions you make, the higher the chances are that you will make a poor decision.
On the Long Term Approach
We are sort of the polar opposites of a lot of investors. We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting, and not a lot of thinking.
Attempting to guess short-term swings in individual stocks, the stock market or the economy is not likely to produce consistently good results. Short-term developments are too unpredictable.
We try to be skeptical of conventional wisdom and try to avoid the waves of irrational behavior and emotion that periodically engulf Wall Street. We don’t ignore unpopular companies. On the contrary, such situations often present the greatest opportunities.
Over the long run appreciation in share prices is most directly related to the return the company earns on its shareholders’ investment. Cash flow, which is more difficult to manipulate than reported earnings, is a useful additional yardstick.
One lesson I have learned is to make fewer decisions. Sometimes the best thing to do is to do nothing. The hardest thing to do is to sit with cash. It is very boring.
The more you trade, the harder it is to add value because you’re absorbing a lot of transaction costs, not to mention taxes.
One of the things I have learned over the years is how important management is in building or subtracting from value… You can have all the written information in the world, but I think it is important to figure out how senior people in a company think.
We ask the following questions in evaluating management: Does management have a substantial stake in the stock of the company? Is management straightforward in dealings with the owners? Is management willing to divest unprofitable operations? Does management use excess cash to repurchase shares? The last may be the most important. Managers who run a profitable business often use excess cash to expand into less profitable endeavors. Repurchase of shares is in many cases a much more advantageous use of surplus resources.
One thing you need to determine is: Are the company’s leaders honest? Do they have integrity? Do they have huge turnover? Do they treat their people poorly? Does the CEO believe in running the business for the long term, or is he or she focused on the next quarter’s consensus earnings?
We try to be disciplined in the price we pay for ownership even in a demonstrably superior business. Even the world’s greatest business is not a good investment if the price is too high.
We do not have any hard and fast rules on selling. We do not sell that well.
If I’ve made one mistake in the course of managing investments it was selling really good companies too soon.
There are a few factors that we look at. First, is this the business we thought it was? If you figure out that a business is not what you thought it was, that’s a bad sign.
The second factor is the management, which can also differ from what you thought. Unfortunately, a lot of managements are very short-term oriented, and that can be another reason to sell. This goes back to the basic integrity and the focus of people in charge.
The third factor is an overly high valuation, and this is often the most difficult, because you’re investing in something you wouldn’t buy at current prices, but you don’t want to sell because it’s a really good business and you think it’s ahead of itself on a price basis. It might be worth holding on to it for a while.
A Maestro of Investments in the Style of Buffett
GEICO’s Top Market Strategist Churning Out Profits
“One of the Investment Greats” Explains His Portfolio Strategy
Wise Words from Philip Fisher
Wise Words from Peter Lynch
Wise Words from Seth Klarman