What GEICO’s Customer Acquisition And Associated Costs Taught Me About Business Economics, Management Quality, And Valuation via Sanjay Bakshi here and here
I read this gem from a Warren Buffett letter:
“In 1999, we will again increase our marketing budget, spending at least $190 million. In fact, there is no limit to what Berkshire is willing to invest in GEICO’s new-business activity, as long as we can concurrently build the infrastructure the company needs to properly serve its policyholders.
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Because of the first-year costs, companies that are concerned about quarterly or annual earnings would shy from similar investments, no matter how intelligent these might be in terms of building long-term value. Our calculus is different: We simply measure whether we are creating more than a dollar of value per dollar spent — and if that calculation is favorable, the more dollars we spend the happier I am.”1 [Emphasis mine]
Mr Buffett was writing about how he thinks about decisions relating to customer acquisition costs for GEICO. But, were there wider implications of what he wrote?
I already knew how Mr. Buffett thinks about capital allocation decisions generally. In his owner-related business principle2 # 6, he states:
“Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.”