GEICO: The “Growth Company” that made the “Value Investing” careers of both Benjamin Graham and Warren Buffett by Wedgewood Partners
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In 1948, we made our GEICO investment and from then on, we seemed to be very brilliant people. Benjamin Graham, 1976
Becky Quick (CNBC): “If you could keep one company that Berkshire owns, either a whollyowned subsidiary, or that Berkshire owns a common equity in, which one would you keep and
Warren Buffett: “I would keep GEICO. It goes back to the -- 62 years ago it changed my life. It'sm also a wonderful company. I would have both things going for me, but that if I hadn't of gone to GEICO when I was 20 years-old and had a fellow there explain the insurance business to me, my life would be vastly different. So I just have to - - I'd have to choose GEICO.”
CNBC interview March 13, 2013
Two of the greatest "Value" investors of all-time owe a substantial part of their wealth and public reputations – and deserved accolades - to a singular great “Growth” company, the Government Employees Insurance Company (GEICO). In the vernacular of investing, “Value” and “Growth” are most often associated with competing, mutually exclusive investing styles. It shouldn’t be so, but as a +30-year veteran in the investing “business” I can assure you that this investing-style division is deeply embedded in the investment management industry. Benjamin Graham’s deserved sobriquets include the “Father of Security Analysis” and the “Dean of Value Investing.” Of course Warren Buffett is known around the globe as the “Oracle of Omaha,” as well as Benjamin’s Graham’s greatest student.
Like many of us in our chosen profession, we sit on the shoulders of the greats. We hope to never stop studying and learning from the masters. I was ever fortunate to get hooked on the stock market my junior year in college in 1984. My Investments334 professor introduced me to, and encouraged me to read about the likes of Benjamin Graham, John Templeton, Warren Buffett, Philip Fisher, John Maynard Keynes, etc. The guiding principles of our investment philosophy at Wedgewood Partners are the classic tenets of both “Value” and “Growth” investing.
Buffett’s evolving investment philosophy has oft been self-described as “85% Graham and 15% Fisher.” Charlie Munger’s “Growth” influence on Buffett deserves special mention on this score. Anyone who has studied the careers of either Graham
or Buffett has surely come to recognize the notable influence and impact that GEICO has had on both of these masters. Indeed, the nearly fourscore history of GEICO is a barnburner tale of birth, incredible growth, tragic near-failure, unlikely rebirth and then incredible growth once again. GEICO may have bonded Graham and Buffett even more than their significant professor-student bond. The long history of GEICO offers students of investing plenty of lessons on of both “Value” and “Growth” investing. Dare I say that the investment lessons of the GEICO story alone are so poignant and instructive to apply to one’s own investment education that even a caveman can do it!
Government Employees Insurance Company
Leo Goodwin was born in 1886 in Lowndes Missouri. Son of a country doctor, educated as an accountant, Leo and his wife Lillian Goodwin founded GEICO in 1936. At the time, 50 year-old Goodwin was an accountant at San Antonio-based United
Services Automobile Association (USAA). USAA was founded in 1922 by a group of U.S. Army officers in order to self-insure each other’s automobile insurance. Apparently at the time, Army officers were considered reckless drivers. Goodwin’s brilliant insight was an expansion of USAA’s concept - bypassing commissioned insurance salesmen and selling low cost auto insurance through the mail at discounts of -30% to -40% directly to federal, state and municipal government
employees and certain categories of enlisted military officers, who statistically had lower claims than the public as a whole. The military list of potential customers would soon expand to include active and reserve commissioned officers and the first
three pay grades of non-commissioned officers, plus veterans on active duty. Government defense contractors and faculty members of colleges and universities were soon solicited.
The Goodwin’s founded GEICO with Ft. Worth banker Cleaves Rhea. The Goodwin’s put up $25,000 in seed capital, Rhea and his relatives put up $75,000. Goodwin and his wife worked literally around the clock, twelve hours every day with nary a day off. On the weekends, Mr. Goodwin drove to military bases to pitch his car insurance to young service families. Mrs. Goodwin stayed back at HQ (likely their kitchen table) and took the helm as bookkeeper, underwriter, and chipped in on the marketing front too. Their combined salary was all of $250 per month. Within their first year they had written over 3,700 policies and collected $104,000 in premiums. $27.62 for car insurance - ah, the good ‘ol days! In 1937 the Company’s operations
were relocated to Washington, D.C. in order to be closer to the country’s largest pool of government workers.
Geico - full study below