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May 31, 2018, 11:41 a.m. EDT

This investor rivals Warren Buffett — and you probably haven’t heard of him

The Berkshire Hathaway CEO so admired Lou Simpson that he suggested the Geico CIO could step in for him if needed

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By Glen Arnold


Bloomberg
Lou Simpson, pictured in 2011.

Geico is probably the best investment Warren Buffett ever made. Much is due to the terrific performance of the insurer’s underwriters. But what turbocharged his return is the investment record of GEICO’s chief investment officer.

Lou Simpson’s record at Geico from 1979 to 2010 rivals that of Buffett at Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.02%   /zigman2/quotes/200060694/composite BRK.B +0.07% , but he remains little-known, except by true Buffett fans.

Despite their different investment choices, Simpson, now 81 years old, and Buffett in many ways have similar investment philosophies. Buffett so admired Simpson that he suggested at one time that the Geico CIO could step in should something happen to himself and Charlie Munger. For his part, Simpson said his smaller portfolio gave him an advantage over Buffett. While they were both running concentrated portfolios of less than 15 to 20 shares (often seven companies or less), Buffett had to manage up to $40 billion whereas Simpson usually had less than $4 billion.

Like Buffett, Simpson developed his investment approach through trial and error, evolving over decades. Earlier in his career, long before being hired by Geico, he was a “growth investor” often failing to properly consider whether that growth was being offered at a reasonable price. He was aiming for spectacular returns from a few star performers, hoping that he had guessed the future correctly.

But through bitter experience he learned that good long-run results come from buying companies with established high performance (rather than mere promises of future riches) with low risk and at a low price.

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Today, many people can crunch the company’s numbers and determine whether the share price looks cheap. But they need to be equally sharp in judging qualitative factors, he told an audience at Northwestern University’s Kellogg School of Management in November 2017.

“As Warren used to tell me, “You’re better off being approximately right than exactly wrong.” For example, 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?”

Buffett highlighted Simpson’s impressive performance data from 1980 through 2004 in his 2004 letter to shareholders . Most fund managers would consider themselves well ahead of the pack if they delivered an annual average outperformance of a mere 1 percentage point; Simpson outperformed by a stunning 6.8% percentage points over a 25-year span.

Geico’s equity portfolio gained an average of 20.3% a year, compared to the S&P 500’s 13.5% /zigman2/quotes/210599714/realtime SPX -0.39% . Put another way, a $10,000 investment compounded at a 13.5% annual rate becomes $237,081 after 25 years; at a 20.3% annual rate, it becomes $1,015,408.

Of course, all investors have years where they underperform the market; Simpson underperformed for three years in a row. As a value investor, Simpson was out of step with the irrational exuberance of the late 1990s dot-com boom. But he stuck to his principles and delivered great results in the years following the 2000 crash.

Here are five key principles that helped Simpson in his quest for outperformance.

Read (all day if you can)

Simpson has a voracious appetite for financial newspapers, other intelligent press, annual reports, industry reports, and generally reads five to eight hours a day. He, like Buffett, is not trading-intensive but reading-intensive and thought-intensive

/zigman2/quotes/208872451/composite
US : U.S.: NYSE
$ 313,270
+70.00 +0.02%
Volume: 182.00
Oct. 18, 2019 6:30p
P/E Ratio
17.77
Dividend Yield
N/A
Market Cap
$511.95 billion
Rev. per Employee
$637,113
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/zigman2/quotes/200060694/composite
US : U.S.: NYSE
$ 208.76
+0.14 +0.07%
Volume: 3.58M
Oct. 18, 2019 6:30p
P/E Ratio
17.75
Dividend Yield
N/A
Market Cap
$511.74 billion
Rev. per Employee
$637,113
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
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