Berkshire Annual Letter 1995 (Part 5)
Back when Warren Buffett attended Columbia University under the tutorlege of Benjamin Graham, he found out that Ben was the Chairman of Government Employees Insurance Company (GEICO), an unknown company to him.
One weekend, Warren Buffett took a train to the headquarters of GEICO, where he was met by Lorimer Davison, Assistant to the President (and who was later to become CEO).
Even though Warren’s only credentials at that time was a student of Graham, “Davy” spent four hours teaching him about the ins and outs of the insurance business.
Up to this day, Warren Buffett is thankful to Davy’s generousity with his time, as Berkshire would not have gotten to where it is today without that afternoon meeting.
As Warren found out, GEICO’s strength was in using direct marketing as its method of selling, giving it an enormous cost advantage over competitors who sold through agents.
So in 1951, Warren started to buy shares in GEICO on four occassions using money that he earned as a delivery boy for The Washington Post.
This stake of $10,282 was more than 50% of his networth and was sold in 1952 for $15,259. (The stake if kept to 1995, would have growth to $1.3 million.)
From 1976 to 1980, Berkshire spent $45.7 million to accummulate a 33.3% stake in the company. Because of the aggressive share buybacks by the company, this stake actually grew to 50% of the company.
In 1995, Berkshire paid another $2.3 billion for the other half of the company that it didn’t own, gaining full control of the company and taking it private.
Warren Buffett likes businesses with economic castles protected by unbreachable “moats”. GEICO is one such example.