One of Warren Buffett’s star investor is a guy called Lou Simpson, who manages GEICO’s $4 billion plus equity.
The 70 year old is one of the greatest investors of all time, out-performing the S&P 500 index an average of 7% over time.
Here are some points extracted from a recent interview that morningstar had with Lou Simpson recently.
Value & Growth
Simpson view is that we need not draw a line between value and growth investing. After all, he always likes to buy growth stock at value prices.
He spoke admiringly of consumer-goods titan Nike and was optimistic on the health-care sector.
Know The Negatives
It is important to understand the negatives associated with a potential investment. Knowing “why not to buy something” is a key aspect to validating any given investment idea, as it means a much deeper understanding of the underlying businesses.
By considering all the flaws or holes in your potential investment, you will have a greater conviction if your stock-pick can stand up to all the scruntiny.
Stick to What You Know, But Don’t Stop Learning
This is a concept that Warren Buffett mentions all the time. Know your own circle of competence, and stay within that circle! In Simpson’s case, he rarely invests in companies that are domiciled abroad as he does not know them as well. He also stays clears of technology stocks.
Having said that, it is important to keep on learning new things.
For example, Simpson went on a trip to India to learn more about their fast-developing economy. He even sits on the board of techonlogy firms.
Patience Is a Virtue
There seems to be a clear link between time horizon and investment outcome. The longer the time horizon and holding period, the better the performance.
It takes a lot of time to find and validate an idea, thus it does not make much sense to flee at the first sign of trouble. Instead, if the original assessment still stands, Simpson will continue to hold.
Stocks Are Better Than Bonds
Simpson uses more of a bottom-up strategy in his stock selection. He also feels that stocks are a bargain when you compare them with bonds.
His philosophy is that he invests in businesses, especially those with durable competitive advantages. They are all invested in for the long term. (Geico’s has a portfolio fewer than 20 stocks.)