Few retirees get the sendoff that Lou Simpson (Trades, Portfolio) received from Warren Buffett (Trades, Portfolio). In 2010, "The Sage of Omaha" wrote in Berkshire Hathaway's (BRK.A) (BRK.B, Financial)Â annual report, "Lou has never been one to advertise his talents. But I will: Simply put, Lou is one of the investment greats. We will miss him.”
Simpson joined Geico in 1979 and retired in 2010.
Previously, in the 1986 annual report, Buffett wrote, “Lou has made me a lot of money. Under today’s circumstances, he is the best I know. He has done a lot better than I have done in the last few years. He has seen opportunities I have missed.”
Who is Simpson?
After graduating from a Chicago high school, Simpson enrolled in the engineering program at Northwestern University. But that was far from his calling; he later wrote, "I am a mechanical misfit. I was a misfit in engineering." After a year, he transferred to Ohio Wesleyan University, and took on a double major in accounting and economics. He went on to earn a master’s degree in economics at Princeton University in 1960.
His initial plan, to teach economics, was diverted when he was offered a job at a Chicago investment firm (lured by a bigger paycheck). In turn, that led him to 10 years at Western Asset Management Inc. in California, where he worked as a money manager and in other positions.
In 1979, he was recruited by Buffett and Geico Chairman Jack Byrne to join Geico, where he became a senior vice president and chief investment officer. Since Geico was a Berkshire Hathaway company, Simpson developed a close connection with Buffett, one apparently based on mutual admiration.
In 2010, after 30 years at Geico, he decided to retire and start his own hedge fund, at age 74. Simpson and his wife opened SQ Advisors LLC in late 2010 with $150 million to $200 million. The initial capital came from family, friends and charities.
What is SQ Advisors?
Based on 13F filing information provided by WhaleWisdom, SQ Advisors is a Naples, Florida-based investment advisory firm. Based on the most recent filing, at the end of third-quarter 2017, the fund had $2.9 billion of assets under management. Its top 10 holdings represent 83.25% of its portfolio.
A Bloomberg profile of SQ refers to it as an employee-owned investment manager, offering services to high net-worth individuals, pooled investment vehicles and charitable organizations, among others. An article at Medium has a different take, saying SQ offers separately managed accounts to friends, family and charities. Since it charges a flat 1% management fee—and no performance fees—it seems to be a labor of love as much as anything else.
The profile also says SQ manages client-focused equity portfolios, with investments in public equity markets around the world. It begins with bottom-up analysis, using fundamental research. Candidates on the short list are then subject to external and internal research.
For a retirement project, started with no more than $200 million in capital, Simpson has done better than most career-building investors could hope for. Even though he no longer is directly connected with Buffett, he appears to have retained the successful value investing touch they shared.
What are Simpson’s Strategies?
In the Form ADV Part 2A, Simpson lists five guidelines for his firm:
- Think for yourself, avoid groupthink.
- Buy into high-return companies that put their shareholders first.
- Don't pay too much, even for an excellent company.
- Think long-term in making investments.
- Avoid excessive diversification.
In a 2015 article for Medium, author MPF adds to those principles, based on research. On thinking independently, he quotes Simpson as saying, "We try to be skeptical of conventional wisdom and try to avoid the waves of irrational behavior and emotion that periodically engulf Wall Street."
Turning to the subject of high-return businesses, MPF reports Simpson's key metric is return on capital. On diversification: Simpson says, according to MPF, too much diversification leads to average returns, at best. Simpson puts an upper limit on holdings at 15 because you cannot get to know too many companies really well.
To the original five principles, MPF adds the following:
- Read a lot, every day: Simpson is said to five to eight hours a day, everything from filings and annual reports to business magazine.
- Speak honestly, use simple language to describes your successes and your failures. A New York Times article from 2007 said Simpson is "disarmingly honest about investments that have not worked out."
- Do not talk about your investments: Simpson says many investors say too much and it works against them.
- Fewer decisions: The Medium article points out Simpson has designed a workplace and lifestyle that maximizes his time to think about the most important issues. The guru himself says he believes in lot of thinking and very little action.
- Study your mistakes: Simpson tries to do post-mortems whenever he has made a mistake, to find out why he made it.
In the same Medium article, guru Glenn Greenberg (Trades, Portfolio) is quoted as saying Simpson looks for low-competition niches, relatively stable pricing, consistent demand for the company’s product(s) and low capital requirements. The latter means most of the earnings can be reinvested, paid to shareholders or used to make acquisitions.
Simpson continues to follow the value investing road, with principles that align with those held by many who follow Benjamin Graham and Buffett. For investors trying to follow his lead, start by becoming a voracious reader so that when a rare opportunity shows up, you will be ready for it.
Holdings
This chart shows Simpson’s sectoral holdings at the end of September:
These are Simpson’s top 10 equity holdings:
- Liberty Global PLC (LBTYK, Financial): 11.31%
- Brookfield Asset Management Inc. (BAM, Financial): 11.25%
- Charles Schwab Corp. (SCHW, Financial): 9.55%
- Allison Transmission Holdings Inc. (ALSN, Financial): 9.5%
- Berkshire Hathaway Inc. (BRK.B, Financial): 8.55%
- Axalta Coating Systems Ltd. (AXTA, Financial): 7.72%
- Apple Inc. (AAPL, Financial): 6.71%
- Sensata Technologies Holding N.V. (ST, Financial): 6.59%
- SBA Communications Corp. (SBAC, Financial): 6.13%
- Cable One Inc. (CABO, Financial): 5.94%
Simpson manages a high-conviction portfolio made up of just 13 stocks, which is worth more than $2.8 billion.
Performance
TipRanks reports Simpson's average annual return over the past three years comes to 17.38%.
It also provides this chart, comparing SQ Advisors (blue), its peer group (orange) and the S&P 500 (purple) over five years:
Note the big dip in 2015, which significantly pulled down his three-year average. Still, gurus must be measured by their losses as well as their gains.
Judging by the chart above, Simpson started out strong but was pulled back to earth by serious declines in 2015. That put him behind the S&P 500 over the past five years, giving him a challenge in coming years.
Conclusion
Simpson was a very late in starting his own business. But, in its first couple of years, his firm fulfilled the expectations created by Buffett.
Simpson was an outstanding performer during most of his years at Geico Insurance, quietly pulling in returns that sometimes matched, or even beat, Buffett’s. He continued to exercise his mind for the good of his new clients after starting SQ in 2010.
Value investors may not be able to read much about Simpson. One place to start would be the archived annual letters of Buffett, with whom Simpson worked closely for many years.
Disclosure: I do not own shares in any of the companies listed in this article, and I do not expect to buy any in the next 72 hours.
