As I covered in my previous article, Warren Buffett (Trades, Portfolio)’s Geico story started in 1951 when the unknown young man from Omaha spent over $10,000 of his own money buying the stock.
“Checking back, I find that I purchased GEICO shares on four occasions during 1951, the last purchase being made on September 26...I accumulated 350 shares of GEICO during the year, at a cost of $10,282.”
But for a man who has built his reputation on his long-term nature, this holding did not last long. In fact, Buffett bailed out the year after, booking a tidy profit of more than 50% including dividends.
“Alas, I sold my entire GEICO position in 1952 for $15,259, primarily to switch into Western Insurance Securities.”
In the second part of this series, I am going to take a look at Western Insurance Securities to try to figure out why Buffett passed up a multimillion-dollar opportunity with Geico to buy it.
Western Insurance Securities Co.
We know a lot about the Western Insurance Securities Co. holding because Buffett wrote about it in the Commercial and Financial Chronicle in a column titled "The Security I Like Best," repeating his Geico playbook.
Buffett opened his new piece on the topic with “again my favorite security is the equity stock of a young, rapidly growing and ably managed insurance company.” Interestingly, he then goes on to hint at Geico’s long-term potential, showing his inexperience at the time:
“Although Government Employees Insurance Co., my selection of 15 months ago, has had a price rise of more than 100%, it still appears very attractive as a vehicle for long-term capital growth.”
Buffett liked Western for no other reason than it was cheap. Buffett noted the “price range in Moody’s financial manual was $12 to $20” compared to earnings per share of $16. What’s more, the shares were only trading at “a discount of approximately 55% from the Dec. 31, 1952, book value of $86.26 per share.”
The stock also offered growth. Buffett calculated Western would produce an ”earned premium volume of $30,000,000” by 1954, which should translate into earnings power of “$30 per share with investment income contributing approximately $8.40 per share after deducting all senior charges from investment income.”
“The patient investor in Western Insurance common can be reasonably assured of a tangible acknowledgement of his enormously strengthened equity position. It is well to bear in mind that the operating companies have expanded premium volume some 550% in the last 12 years. This has required an increase in surplus of 350% and consequently restricted the payment of dividends. Recent dividend increases by Western Casualty should pave the way for more prompt payment on arrearages.”
I think the contrast between Geico and Western, as well as Buffett’s decision to dump Geico (which Benjamin Graham was still involved with), gives us an exciting insight into Buffett’s investment mentality at the time. Even though he understood the power of management and growth, he was still searching for value at any cost.
We can only speculate as to what impact this had on his wealth, but a rudimentary calculation shows that if he had held Geico for the next 20 years (with substantially all of his wealth invested), Buffett might not have the wealth he has today. Indeed, in the first part of this series I included a quote from Buffett: “in the next 20 years, the GEICO stock I sold grew in value to about $1.3 million.”
Over same period, in the real world, Buffett’s wealth exploded to around $34 million. And, as I am going to discuss in the next part of this series, by being out of Geico, Buffett was able to gain a controlling stake in the company and make even more cash when it nearly collapsed in the late 1970s. This was not planned, it was a stroke of luck, but Buffett’s investment skill allowed him to be in the right place at the right time.
