Concentrated Investing

Strategies of the World's Greatest Concentrated Value Investors

Allen C. Benello, Michael van Biema, Tobias E. Carlisle

• Publisher: Wiley
• Year: 2016
• Print ISBN: 9781119012023
• eBook ISBN: 9781119012047
• Edition: 1
• Topic: Business
• Subtopic: Stocks
• Index: Business

Discover the secrets of the world's top concentrated value investors

Concentrated Investing: Strategies of the World's Greatest Concentrated Value Investors chronicles the virtually unknown—but wildly successful—value investors who have regularly and spectacularly blown away the results of even the world's top fund managers. Sharing the insights of these top value investors, expert authors Allen Benello, Michael van Biema, and Tobias Carlisle unveil the strategies that make concentrated value investing incredibly profitable, while at the same time showing how to mitigate risk over time. Highlighting the history and approaches of four top value investors, the authors tell the fascinating story of the investors who dare to tread where few others have, and the wildly-successful track records that have resulted.

Turning the notion of diversification on its head, concentrated value investors pick a small group of undervalued stocks and hold onto them through even the lean years. The approach has been championed by Warren Buffett, the best known value investor of our time, but a small group of lesser-known investors has also used this approach to achieve outstanding returns.

• Discover the success of Lou Simpson, a former GEICO investment manager and eventual successor to Warren Buffett at Berkshire Hathaway
• Read about Kristian Siem, described as "Norway's Warren Buffett, " and the success he has had at Siem Industries

Concentrated Investing will quickly have you re-thinking the conventional wisdom related to diversification and learning from the top concentrated value investors the world has never heard of.

CHAPTER 1
Lou Simpson: The Disciplined Investor: A Portrait of Concentration

Stop the music.

—Warren Buffett to Jack Byrne, chairman of GEICO, after meeting Lou Simpson in 1979¹

In 1979, GEICO, an auto insurance company based in Washington, DC, that had been brought close to bankruptcy just three years earlier was searching for a new chief investment officer. The company’s recent near-death experience, and the perception of insurance companies’ investment efforts as hidebound, and highly risk-averse, had made the search difficult. The recruiter, Lee Getz, vice chairman of Russell Reynolds, did find a candidate who later turned it down because his wife refused to move to Washington.² Lamenting his lack of success in filling the position in over a year, Getz told his friend Lou Simpson about the little insurance company with big problems that no one wanted to tackle. He asked Simpson, the chief executive of California-based investment firm Western Asset Management, if he was interested in the job. Simpson was reluctant.³ Western Asset Management had been a subsidiary of a big California bank holding company. Simpson was sick of politicking within the confines of bank bureaucracy, and didn’t have any great desire to repeat the experience in an insurance company. He also knew that GEICO had almost gone belly up just three years earlier.

As a favor, Getz asked Simpson to interview with the company’s chairman, John “Jack” Byrne Jr., the man who had almost single-handedly pulled GEICO back from the brink of insolvency.⁴ Simpson agreed if only to help out an old friend. He traveled to Washington to meet with Byrne, who Simpson judged as being “a very, very smart guy,” but also a micro-manager involved in everything GEICO did.⁵ Simpson found the role interesting, but not compelling. He craved autonomy, and Byrne, who had just saved GEICO, seemed unlikely to grant it. Byrne called Simpson back for a second interview. Though he had reservations he dutifully traveled back to Washington. In the second interview, Byrne told Simpson, “We’re really interested in you. But the one hoop you’re going to have to go through is to meet with Warren Buffett.”⁶ With about 20 percent of GEICO, Buffett was the largest shareholder through Berkshire Hathaway. Byrne said, “Warren thinks we need a new investment person. The person before was really not up to the job.”⁷ Though Buffett didn’t yet have a high profile, Simpson had read about the Nebraska-based value investor who was just renewing a longstanding interest in GEICO.

“Unstoppable” GEICO

Buffett has a storied 65-year association with GEICO, beginning in 1951 as a 20-year-old graduate student in Benjamin Graham’s value investing class at Columbia. He recounted the first 45 years of that association in his 1995 Chairman’s Letter following Berkshire’s purchase of the half of GEICO it didn’t own.⁸ It was then the seventh-largest auto insurer in the United States, with about 3.7 million cars insured (in 2015, it is second, with 12 million policies in force). Buffett attended Columbia University’s graduate business school between 1950 and 1951 because he wanted to study under Graham, the great value investor and investment philosopher, who was a professor there. Seeking to learn all he could about his hero, he found that Graham was the chairman of Government Employees Insurance Company, to Buffett “an unknown company in an unfamiliar industry.”⁹ A librarian referred him to Best’s Fire and Casualty insurance manual—a large compendium of insurers—where he learned that GEICO was based in Washington, DC.

On a Saturday in January 1951, Buffett took the early train to Washington and headed for GEICO’s downtown headquarters. The building was closed for the weekend, but he frantically pounded on the door until a custodian appeared. He asked the puzzled janitor if there was anyone in the office the young Buffett could talk to. The man said he’d seen one man working on the sixth floor—Lorimer Davidson, assistant to the president and founder, Leo Goodwin, Sr. Buffett knocked on his door and introduced himself. Davidson, a former investment banker who had led a round of funding for GEICO before joining it, spent the afternoon describing to Buffett the intricacies of the insurance industry and the factors that help one insurer succeed over the others.¹⁰

Davidson taught Buffett that GEICO was the very model of an insurer built to succeed. Formed in 1936, at the height of the Great Depression by Goodwin and his wife Lillian, GEICO was set up to be low-cost from the get go.¹¹ Goodwin had been an executive at the United Services Automobile Association (USAA), an auto insurer founded to insure military personnel, and a pioneer in the direct marketing of insurance. He had seen data that showed federal government employees and enlisted military officers tended to be financially stable, and also low-risk drivers. Those two attributes, he surmised, would mean that premiums were paid on time, with lower and infrequent claims. Agents were typically used to provide professional advice for more complex business insurance requirements. Auto insurance, though it was mandatory and expensive, was also relatively simple. Most consumers would know what they required in an auto policy.¹² Goodwin reasoned that GEICO could cut out the agents and market directly to consumers, thereby minimizing distribution costs, just as USAA had. Those two in...

Table of contents

• Cover
• Title page
• Copyright
• Dedication
• Preface
• Acknowledgments
• Introduction
• Chapter 1 Lou Simpson: The Disciplined Investor: A Portrait of Concentration
• Chapter 2 John Maynard Keynes: Investor Philosopher: The Economics of Concentration
• Chapter 3 Kelly, Shannon, and Thorp: Mathematical Investors: Concentration Quantified
• Chapter 4 Warren Buffett: The Kelly-Betting Value Investor: Portfolio Concentration for Value Investors
• Chapter 5 Charlie Munger: Concentration’s Muse: Quality without Compromise
• Chapter 6 Kristian Siem: The Industrialist: The Importance of Permanent Capital to the Long-Term Investor
• Chapter 7 Grinnell College: The School of Concentration: Concentration and Long-Term Investing for Endowment
• Chapter 8 Glenn Greenberg: The Iconoclast: Simple, Common Sense Research, and Tennis Shoes
• Chapter 9 Conclusion: The Concentrated Investor’s Temperament
• About the Authors
• Index
• EULA