Concentrated Investing. Carlisle Tobias E.

far above the market’s 21 percent gain. By then, almost a third of GEICO’s portfolio was invested in stocks, up from just 12 percent when Simpson started. Byrne later noted, “We gave him a broad, unfettered pasture to work in, and we allowed him to put an unusual percent of the company’s assets into equities. And Lou just knocked the cover off the ball for us.”97 Simpson was head of investments for GEICO for 31 years from 1979 until his retirement from GEICO in 2010, aged 74, by which time he was president and co-chief executive officer of GEICO Corporation.98 His record over that long period is extraordinary, trouncing market averages and most investment managers’ performance. Simpson says of his time at GEICO, “Over the years we put together a good record. At one time we were hitting on all cylinders and I think there was a period of five, six, seven, eight years where we were outperforming by over 15 percent a year. But over a 25-year period, and this was in the Berkshire Report, our over performance was 6.8 percent a year.”99

Buffett first mentioned Simpson in passing in a letter to the shareholders of Berkshire in 1982, describing him as “the best investment manager in the property-casualty business.”100 From that heady start, he became increasingly effusive about Simpson as time wore on. He detailed Simpson’s record in the 2004 report, writing, “Take a look at the facing page to see why Lou is a cinch to be inducted into the investment Hall of Fame.”101 Under the heading “Portrait of a Disciplined Investor Lou Simpson,” Buffett set out Simpson’s extraordinary record, reproduced here in Table 1.1.

Table 1.1 “Portrait of a Disciplined Investor Lou Simpson” from Buffett’s 2004 Berkshire Hathaway “Chairman’s Letter”

      Buffett joked in 2010 that he had since omitted updates to Simpson’s record only because its performance made Buffett’s look bad, quipping, “Who needs that?”102 For his part, Simpson does not crow about GEICO’s performance except to say that “it has been very, very good.”103

      The deal Simpson had struck with GEICO after he had been at the company several years paid him handsomely. Detailing the arrangement he and Byrne had made with Simpson, Buffett wrote in 1996, “In Lou’s part of GEICO’s operation, we again tie compensation to investment performance over a four-year period, not to underwriting results nor to the performance of GEICO as a whole. We think it foolish for an insurance company to pay bonuses that are tied to overall corporate results when great work on one side of the business – underwriting or investment – could conceivably be completely neutralized by bad work on the other. If you bat .350 at Berkshire, you can be sure you will get paid commensurately even if the rest of the team bats .200.”104 Simpson was paid big bonuses if GEICO’s investments outperformed the S&P 500 over a sustained period, which he achieved numerous times during his tenure at GEICO. Evidently, Buffett was happy with the arrangement. When Berkshire acquired the remaining half of GEICO, Buffett kept Simpson, and the deal, in place. While the salary package was very lucrative for Simpson, Buffett noted that he “could have left us long ago to manage far greater sums on more advantageous terms. If money alone had been the object, that’s exactly what he would have done. But Lou never considered such a move.”105

      Simpson, associates say, has derived great satisfaction from the recognition that Buffett has bestowed upon him.106 Buffett has described him as “the class of the field among insurance investment managers.”107 He was also made a part of the so-called Buffett Group, an inner circle of about 50 who gather with Buffett every other year for days of conversation about value investing, among other subjects.108 David R. Carr Jr., president of Oak Value Capital Management, an investment management company, and a Berkshire shareholder, said, “He’s one of the sainted crowd; he understands and practices value investing.”109 Buffett has noted about Simpson’s returns that they “are not only terrific figures but, fully as important, they have been achieved in the right way. Lou has consistently invested in undervalued common stocks that, individually, were unlikely to present him with a permanent loss and that, collectively, were close to risk-free.”110