“The only way one man can exercise power over another is over his body and what is inferior to it, his possessions. You cannot impose anything on a free mind, and you cannot move from its state of inner tranquility a mind at peace with itself and firmly founded on reason.”

— Boethius

Lou Simpson

"We try to be disciplined in the price we pay for ownership even in a demonstrably superior business. Even the world's greatest business is not a good investment if the price is too high."

— Lou Simpson

Louis A. Simpson joined GEICO in 1979 as the company’s chief market strategist and was named CEO and President of capital operations in 1993. According to Warren Buffett’s 2004 letter to Berkshire Hathaway shareholders Mr. Simpson achieved an average annual gain of 20.3% from 1980 to 2004 compared to 13.5% for the S&P 500, outperforming the index in eighteen of twenty-five years and only posting losses in three years.

Mr. Simpson retired from GEICO at the end of 2010 and founded SQ Advisors, a small money management firm where his publicly disclosed positions were closely followed by value investors. In addition to his investment activities, Mr. Simpson was active in philanthropic causes, most notably related to biomedical research. He died at the age of 85 on January 8 after a prolonged illness.

GEICO’s investment performance was a key advantage for the firm when it was publicly traded, and Mr. Simpson continued to manage the portfolio after Berkshire Hathaway acquired GEICO in 1995. At the time, Mr. Simpson was the only investment manager at Berkshire Hathaway to whom Warren Buffett granted complete autonomy to make investment decisions.

Lou Simpson kept a very low profile, but there are still a number of resources available to learn more about his remarkable life and career. The following links are a few that I have found interesting, starting with his obituary in The Chicago Tribune:

Louis Simpson, savvy investor whose $92 million gift funded a biomedical research center, dies at 85 by Bob Goldsborough, January 10, 2022. “Simpson and his wife funded scholarships and endowed academic positions at Northwestern. In 2015, their commitment to the university culminated in a $92 million gift to fund biomedical research programs at the university’s medical school. The gift came just a year after the couple had donated $25 million to endow an institute for bionanotechnology in medicine.” (Chicago Tribune)

GEICO’s Top Market Strategist Churning Out Profits by David A. Vice, May 11, 1987. "One of the things I have learned over the years is how important management is in building or subtracting from value," Simpson said. "We will try to see a senior person and prefer to visit a company at their office, almost like kicking the tires. You can have all the written information in the world, but I think it is important to figure out how senior people in a company think." (Washington Post)

Buffett on Lou Simpson and His Successful Investing Strategy by Johnny Hopkins, October 31, 2017. “An investor is not likely to obtain superior results by buying a broad cross-section of the market. The more diversification, the more performance is likely to be average, at best. We concentrate our holdings in a few companies that meet our investment criteria. Good investment ideas — that is, companies that meet our criteria — are difficult to find. When we think we have found one, we make a large commitment. The five largest holdings at Geico account for more than 50 percent of the stock portfolio.” (The Acquirer’s Multiple)

A Dozen Things I’ve Learned from Lou Simpson About Investing and Business by Tren Griffin, April 4, 2015. “When you ask whether someone is a value or growth investor – they’re really joined at the hip. A value investor can be a growth investor because you’re buying something that has above-average growth prospects and you’re buying it at a discount to the economic value of the business.” (25iq)

Learning from Lou Simpson, November 16, 2017. “In 1979 Jack Byrne, the CEO of Geico, was looking for a new chief investment officer to run Geico's investment portfolio. Jack had identified four candidates and had then sent them to Omaha to meet Warren Buffett who was a shareholder. ''I sent three of the four to meet Warren,'' Mr. Byrne recalled. ''And after a four-hour interview with Lou, he called me and said: "Stop the search. That's the fella." Lou stayed on for over 25 years racking up returns that bettered the S&P500 by an astonishing 6.8%pa.” (Investment Master Class)

2010 Berkshire Hathaway Annual Letter by Warren Buffett, February 26, 2011. “Last summer, Lou Simpson told me he wished to retire. Since Lou was a mere 74 — an age Charlie and I regard as appropriate only for trainees at Berkshire — his call was a surprise. Lou joined GEICO as its investment manager in 1979, and his service to that company has been invaluable. In the 2004 Annual Report, I detailed his record with equities, and I have omitted updates only because his performance made mine look bad. Who needs that? 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.” (Berkshire Hathaway)

Source: Berkshire Hathaway’s 2004 Annual Report

Articles

Data Update 1 for 2022: It is Moneyball Time! by Aswath Damodaran, January 8, 2022. This is the first of a series of data updates provided every year by Professor Damodaran: “I would love to tell you that I am driven by altruistic motives in sharing my data, and push for sainthood, but I am not. I would have produced all of the data that you see anyway, because I will need it for my work, both in teaching and in practice, all year. Having produced the data, it seems churlish to not share it, especially since it costs me absolutely nothing to do so. If there is a hidden agenda here, it is that I think that in spite of advances over the last few decades, the investing world still has imbalances, especially on data access, and I would like it make a little flatter. Thus, if you find the data useful, I am glad, and rather than thank me, please pass on the sharing.” (Musings on Markets)

Does Not Compute by Morgan Housel, January 5, 2022. As Morgan Housel says, it can often be hard to distinguish between what is actually happening and what you think should be happening. “If you look, I think you’ll find that wherever information is exchanged – wherever there are products, companies, careers, politics, knowledge, education, and culture – you will find that the best story wins. Great ideas explained poorly can go nowhere while old or wrong ideas told compellingly can ignite a revolution.” (Collaborative Fund)

Thank You for Speculating by Jamie Catherwood, January 8, 2022. The level of speculative activity in financial markets lately seems extreme, but the reality is that speculative excess has long been a feature of financial markets. The bucket shops of the early 20th century facilitated speculative excess in the same way that Robinhood does today, as readers of the classic Reminiscences of a Stock Operator know. In this article, Jamie Catherwood discusses the history of speculation and points out that there have been some positive things about periods of speculative excess — specifically, increased awareness of financial markets eventually resulted in some speculators “graduating” into more rational long-term investors. (Investor Amnesia)

Investments We Make, January 5, 2022. One of Warren Buffett’s advantages during the first few decades of his management of Berkshire Hathaway was a reputation for being an acquirer who will not saddle companies with debt and seek to “flip” them for a quick profit. This attracted founders who wanted liquidity from a sale but still cared about the long-term outcome for their business and its employees. Berkshire is now too large to acquire almost all founder-led family run businesses, but Warren Buffett’s playbook for this type of acquisition is alive and well elsewhere. (Permanent Equity)

The Best Investment for This Coming Crazy Year by Jason Zweig, January 7, 2022. “Ask what the single best investment is likely to be this year, and you might get suggestions like bitcoin, Tesla Inc. shares or cheap value stocks. I think the best investment of 2022 is likely to be discipline. With the course of the coronavirus pandemic unclear, inflation expected to keep spiking and the Federal Reserve poised to raise interest rates, anything can happen—and probably will. What’s more, the things that feel most certain aren’t as obvious as they seem—so investors need to beware of taking drastic actions that, later on, they will wish they could undo.” (Wall Street Journal)

Podcasts

Gregory Zuckerman on the Crazy Race to Create the COVID Vaccine, January 10, 2022. In this podcast, Gregory Zuckerman discusses his latest book, A Shot to Save the World, which is about the incredibly fast development of the COVID vaccines in 2020. Zuckerman is also the author of The Man Who Solved The Market, a fascinating account of Jim Simons which I reviewed in 2019. (EconTalk)

How the Federal Reserve Broke the American Economy w/ Christopher Leonard, January 6, 2022. This is an interview of Christopher Leonard, the author of The Lords of Easy Money, a recent book that is highly critical of the Federal Reserve’s monetary policy during the period starting with the 2008-09 financial crisis. It is rare to read criticism of the Federal Reserve in the mainstream media, so it was interesting to hear Leonard, who is a New York Times journalist, discuss just how unconventional and risky recent monetary policy has been. (We Study Billionaires)

Betting Big on Cryptocurrency & Bitcoin, January 7, 2022. Bill Miller has made an enormous bet on Bitcoin by putting fifty percent of his personal portfolio into the cryptocurrency and related assets. The other fifty percent is invested in Amazon stock. He first purchased Bitcoin in 2014 when it was trading around $200 but his big bet came last year when Bitcoin dropped to the $30,000 level. In this interview, Miller explains his bullish case for Bitcoin. (Consuelo Mack’s WealthTrack)

Copyright, Disclosures, and Privacy Information

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.

Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

Rational Reflections

Lou Simpson's Life and Legacy