Sunday, April 29, 2007

Louis Simpson interview

Published on The New York Times, Sunday, April 29, 2007
GEICO Exec Thinks A Lot Like Buffett
Hathaway CEO is a fan of little-known investment manager Louis Simpson


CHICAGO – Warren E. Buffett is hardly a man of mystery.

But when investors gather in Omaha May 5 for the Berkshire Hathaway annual meeting, there will be a nagging question mark over the hear of the 76-year-old chairman: who might someday replace him in each of the two roles he plays – chief executive of Berkshire Hathaway, and its chief investment officer?

A bit more is known about the choice of a future chief executive. Buffett has said there are three candidates from various Berkshire-owned companies. Buffett watchers speculate that the list includes David L. Sokol of MidAmerican Energy Holdings; Ajit Jain, head of the reinsurance division of Berkshire’s National Indemnity Company; Tony Nicely, chief executive of GEICO; Joseph P. Brandon, chairman of General Re; and Richard T. Santulli, founder of NetJets.

The bigger mystery is who will become the chief investment officer. Buffett says he does not know himself. On this point of succession, “frankly, we are not as well prepared,” he wrote in his 2006 shareholder letter last month.

Here is a clue, though. He or she will probably be a lot like Louis Simpson.

Louis who?

Simpson, 70, has long overseen the investment portfolio of GEICO, the insurance company Berkshire owns, which is not valued at more than $4 billion. He is also the only man other than Buffett who has managed stock investments in Berkshire’s portfolio.

Buffett is a big fan. “He is the kind of person we are looking for: smart, classy, loyal,” he said of Simpson in a recent telephone interview. But Simpson is just six years younger than Buffett, who has written that “for the long term, though, we need a different answer.”

Applicants would do well to learn from Simpson, which is easier now that he has agreed to his first interview since Berkshire Hathaway gained total control of GEICO in 1995.

In many ways, Simpson, whose title at GEICO is chief executive for capital operations, is a lot like his boss. The two have the same general distaste for technology stocks. They both favor intensive research to find attractive companies to invest in, and they share a willingness to bet on returns from just a handful of stocks.

In terms of style, though, there are some major differences. Simpson, a deliberate, slow-talking executive, has maintained much lower visibility. “I have always felt I could do a better job in adding value by being somewhat removed from the circus and pari-mutuel atmosphere of the market,” he said.

Simpson works in Chicago, where he moved from the La Jolla district of San Diego two years ago because his second wife, Kimberly, a chemical engineer, missed the energy of urban life.

Though he is already well-connected among Chicago’s power brokers, he tends to describe people in terms like “fancy” if they are not the plain-spoken types that populate Berkshire’s host of companies.

Simpson’s work life is similarly low-key. On a recent spring day, he sat in his three-room office suite on North Michigan Avenue here, where he works with a small staff, explaining that it had been a particularly busy time.

Busy, though, is relative. There were no researchers running around, no Bloomberg terminals, and no interruptions. “We are sort of the polar opposites of a lot of investors,” Simpson said. “We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting, and not a lot of thinking.”

He does not crow about GEICO’s performance except to say that “it has been very, very good,” and he is disarmingly honest about investments that have not worked out.

“Pier 1 was a horrible mistake,” he acknowledged. “It was our own doing. They were totally out of touch fashion-wise, and it was a disaster.”

Such mistakes notwithstanding, his track record has even led Buffett to brag about him periodically. In 2004, the only time that Berkshire ever stated GEICO’s performance separately, Simpson over 24 years had posted a 20 percent average annual gain, surpassing the Standard & Poor’s 500-stock index by 6.8 percentage points.

Since 2004, GEICO’s results have been somewhat better than the S & P index, he said, declining to be specific. In 2005, the S & P was up 4.9 percent, compounded. In 2006, it rose 15.8 percent.

“He has an amazing record,” Buffett said in the interview. “He does not make a lot of noise about it. He is a very sensible, sound, decent guy.”

To find stocks, Simpson does not read analysts’ reports. “They have their own agenda,” he said.

Nor does he search data on the Bloomberg terminal for ideas. “If I have the Bloomberg on, I find I am looking at what the market is doing,” he said. “I am looking at every news story. I really like to be the one who is parsing the information, rather than having a lot of irrelevant information thrown at me.”

Sometimes he speaks with Buffett several times a week and sometimes not for a month or two. Simpson makes his own decisions and essentially works alone.

“The more people you have, the more difficult it is to do well,” he said. “You have to satisfy everybody. If you have a limited number of decision makers, they are more likely to agree.”

It is hard to know which stocks are GEICO’s and which are Buffett’s picks. Simpson holds about 10 major positions: According to filings with the Maryland Insurance Administration, they are in American Standard, Nike, Comcast, Costco Wholesale, First Data, Home Depot, ServiceMaster and UnitedHealth Group (he bought it after the stock-option scandal). GEICO’s biggest position is TESCO of Britain, a stock also owned by Berkshire Hathaway.

Simpson found Nike, one of GEICO’s most successful holdings, through a stake in the rival Reebok. He had hired a journalist-turned researcher, and the researcher thought that Reebok was the “cat’s meow,” Simpson recalled, adding: “Paul Fireman ran the company, but not particularly well. The more we got into it, the more I saw the really quality company with the franchise and sports brand was Nike. It was truly a worldwide brand that did not have a lot of penetration in growing parts of the world such as Asia.”

Thomas Russo, a partner in Gardner Russo & Gardner, also studied that industry for investors. GEICO “did an enormous amount of research,” he said. “They wanted to understand the management questions,” adding, “We were researching companies in that same sector, and we had a pretty good idea of what was going on.”

Simpson, who grew up in Chicago and has three sons, began his investing career at Stein Roe & Farnham. During a heady investment period in the late 1960s, he learned the perils of market timing when he worked for Shareholders Management, then a hot fund company run by Fred Carr. But when the market turned, Shareholders’ Enterprise Fund took a nose dive, and there were substantial redemptions. Simpson resigned. “I viewed myself an investor, and they were trading-oriented,” he said.

From there, he joined Western Asset Management where he rose to chief executive. Still, that firm basically followed analysts’ recommendations.

It was not until GEICO’s chairman, John J. Byrne, called him in 1979 to become its chief investment officer that Simpson found a niche where he could put his own ideas to work. Berkshire Hathaway was already a shareholder in GEICO, and Byrne sent several candidates to see Buffett about the management job. After a four-hour interview with Simpson, Buffett called Byrne. “Stop the search,” Byrne recalled him saying. “That’s the fellow.”

Simpson’s compensation has not been disclosed since Berkshire took over GEICO in 1995. At that time, he received a moderate salary and a bonus based on how much the portfolio outperformed the S & P 500. He said that structure had not changed.

Buffett has noted that Simpson could probably make more money elsewhere. Simpson says he is not tempted.

Does the fact that Buffett seeks a younger heir for the long term upset him?
“If he would have asked me to take over the investments for Berkshire, I certainly would have done it,” Simpson said, “but I certainly did not seek it out or wait for it to happen.”

That kind of patience has proved to be its own reward. “Lou can keep running money as long as he wants, “ Buffett said.


fishman said...

Hey berkshire,

very long since you last post soemthing more personal, like how your investments are doing. Not asking you to disclose your holdings lah, just hungry for your personal investing insight using buffettology!

So far I've opened an account with Alvin of UOB-Kay Hian but yet to do anything yet. Not rushing in, especially at this point!

Berkshire said...

Hi Fishman,

Sad to say, Alvin has left KH to join a global bank in its investment arm. Another good broker gone, but understand he'll be handing his customers to his friend whom I believe will serve like Alvin does.

Ok back to your query. Personally, what I comment on my blog is actually the basis and principles in how I select my holdings. So it really doesn't matter if I give my personal portfolio example or not. But of course, I can give my personal portfolio experience to tie up with the principles that are stated.

I determine that on and off I may cite some of my personal investing portfolio examples but I try to leave it as there. Anyway, I do cite some in the past like Johnson and Johnson and Walgreens, and some like Kingboard. But I could not cite many constantly, for the reason that I am not a trader or flip-flopper in investment. And that my portfolio is very concentrated in only a couple of stocks.

I too determine that I will endeavor to write an annual writing or report on each financial year like how the major investment funds do. And in this, I will cite the stocks which I had experience in the given year.

Maribel said...

Keep up the good work. said...

Tks very much for your post.

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