Moats: The Competitive Advantages of 70 Buffett & Munger Businesses

Click image below for free PDF of Bud Labitan’s book Moats: Competitive Advantages of Buffett & Munger Businesses.

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Berkshire Hathaway Value Update, Year-End 2014

“As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock). In our 2010 annual report, however, we laid out the three elements – one of them qualitative – that we believe are the keys to a sensible estimate of Berkshire’s intrinsic value. That discussion is reproduced in full on pages 123-124.

Here is an update of the two quantitative factors: In 2014 our per-share investments increased 8.4% to $140,123, and our earnings from businesses other than insurance and investments increased 19% to $10,847 per share.”

—Berkshire Hathaway, Annual Report 2014, p. 7

Intrinsic Business Value Update

Last weekend I read the 2014 annual report from Berkshire Hathaway. As usual I enjoyed it, and even more so this year due to the extra writings from both Warren and Charlie.

Buffett himself summed up Berkshire’s 2014 in a good way in the beginning of the shareholder letter, when he said that “It was a good year for Berkshire on all major fronts, except one.” The exception was attributable to BNSF that according to Buffett “…disappointed many of its customers. These shippers depend on us, and service failures can badly hurt their businesses.”

The table below shows some key financial data for the prior ten-year period, including an estimate of intrinsic business value (by using the so-called “two-bucket approach”).

By using this two-bucket approach and applying a pre-tax earnings per share multiple of 10 times, results in a intrinsic business value per A share of $248,593 (or $166 per B share) at the end of 2014, and increase of 12.8% year-over-year. Book value per share increased 8.3%, from $134,973 to $146,186. The biggest change was in the price per share, increasing 27.0% year-over-year, from $177,900 to $226,000.

The 10-year average intrinsic business value (IBV) to book value (BV) was 1.65. Price to book value and price to intrinsic business value averaged 1.38 and 0.84 respectively.

At the moment (March 6, 2015) the A share is trading at $218,986 (or $146 per B share), giving a margin of safety of 12%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

KKR and RJR Nabisco: Video + Case

“I think Henry might tell you today that part of what was driving him subconsciously was the desire to win. The single most deadliest sin that you could have in the acquisitions business.” —Bryan Burrough, Author “Barbarians at the Gate”

Warren Buffett wrote about RJR Nabisco as a major arbitrage position in the Berkshire Hathaway’s letter to shareholders for fiscal year 1988, as follows:

At yearend, our only major arbitrage position was 3,342,000 
shares of RJR Nabisco with a cost of $281.8 million and a market 
value of $304.5 million. In January we increased our holdings to 
roughly four million shares and in February we eliminated our 
position. About three million shares were accepted when we 
tendered our holdings to KKR, which acquired RJR, and the 
returned shares were promptly sold in the market. Our pre-tax 
profit was a better-than-expected $64 million.

     Earlier, another familiar face turned up in the RJR bidding 
contest: Jay Pritzker, who was part of a First Boston group that 
made a tax-oriented offer. To quote Yogi Berra; “It was deja vu 
all over again.”

     During most of the time when we normally would have been 
purchasers of RJR, our activities in the stock were restricted 
because of Salomon’s participation in a bidding group. 
Customarily, Charlie and I, though we are directors of Salomon, 
are walled off from information about its merger and acquisition 
work.  We have asked that it be that way: The information would 
do us no good and could, in fact, occasionally inhibit 
Berkshire’s arbitrage operations.

     However, the unusually large commitment that Salomon 
proposed to make in the RJR deal required that all directors be 
fully informed and involved.  Therefore, Berkshire’s purchases of 
RJR were made at only two times: first, in the few days 
immediately following management’s announcement of buyout plans, 
before Salomon became involved; and considerably later, after the 
RJR board made its decision in favor of KKR. Because we could 
not buy at other times, our directorships cost Berkshire 
significant money.

RJR Nabisco – 1990, HBS Case

RJR Nabisco – 1990, HBS Case Solutions

A Case Study of a Complex Leveraged Buyout

Businessweek Archives: ‘Barbarians’ Revisited

Collection of RJR Nabisco newspaper articles

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Q&A: Case Study of See’s Candy

“There was something special. Every person in California has something in mind about See’s Candies and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him… See’s Candies means getting kissed. If we can get that in the minds of people, we can raise prices.” —Warren Buffett

This post contains my answers to the questions posted at CSInvesting.org as part of the DEEP VALUE course and the case study on See’s Candy. Feel free to comment and share your own views, reflections and take-aways.

Company Overview

A brief description of See’s Candy as of today:

See’s Candy Shops, Inc. produces boxed chocolates and candies. The company offers chocolate assortments, nuts and chews, decadent chocolate truffles, milk and dark chocolates, brittles and toffees, truffles, lollypops, candy bars, gift cards, and kosher categories. It offers products online, as well as through its shops in the United Sates, Hong Kong, Japan, and Macau. The company was founded in 1921 and is headquartered in Carson, California. (Source: Bloomberg)

Financial Data and Operating Metrics

From the current description of the business, let’s turn back to the time when Buffett and Munger purchased See’s, that is in the beginning of the 70’s.

From the financials disclosed by Warren in his shareholder letters we can see that See’s development has been excellent. Growing sales revenues translating into higher operating profits. See’s excellence is, to a great extent, derived from its ability to raise prices along with and also above the rate of inflation and at the same time requiring very limited investment in tangible assets.

A look at the development in the number of pounds of candy sold shows that during the same time period (1972 to 1984) as revenues more than quadrupled, operating profit after taxes increased more than tenfold, the number of pounds of candy sold increased only 46%. That’s right, just 46% during this 12 year period, or at an average growth rate per year of 3.2%. So, the great growth rate shown by sales revenues, was not due to volume growth, but to price.

If we take a look at sales revenues, operating expenses (OPEX) and operating profit after taxes (OPAT) on a per-pound basis, it’s clear that at the same time as sales revenue grew, operating expenses were managed in a good way which resulted in great growth in operating profit after taxes.

Looking at the data broken down on a per store level the same can be seen even here. Rising revenues per store, rising OPEX (even though at a lower rate than the growth in revenues), which contributed to the great growth rate in OPAT per store. At the same time the number of pounds of candy sold per store was growing real slow, and even turned negative for three of the four periods for which averages are calculated (see table below).

And finally, from where can any support for the pricing power of See’s be derived? If growth in sales revenues is compared to volume growth from the number of pounds of candy sold, we get a rough measure of the price increase each year (before inflation, i.e., nominal amounts). Taking inflation into account in the next step then gives the real price increases, that is any amount of the total price increase each year that remains when inflation for the same period is taken into account.

A year-to-year comparison does not always show any clear signs, growth between single years can go in opposite ways even when the underlying trend during a couple of years tells another tale. Instead, from looking at longer time periods it can be seen that See’s has not just been able to raise prices to match inflation, See’s also was able to raise prices at a rate higher than inflation, i.e., in real terms. (Any input regarding the pricing power issue of See’s and how to derive it would be greatly appreciated. Does my thinking make sense, or should something maybe be reconsidered here in my attempt to try to find the key to the “untapped pricing power” of See’s (both in nominal and real terms) Feel free to comment!)

Describe the competitive advantages of See’s.

In our primary marketing area, the West, our candy is preferred by an enormous margin to that of any competitor. In fact, we believe most lovers of chocolate prefer it to candy costing two or three times as much. (In candy, as in stocks, price and value can differ; price is what you give, value is what you get.)

—Warren Buffett, 1983 Letter to Shareholders

See’s moat most likely stems from:

• CAPTIVE CUSTOMERS through habit formation and maybe even some kind of emotional switching costs due to psychological reasons coming from the influence from mere-association tendency and the social proof tendency (both discussed by Charlie Munger in his speech The Psychology of Human Misjudgment), and
• LOCAL ECONOMIES OF SCALE in advertising and distribution.

For a hint on why it seems likely to assume the presence of LOCAL ECONOMIES OF SCALE even some decades ago, take a quick look at the map below showing some 186 See’s stores in California AS OF TODAY (Source: ca.sees.com). This concentration reminds me of the Walmart map that I posted in another post (see here).

Could this be a faster growing business if See’s sold through other marketing channels?

See’s most likely would be able to increase its growth rate (in volume) if it was sold through other marketing channels. But, would it still be as profitable? Probably not. But as we can see from an analysis of See’s moat and its sources, the moat sources are most favorable in California, and thus probably less so in other parts of the U.S.

How does Buffett analyze this business?

• Poundage volume
• Units sold per store

The poundage volume in our retail stores has been virtually unchanged each year for the past four, despite small increases every year in the number of shops (and in distribution expense as well). Of course, dollar volume has increased because we have raised prices significantly. But we regard the most important measure of retail trends to be units sold per store rather than dollar volume. On a same-store basis (counting only shops open throughout both years) with all figures adjusted to a 52-week year, poundage was down .8 of 1% during 1983.

—Warren Buffett, 1983 Letter to Shareholders

• Per-pound realization
• Per-pound costs
• Same store-volume

During 1984 we increased prices considerably less than has been our practice in recent years: per-pound realization was $5.49, up only 1.4% from 1983. Fortunately, we made good progress on cost control, an area that has caused us problems in recent years. Per-pound costs – other than those for raw materials, a segment of expense largely outside of our control – increased by only 2.2% last year.

Our cost-control problem has been exacerbated by the problem of modestly declining volume (measured by pounds, not dollars) on a same-store basis. Total pounds sold through shops in recent years has been maintained at a roughly constant level only by the net addition of a few shops annually. This more-shops-to-get-the-same-volume situation naturally puts heavy pressure on per-pound selling costs.

In 1984, same-store volume declined 1.1%. Total shop volume, however, grew 0.6% because of an increase in stores. (Both percentages are adjusted to compensate for a 53-week fiscal year in 1983.)

—Warren Buffett, 1984 Letter to Shareholders

What price did Buffett pay and why?

See’s is a slow grower, but its growth is steady and reliable—and best of all, it doesn’t take additional infusions of capital.

—Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger

Purchase price for See’s amounted to $25 million, a business earning $4 million pre-tax and $2 million after-tax, from $8 million in tangible assets (25% after-tax ROC or 50% pre-tax ROC), which translates into these key ratios:

• 12,5 times after-tax earnings (8% yield)
• 6,3 times pre-tax earnings (16% yield)
• 3 times invested capital

In comparison, the 10-year treasury rate in January 1972 was 5.95 percent.

Harry See’s asked for $30 million, but Buffett and Munger weren’t willing to pay more than $25 million, since this was a lot higher than the capital invested in the business. Harry See’s finally accepted the price of $25 million and Buffett and Munger, through Blue Ship Stamps, acquired a great franchise.

Q&A: Case Study on Dempster Mill Manufacturing Company

“When control of a company is obtained, obviously what then becomes all-important is the value of assets, not the market quotation for a piece of paper (stock certificate).” —Warren Buffett

In this post I lay out my answers to the questions posted at CSInvesting.org as part of the DEEP VALUE course and the case study on Dempster Mill Manufacturing Company. Feel free to comment and share your own views, reflections and take-aways.

I do not think that these questions are that easy. But I have tried to come up with decent answers, since by not trying I won’t learn anything. So, take it for what it is and feel free to share our own thoughts, preferably over at the comment section at CSInvesting where you will find many others who also participate in the DEEP Value course.

How did Buffett find this investment and what ways did he reach an intrinsic value?

Buffett found Dempster since the “figures were extremely attractive.” In other words, a low price compared to book value.

How many margins of safety did he have?

When Buffett first acquired stock in Dempster the most important margin of safety was most likely in the great discount between price and book value.

Later on when Buffett realized that current management didn’t succeed he had Harry Bottle to take over as CEO. This provided sort of a second margin of safety, a great manager or management team is never a negative. And in Harry Bottle Buffett found himself a great CEO able to run the business in a way Buffett himself thought was most likely to create the most value. I put Harry as second, because I think that he was more important than any potential future improvement in earning power. The earning power was more likely to be an outcome of great operating management.

Third, possible improvement in earning power.

What “type” of investment is this—is earning power below Asset Value?

The investment in Dempster started out as a net asset value investment, this due to the great discount between price and book value. Buffett also wrote that “the figures were extremely attractive.” It wasn’t the qualitative aspects of Dempster that was the main reason why Buffett started acquiring stock, it was all based on the great discount to book value per share.

When Buffett started purchasing Dempster stock the earning power value was a lot lower than the value of the assets, even compared to net current asset value and Buffett’s valuation applying different discounts to each balance sheet item.

Buffett wrote that Dempster had “…earned good money in the past but was only breaking even currently.” Earning power value clearly had taken a hit, and was probably a big reason for the stock price trading at such a big discount to book value. As Graham & Dodd wrote in Security Analysis when discussing Westinghouse Electric and Manufacturing Company position; “…the stock sold for much less than the net current assets alone, presumably indicating widespread doubt as to its ability to earn any profit in the future.”

Buffett may have had some expectations for the earning power to come back and help support a higher stock price, even if this was far from a sure thing. The margin of safety was in the low price compared to book value. If earning power would be restored, that would serve as a bonus I think.

Is this a franchise? Why or why not is this occurring?

Dempster was not a franchise. Buffet wrote that “The operations for the past decade have been characterized by static sales, low inventory turnover and virtually no profits in relation to invested capital.” Not the characteristics to be expected from a franchise. Buffett also wrote that Dempster was in a “fairly tough industry,” and it also had “unimpressive management.”

If earning power was to be restored it would probably, even in the best case, only support the net asset value, thus no excess returns and no earning power value greater than the asset value. This would indicate a business without any franchise value, i.e., no sustainable competitive advantage—or moat.

Was Buffett lucky in this investment? Why or why not?

I think luck always plays some part. But Buffett started to purchase stock due to the margin of safety he deemed to be present. So even if Harry Bottle had not come along, Buffett might have been able to sell out without making a loss. When already invested and taking control he used his skill as a business owner in a pretty good way I think, mostly through Harry Bottle taking care of the daily operating activities.

How would Graham approach an investment like this?

Not really sure about this one. Graham also invested in businesses situations that could be compared to Dempster. But even if Graham did so, maybe the most likely way he would look at Dempster would be purely quantitative. From what I can see, Dempster never was a pure net-net during the time Buffett was an owner. So maybe Graham would have stayed away from it.

What would have been the big difference between Graham and Buffett concerning Dempster Mills?

That Graham never would have bought because the stock wasn’t cheap enough to provide a margin of safety to an estimated liquidation value (current asset minus total liabilities). But I’m not really sure about this one. Will be interesting to see the comments to this question.

So, now I shall start reading the comments to see what all other participants have to say about these questions. Even though the case study was posted a few days ago I have not read any comments that’s been posted, since this would sort of “anchor” my own answers.

BTW. Today I received my King Icahn book in the mail. Look forward to start reading. But will wait until John says go.

All for now!

Warren Buffett & Ajit Jain Interview From India

Transcript below from the Farnam Street blog.

If you look at the typical stock on the New York Stock Exchange, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.

And you can forget about everything else. That is a wonderful game to play in. There’s almost nothing where the game is stacked in your favor like the stock market.

What happens is people start listening to everybody talk on television or whatever it may be or read the paper, and they take what is a fundamental advantage and turn it into a disadvantage. There’s no easier game than stocks. You have to be sure you don’t play it too often.

—Warren Buffett

FYI. There is a watermarked transcript available for purchase via Farnam Street.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Duracell: A Durable Cell Battery “Trusted Everywhere” Moves In With Berkshire

“‘I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,’ commented Warren E. Buffett, Berkshire Hathaway chief executive officer. ‘Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.'” ―Berkshire Hathaway Inc. News Release

SEC filing: “Berkshire Hathaway to Acquire Duracell in Exchange for P&G Shares”

“‘I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,’ commented Warren E. Buffett, Berkshire Hathaway chief executive officer. ‘Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.’

Berkshire’s stock ownership is currently valued at approximately $4.7 billion. P&G said it expects to contribute approximately $1.8 billion in cash to the Duracell Company in the pre-transaction recapitalization.

P&G said the transaction maximizes the after-tax value of the Duracell business and is tax efficient for P&G. The value received for Duracell in the exchange is approximately 7-times fiscal year 2014 adjusted EBITDA. This equates to a cash sale valued at approximately 9-times adjusted EBITDA.”

Source: SEC Edgar System, 2014 P&G ANALYST MEETING PRESS RELEASE

Company History

• 1935: P.R. Mallory founds Duracell’s predecessor company.
• 1944: Inventor Samuel Ruben joins forces with Mallory, kicks off battery business.
• 1966: Earnings per share hit $2.34 before falling off with recession related drop in consumer spending.
• 1972: Sales of electrical and electronic items to industry are boosted.
• 1978: P.R. Mallory is acquired by Dart Industries.
• 1980: Dart merges with Kraft Inc.
• 1986: Kraft retains Duracell portion of business after split with Dart.
• 1988: Kohlberg Kravis Roberts takes over Duracell during leveraged buyout spree.
• 1989: Duracell goes public.
• 1996: The Gillette Company acquires Duracell.
• 2005: Procter & Gamble is set to buy Gillette.
• 2014: Berkshire Hathaway acquires Duracell from Procter & Gamble.

Sources: Referenceforbusiness.com; Wikipedia.com

The Procter & Gamble Company 2014 Analyst Meeting

Source: P&G Investor Relations

Duracell Inc, 1996 10-K

Source: SEC EDGAR

What Does Buffett See in Batteries?

Morningstar’s view on today’s Berkshire deal:

“We’re not sure what to make of wide-moat Berkshire Hathaway’s $4.7 billion purchase of the Duracell battery business from Procter & Gamble, another wide-moat firm. While one would have expected to see Warren Buffett use some of the more than $40 billion in excess cash on Berkshire’s books at the end of the third quarter to finance a deal of this size, the transaction has actually been structured as a tax-exempt transfers of assets, with P&G accepting Berkshire’s 52.8 million share equity stake in the consumer products firm (worth $4.7 billion at yesterday’s market close) for Duracell. That said, it remains to be seen whether P&G’s $1.8 billion pre-transaction recapitalization of the battery business will be viewed as a taxable event for Berkshire. We are leaving our fair value estimate in place.”

Source: See link to Morningstar analyst report below. 

Further Reading

• Warren Buffett Is Buying Batteries
• Berkshire Hathaway Inc. News Release
• Berkshire Buying Duracell From P&G in $3B Deal
• What Does Buffett See in Batteries?
• Morningstar: Berkshire Analyst Report

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Four Books Warren Buffett Particularly Treasure

“My intellectual odyssey ended, however, when I met Ben and Dave, first through their writings and then in person. They laid out a roadmap for investing that I have now been following for 57 years. There’s been no reason to look for another.”—Warren Buffett

Warren Buffett’s Forward to the Sixth Edition of Security Analysis

“There are four books in my overflowing library that I particularly treasure, each of them written more than 50 years ago. All, though, would still be of enormous value to me if I were to read them today for the first time; their wisdom endures though their pages fade.

Two of those books are first editions of The Wealth of Nations (1776), by Adam Smith, and The Intelligent Investor (1949), by Benjamin Graham. A third is an original copy of the book you hold in your hands, Graham and Dodd’s Security Analysis. I studied from Security Analysis while I was at Columbia University in 1950 and 1951, when I had the extraordinary good luck to have Ben Graham and Dave Dodd as teachers. Together, the book and the men changed my life.

On the utilitarian side, what I learned then became the bedrock upon which all of my investment and business decisions have been built. Prior to meeting Ben and Dave, I had long been fascinated by the stock market. Before I bought my first stock at age 11—it took me until then to accumulate the $115 required for the purchase—I had read every book in the Omaha Public Library having to do with the stock market. I found many of them fascinating and all interesting. But none were really useful. My intellectual odyssey ended, however, when I met Ben and Dave, first through their writings and then in person. They laid out a roadmap for investing that I have now been following for 57 years. There’s been no reason to look for another.

Beyond the ideas Ben and Dave gave me, they showered me with friendship, encouragement, and trust. They cared not a whit for reciprocation—toward a young student, they simply wanted to extend a one-way street of helpfulness. In the end, that’s probably what I admire most about the two men. It was ordained at birth that they would be brilliant; they elected to be generous and kind.

Misanthropes would have been puzzled by their behavior. Ben and Dave instructed literally thousands of potential competitors, young fellows like me who would buy bargain stocks or engage in arbitrage transactions, directly competing with the Graham-Newman Corporation, which was Ben’s investment company. Moreover, Ben and Dave would use current investing examples in the classroom and in their writings, in effect doing our work for us. The way they behaved made as deep an impression on me—and many of my classmates—as did their ideas. We were being taught not only how to invest wisely; we were also being taught how to live wisely.

The copy of Security Analysis that I keep in my library and that I used at Columbia is the 1940 edition. I’ve read it, I’m sure, at least four times, and obviously it is special.

But let’s get to the fourth book I mentioned, which is even more precious. In 2000, Barbara Dodd Anderson, Dave’s only child, gave me her father’s copy of the 1934 edition of Security Analysis, inscribed with hundreds of marginal notes. These were inked in by Dave as he prepared for publication of the 1940 revised edition. No gift has meant more to me.”

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

Chapter 8 of Berkshire Beyond Buffett: Free Download

Berkshire Beyond Buffett: The Enduring Value of Values

Lawrence A. Cunningham is out with a new book titled Berkshire Beyond Buffett: The Enduring Value of Values.

At ValueWalk.com I found a link to a free download of chapter 8 of this book.

I have not read the book myself yet, but it’s on my reading list.

Even though I haven’t read it, I thought I’d share the link for everyone to have a look. Just go here for a free download of chapter 8.

For some information about the book, here is the book description from Amazon.com (same link as above).

“Berkshire Hathaway, the $300 billion conglomerate that Warren Buffett built, is among the world’s largest and most famous corporations. Yet, for all its power and celebrity, few people understand Berkshire, and many assume it cannot survive without Buffett. This book proves that assumption wrong.

In a comprehensive portrait of the distinct corporate culture that unites and sustains Berkshire’s fifty direct subsidiaries, Lawrence A. Cunningham unearths the traits that assure the conglomerate’s perpetual prosperity. Riveting stories recount each subsidiary’s origins, triumphs, and journey to Berkshire and reveal the strategies managers use to generate economic value from intangible values, such as thrift, integrity, entrepreneurship, autonomy, and a sense of permanence.
Rich with lessons for those wishing to profit from the Berkshire model, this engaging book is a valuable read for entrepreneurs, business owners, managers, and investors, and it makes an important resource for scholars of corporate stewardship. General readers will enjoy learning how an iconoclastic businessman transformed a struggling textile company into a corporate fortress destined to be his lasting legacy.”

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. This article is informational and is in my own personal opinion.

Buffett & GEICO: 1976 Letter and 1951 Research Report

“At the time I felt that GEICO possessed an extraordinary business advantage in a very large industry that was going to continue to grow. Since that time they never have lost that advantage – the ability to give the policyholder back in losses a greater percentage of the premium dollar than any other auto insurance company in the country, while still providing a profit to the company. I always have been attracted to the low cost operator in any business and, when you can find a combination of (i) an extremely large business, (ii) a more or less homogenous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation. That situation prevailed twenty-five years ago when I first became interested in the company, and it still prevails.”
—Warren Buffett

1976 GEICO Letter

“Warren Buffett recently gave the WSJ a letter he wrote in 1976 to one of Berkshire’s top executives. In the letter, Warren Buffett explained his reasoning behind the GEICO purchase.” (Source: ValueWalk.com)

See here for this letter about GEICO, written by Warren back in 1976.

1951 GEICO Research Report

Another good read, also about GEICO, is the reprinted research report The Security I Like the Best, written by Warren back in the end of 1951.

See here for this report that was included in the Berkshire Annual report from 2005 on page 24.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. This article is informational and is in my own personal opinion.