Managing Your Portfolio 171annual return of 18 percent, compared with the 12.9 percent of the
Standard & Poor’s 500 Index.
Lou Simpson
About the time Warren Buffett began acquiring the stock of the Gov-
ernment Employees Insurance Company (GEICO) in the late 1970s, he
also made another acquisition that would have a direct benef it on the
insurance company’s f inancial health. His name was Lou Simpson.
Simpson, who earned a master’s degree in economics from Prince-
ton, worked for both Stein Roe & Farnham and Western Asset Manage-
ment before Buffett lured him to GEICO in 1979. He is now CEO of
Capital Operations for the company. Recalling his job interview, Buf-
fett remembers that Lou had “the ideal temperament for investing.”^19
Lou, he said, was an independent thinker who was conf ident of his own
research and “who derived no particular pleasure from operating with
or against the crowd.”
Simpson, a voracious reader, ignores Wall Street research and in-
stead pores over annual reports. His common stock selection process is
similar to Buffett’s. He purchases only high-return businesses that are
run by able management and are available at reasonable prices. Lou also
has something else in common with Buffett. He focuses his portfolio on
only a few stocks. GEICO’s billion-dollar equity portfolio customarily
owns fewer than ten stocks.
Between 1980 and 1996, GEICO’s portfolio achieved an average
annual return of 24.7 percent, compared with the market’s return of
17.8 percent (see Table 10.3). “These are not only terrif ic f igures,” says
Buffett, “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.”^20
It is important to note that the focus strategy sometimes means en-
during several weak years. Even the Superinvestors—undeniably skilled,
undeniably successful—faced periods of short-term underperformance. A
look at Table 10.4 shows that they would have struggled through several
diff icult periods.
What do you think would have happened to Munger, Simpson, and
Ruane if they had been rookie managers starting their careers today in
an environment that can only see the value of one year’s, or even one