We all know the story of Warren Buffett, the “Oracle of Omaha”, chairman and largest shareholder of Berkshire Hathaway, and the third wealthiest person in the world. He got that way thanks to his love of value investing – that is, buying undervalued businesses and waiting for them to reach their true value – and in turn, he got his love of value investing from Benjamin Graham.
At age 19, Buffett accidentally bought Graham’s classic, The Intelligent Investor, which profoundly shaped his investment outlook. He went on to become a student of Graham’s at Columbia Business School (in fact, his only A+ student in 27 years of teaching!) where he first learned that Graham was chairman of Geico.
|In 1948, we made our GEICO investment and from then on, we seemed to be very brilliant people. Benjamin Graham, 1976
“A week earlier, I knew nothing about the company,” says Buffett. But the fact that Graham was on the board was enough for him.
20-year-old Buffett hopped a train one Saturday, traveled to Geico’s headquarters in New York City, and pounded on the locked door until a janitor let him in. The janitor handed him off to Lorimer “Davy” Davidson – later to become Geico’s CEO – and the only other person in the office on the weekend.
“Davy had no reason to talk to me, but when I told him I was a student of Graham’s, he then spent four or so hours answering unending questions about insurance in general and Geico specifically,” Buffett says.
“He answered my questions, taught me the insurance business and explained to me the competitive advantage that Geico had,” he continues… “That afternoon changed my life.”
Shocking New Engine Runs on Zero Fuel… 100% Air
Geico paid off handsomely for both Graham and Buffett. Throughout the next few decades, as the pair’s mentorship and friendship continued – with both men serving on the board at different times, and ultimately, Geico’s acquisition by Berkshire Hathaway- the company mushroomed into an insurance juggernaut, currently one of the fastest-growing major auto insurers in America. At the time Buffett completed the acquisition in 1995, Geico stock was up to $300 from just above $2, where it had hovered when he started buying in 1976. (He had initially purchased a few shares in the 1950s, shortly after his fateful meeting with the janitor, but then sold them and sat out for the next several decades.)
In 2013, Buffett told CNBC that if he could only keep one Berkshire company, it would have to be Geico.
|Becky Quick (CNBC): “If you could keep one company that Berkshire owns, either a wholly owned subsidiary, or that Berkshire owns a common equity in, which one would you keep andwhy?”
Warren Buffett: “I would keep GEICO. It goes back to the — 62 years ago it changed my life. It’s also a wonderful company. I would have both things going for me, but that if I hadn’t of gone to GEICO when I was 20 years-old and had a fellow there explain the insurance business to me, my life would be vastly different. So I just have to – – I’d have to choose GEICO.”
CNBC interview March 13, 2013
Of course, Warren Buffett is famous for his predictive powers for a reason…
Geico wasn’t always the massively profitable enterprise it is today – in fact, it’s had some very painful shorter-term bumps and bruises.
In 1976, shortly before Buffett stepped in, it posted a $126 million loss and was unable to pay shareholders a dividend. Teetering on the brink of bankruptcy, new chairman John J. Byrne found a buyer – Warren Buffett – and sold him $4.1 million worth of stock. Then Byrne set about cost-cutting, turned a profit in 1977…and the rest is history.
History has come down decidedly on Geico’s side – and with Buffett’s track record, that’s hardly a shock…
But in the mid-seventies, if you were anyone but Warren, you’d have been saying — with a broker the Washington Post quoted at the time — “Who’d want to buy into Geico now?”
That brings us to a very famous Benjamin Graham quote, whose provenance I’ll get to in a moment:
“In the short-run, the market is a voting-machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long-run, the market is a weighing machine.”
As an interesting side note to this discussion, there’s no record of this actual quote in Graham’s published writings. The original source for the quote is Buffett’s 1993 shareholder letter, where he attributes the saying to Graham. Since Graham never actually wrote down the quote, there has been an occasional tussle in investor forums over whether he said it at all. Perhaps in a future article I’ll dig into some interesting nuances of the debate. But for now, here’s a summary: In an effort to get to the bottom of things, Wall Street reporter Jason Zweig finally called Buffett in 2011, and Buffett confirmed that Graham said it many times in the office and in lectures, even if he never wrote it. Zweig calls Buffett an “unimpeachable source,” and deems the case closed. (Fascinating stuff for a word nerd like me!)
No matter “who said it first” – the takeaway is the same… in a nutshell, that shorter-term price movements are driven by investor psychology and emotion rather than the company’s underlying fundamentals – but over the longer term, fundamentals are what truly determine a company’s value (and thus, its performance).
Buffett clearly saw a longer-term value, “weighing machine” opportunity in Geico – and he bought in, with spectacular results.
Of course, he did miss a shorter-term, “voting machine” opportunity to short Geico, back when it took its dramatic plunge in the early seventies (but of course, that’s not what Buffett does, and not part of the “value investing” strategy at all).
The good news for us is that as 10-Minute Millionaires, we can take advantage of both of these “machines”…
We Move Beyond Value Investing to Notch More Triple-Digit Gains
If you’ve been with us at 10-Minute Millionaire for any length of time, you know that we talk about three broadly different ways to make money in the markets, all organized under a large and profitable umbrella. First, there’s income – steady streams of money from yields, dividends, and other special opportunities – that comes in monthly or quarterly and allows you to build up your nest egg. (You can learn more about our latest income opportunities in “10-Minute Millionaire Insider” right here… and as a matter of fact, we have a new one we’ll be releasing very soon that has a lot to do with Buffett’s value strategies. Stay tuned for more about that towards the end of this week.)
We also talk about a growth strategy – stocks that could greatly outperform the market over the mid to long-term, and that we buy and hold for six months to a year. These stocks are going to grow under momentum and increase our account through appreciation, and we recommend a lot of them right here in 10-Minute Millionaire.
Then, finally, we frequently recommend short-term opportunities – often options – where we’ll get in and out quickly with a succession of fast hits (usually in a month or less). We use this strategy frequently and to great effect in Stealth Profits Trader (get a look at our recent Stealth track record here).
If you’ll think about this for a minute, you’ll spot both the “voting machine” and the “weighing machine” here…
We talk a lot here about the broader market narrative – the overarching concept that’s central as a market driver. We pick “growth stocks” very carefully that are positioned for strong upward motion over a longer period of time, as part of that story – which dovetails nicely with the “weighing machine” part of Graham’s quote. And those carefully chosen stocks often reap extraordinary wins – like the almost un-heard-of 100% on a single stock (not an option) that “Insiders” saw last week.
On the other hand, our short-term opportunities – the ones where we play technicals, find pullbacks on strong stocks, take advantage of market psychology, “buy the rumor, sell the news” – those are the times when the market “votes,” and when we can take home rapid series of triple-digit gains, like our three 100% PYPL wins in a single month.
Our income and growth plays owe a lot to Graham’s and Buffett’s teaching. And our short-term trades give us a nice additional form of quick hit money making opportunities.
Later this week, I’ll show you another niche where we can stand once again on Buffett’s broad shoulders – and I’ll reveal an income investment that the Oracle of Omaha used extensively early in his career but has now put aside due to the massive size of Berkshire Hathaway. And this is a big income generator where you can get in now…
I’m working on that report now and will have the final research to you by Friday.
In the meantime, have a wonderful week, and God bless you.