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Lou Simpson's Investing Life in Quotes
Lou Simpson was someone who let his returns do the talking. You’ve probably never heard of him — and that’s just how he liked it.
Simpson served as GEICO’s chief investment officer and, between 1980 and 2004, he trounced the S&P 500 by 6.8% per year. That kind of outperformance — sustained for a quarter of a century, no less — created immense wealth for GEICO and its stakeholder (and eventual owner) Berkshire Hathaway. The incomparable Warren Buffett even once named Simpson as the top candidate to take over Berkshire’s investments if anything ever happened to him. After retiring from GEICO in 2010, Simpson started SQ Advisors to stay involved in the investing world on a smaller scale.
Sadly, Simpson passed away on January 8 at the age of 85. To better examine the life and legacy of a man who flew so far under the radar, I’ve gathered some quotes from the people who knew Simpson best (along with some from Lou himself — on the very rare occasions that he granted the media an interview).
Jack Byrne, CEO of GEICO, on Simpson’s interview with Warren Buffett in 1979 to become GEICO’s new chief investment officer:
I sent three of the four [candidates] to meet Warren and, after a four-hour interview with Lou, he called me and said, “Stop the search. That’s the fella.”
Warren Buffett, in his 1986 letter to Berkshire Hathaway shareholders, on GEICO beating the S&P 500 by 20% that year:
It’s a little embarrassing for me, the fellow responsible for investments at Berkshire, to chronicle Lou’s performance at GEICO. Only my ownership of a controlling block of Berkshire stock makes me secure enough to [tell you Simpson beat the S&P 500 by 20%].
These are not only terrific figures 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.
In a (very) rare interview with The Washington Post in 1987, Simpson explained his investing philosophy:
We try to be skeptical of conventional wisdom and try to avoid the waves of irrational behavior and emotion that periodically engulf Wall Street. We don’t ignore unpopular companies. On the contrary, such situations often present the greatest opportunities.
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.
Attempting to guess short-term swings in individual stocks, the stock market, or the economy is not likely to produce consistently good results. Short-term developments are too unpredictable.
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% of the stock portfolio.
One lesson I have learned is to make fewer decisions. Sometimes, the best thing to do is to do nothing. The hardest thing to do is to sit with cash. It is very boring.
Warren Buffett in 1987:
[Lou] sticks to his principles. Most people on Wall Street don’t have principles to begin with. And, if they have them, they don’t stick to them.
I pondered for eight years what makes Lou knock the cover off the ball. Lou is very bright … but the woods are filled with bright guys. It has more to do with his personality. He is very, very sure of his own judgments. He ignores everybody else. He gets one or two really strong ideas a year and then likes to swing very hard.
Lou is very much his own man. His most important distinguishing trait is his stark independence of judgment.
I would argue that good stock-picking records are held by people who are a little cranky and are willing to bet against the herd. Lou has that mindset and that’s what impressed us.
We are sort of the polar opposites of a lot of investors. 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.
Warren Buffett in 1995:
Lou takes the same conservative, concentrated approach to investments that we do at Berkshire, and it is an enormous plus for us to have him on board. One point that goes beyond Lou’s GEICO work: His presence on the scene assures us that Berkshire would have an extraordinary professional immediately available to handle its investments if something were to happen to Charlie and me.
Warren Buffett in 2004:
You may be surprised to learn that Lou does not necessarily inform me about what he is doing. When Charlie and I assign responsibility, we truly hand over the baton — and we give it to Lou just as we do to our operating managers. Therefore, I typically learn of Lou’s transactions about ten days after the end of each month. Sometimes, it should be added, I silently disagree with his decisions. But he’s usually right.
It’s not unheard of to beat the averages for a couple of years, maybe even five or ten years. But imagine beating the S&P 500 by an average annual gain of 6.8% over twenty five years! This extraordinary track record speaks for itself — Lou has one of the greatest investment minds of our time. He is, as Warren says, a shoo-in for the Investment Hall of Fame.
Warren Buffett in 2010:
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 the 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.
Addendum: Had to add in this tweet from The Conservative Income Investor, who makes an excellent point about Simpson here.
One of the biggest mental hurdles in investing comes when a company’s price increases. Even if the stock remains under-priced — and will likely lead to excellent returns in the future — there’s just something about seeing it go from $20 to $30 (or more) that causes even the best investors to hit the brakes and stop buying. Just because you were able to purchase shares at a lower price in the past, that shouldn’t dissuade you from adding to your position in the present if it still looks like a good deal.
A well-run company’s share price should increase over time as they continue to grow revenue and profits. If you have a solid understanding of the company’s underlying business and a strong thesis for why it’s still under-valued, don’t fall prey to concerns that you “missed the boat” or become anchored to the lower price you paid years ago.
If Lou Simpson had turned his nose up at Nike in the ‘90s because he had bought shares at a lower price in the ‘80s, it’s unlikely that he would have found another investment that returned 18.5% annually. Don’t let this mental hurdle lead you down the path of lower returns.