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The 11-year old Buffett managed to scrape together $114.75 to buy his first shares in Capital Cities in 1941. They did not perform very well, but the experience stimulated both thought and the desire to search for an understanding of what are good and bad approaches to share selection.
In his teenage years he did all sorts of things to make a dollar, from buying and renting pin-ball machines to retrieving lost golf balls, but the largest contributor to his growing pot was the five daily newspaper rounds delivering the Washington Post.
Graham and GEICO
By the time he was 20 he had about $15,000 and had discovered the investing principles developed by Benjamin Graham, by reading his book, The Intelligent Investor.
So keen was he to learn more from Graham that Buffett enrolled on a course he presented at Columbia University. During the second term he found that Graham’s investment fund held a significant stake in a small insurance company called Government Employees Insurance Company, GEICO for short.
After some research, including knocking on the front door on a Saturday and bombarding Lorimer Davidson, the assistant to the president, with questions for four hours, Buffett invested two-thirds of his savings into GEICO shares.
Within a year he had sold them for a 50% profit. Not bad, but he later kicked himself for not holding onto shares in a company with such a high quality economic franchise. If they had been retained, and he had gone fishing for the next nineteen years, they would have been worth $1.3m.
GEICO will always be remembered with affection. It was a memorable investment for him because it kick-started the first phase of his investing career. He had gone out from the classroom and engaged in practical employment of the key principles taught by his mentor:
- Conduct a thorough analysis of a company
- Make sure there is a margin of safety in the difference between your estimated intrinsic value and the price at which the share is selling
- Do not aim at more than a satisfactory return
- Remember that Mr Market comes up with some strange valuations from time to time, so you need independence of mind to decide whether Mr Market is being sensible, or undervaluing this particular company.
During his absence from the share register the company became very successful, but Buffett left it alone for 24 years. During that time the market could see that GEICO was a good business and had a tendency to price its shares too high for a value-focused investor.
In sum, it was a good company, but not a good investment to buy.
No matter, he found other brilliant investments such as Sanborn Maps, American Express and Disney, and his net worth shot past the $1m mark, and then past the $10m milestone. He was having great fun managing his investment partners’ money and charging them one-quarter of what he made above a 6% threshold.
Every now and then his eye would glance GEICO’s way, but ………..
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