Buffet on GEICO - A case study

Buffett selected GEICO because:

It had higher profit margin because it managed to lower its expenses by using mails instead of agents. This higher profit margin,in turn allowed the company to sell its products at a lesser price than other companies.

But where were the entry barriers for other companies? Every other company could have stopped using agents and start using mails.

The second favorable reason was that the company was small and hence had a pretty large room to grow, unlike the peers.However, this second point doesn’t offer much to discuss regarding the present context. So lets concentrate on the first one only.


I think being small is a much more important criteria than one may think.

Usual trend in any industry is to follow leading or most successful business in the industry. These leading businesses are mostly busy and comfortable focusing on their own growth as well as that of their top competitors. Hence, often we see that smaller peers are overlooked by industry leaders as well as analysts.

Secondly, insurance agents had been a tried and tested method of bringing in business. While in hindsight, insurance through mails seems like a great idea, at that time one would believe that personal relationship with an agent was more likely to convince a customer to buy your insurance.

Hence, I believe that most competitors didn’t take GEICO’s business model seriously until it became too big to ignore.

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So, an “apparently unworthy” idea can turn into a moat !

But there was 100% chance of others duplicating the idea, maybe after they started to figure out how the idea was working. It won’t be wrong to presume that Buffet was lucky that they did not. Luck played an important part for Buffet when it comes to GEICO. What do you say?

Luck will always play a part in any of your investments. But it is something we cannot control, hence I don’t really care about it.

On the point of competitors copying your business model, I believe that Buffett could always sell his stake if and when needed. I think we should give Buffett credit for making a smart decision (not out of fanboyism) based on the facts, that he understood the commoditized nature of the industry and invested in the lowest cost insurance provider (which didn’t have to sacrifice margins for lowering the costs) in its early days.

Isn’t it exactly what we try to do? Trying to identify a winner early and then stay invested as long as our investment thesis plays out. Not to mention we always have the option to sell if things go wrong (like they did for Buffett when he acquired Berkshire).

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Just recalled that it was Ben Graham who made a 500-bagger with GEICO. Buffett on the other hand, sold it for 50% gain after investing for the first time and then repurchased it later.