A multi-decade exploration of GEICO returns

In early 1948, Ben Graham purchased an approximately 50% interest in Government Employees Insurance Co. (GEICO) through the Graham-Newman partnership. Graham and Newman put $736,000 (20% of their fund’s assets at the time) into GEICO.1

As Graham stated in the postscript of The Intelligent Investor:

“Ironically enough, the aggregate of profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners’ specialized fields, involving much investigation, endless pondering, and countless individual decisions.”

From GEICO’s initial public offering year (1948) through the time the Graham-Newman partnership liquidated (1956), GEICO was a 32x return versus 5x for the partnership ex-GEICO over the same period.2 

But the story didn’t end there. Far more important was what was to follow. 

In the decades to come, GEICO was a 1,600x in its first 20 years from its initial public offering, and— until it was ultimately acquired by Berkshire in 1995— was a nearly 64,000x return from its public listing.3 In the post-Berkshire acquisition years, we estimate that GEICO has been a 14x (using the same premiums written multiple Berkshire acquired the company for, 1.7x, a heavy discount to peers today), which means that $1 invested at the initial public offering in 1948 is conservatively worth >887,000x nearly 75 years later (a 20.3% IRR).4

Good.

         God.

                   Graham.

                               An 887,000x!5

“Far exceeded” indeed.6 Talk about the power of structurally cost-advantaged, dramatically lower-priced, incredible customer value proposition, and long-runway businessesT

To be sure, there were numerous challenges along the way.

The biggest of these was well-known and a source of extreme wealth creation for several Worldly Partners nearly thirty years after GEICO’s initial public offering. In the years leading up to 1975-76, the company had compromised on its underwriting standards to expand market share; it moved from its niche position of insuring the safest category of drivers to insuring drivers with little experience who fell under high-risk categories. The company reached a breaking point in 1975, when this poor underwriting was coupled with the severe impact on the entire auto insurance industry by high increases in medical and auto repair costs, further leading to heavy underwriting losses. In 1976, GEICO was on the brink of bankruptcy for violating regulatory capital requirements. In May 1976, John Byrne became CEO of GEICO and started taking aggressive steps to steer the company out of crisis through premium rate increases (while maintaining a strong price gap versus competitors) and robust operating cost controls. The rest is history.

In the 74 years since GEICO’s initial public offering, there have been twelve recessions lasting a cumulative ten years, the S&P 500 has dropped more than 10% twenty-six times, the S&P 500 has fallen more than 30% from the previous high six times, there have been eleven bear markets, and annual inflation has exceeded 7% in twelve separate years. GEICO was down 90%+ for a five-year-plus stretch.7

There were many “smart” reasons to sell along the way to the 887,000x. If you were to make the stock price your North Star (versus framing the businesses within their rarefied, historically contextualized competitive advantages and tracking the structural cost advantage, comparative pricing, etc.), it would have been nothing short of terrifying. It would have been temperamentally difficult to feel one would get a return, let alone what was to come. Though youthful by comparison, these return patterns, paths, and trajectories are similar for Costco, Amazon, Autodesk, Intuit, Home Depot, and other historic mental model series companies (see Owner’s Manual). What makes the journey of the 887,000x so difficult, of course, was holding GEICO all the way through. GEICO spent 75% of its time (36 of its 48 years public) below a previous high. Temperament is by far the hardest part of the journey. Call His Holiness the Dalai Lama and Jinpa!

So what happened to the Grahams and GEICO? I asked Ben Graham’s son, Dr. Ben Graham, Jr. (Buzz), about this. The Graham family continued to benefit from GEICO for generations, with Ben Graham staying on the board through 1965 (17 years after his investment). And in fact, the Graham family continues to own GEICO today through Berkshire Hathaway.

Hopefully, my own children, keeping contextualized business history firmly in mind, will be able to own our structurally cost-advantaged, dramatically lowest-priced, huge customer value, early in our runway businesses over their lifetimes. Our first child’s name means “without noise” in Sanskrit, the closest we could find to inner scorecard and temperament, and our second is named after the constant learner hero of the Mahabharata. Between the meanings of their two names, they will hopefully monitor and be fortunate enough to hold our rarefied companies for many decades, like the O.G., Ben Graham, GEICO, and the Graham family. The Grahams have reaped the rewards of the G-GEICO-thang for 74 years. And ultimately, for the total record of the dean of Wall Street, the father of value investing, the man most associated with net-nets, the immensity of that singular structurally cost-advantaged, dramatically lowest-priced, and early in the runway capital allocation decision (the 887,000x!) is all that matters.

Appendix: A note on our GEICO work

Benjamin Graham invested approximately 20% of the Graham-Newman partnership in GEICO in 1948, shortly before it became publicly traded. In the postscript in his seminal book The Intelligent Investor, Graham wrote that he made more money on GEICO than on all his other investments combined.8

To figure out the magnitude of the GEICO return, we independently estimated the total return of GEICO as a company from its initial public offering to the present day.

Because GEICO was acquired by Berkshire Hathaway and delisted in January 1996, data on stock performance from 1996 onward does not exist. Instead, we made simple assumptions on the change in value of GEICO from 1996 to September 30, 2022. Premiums written have gone up by 14x since 1996, and we assume the multiple stayed the same from acquisition. By our conservative math, GEICO has been a 14x since Berkshire Hathaway acquired it in 1996.9

Filling the near half-century gap from 1948 to 1996 posed a much bigger challenge.

For starters, what was GEICO’s initial public offering price? This might seem like a simple question with no room for interpretation, but GEICO has a complicated history. GEICO didn’t have a formal initial public offering, where it was listed on an exchange like the New York Stock Exchange. Instead, in 1948 one of GEICO’s original founding families (the Rhea family) decided to sell their 75% stake in GEICO to several parties, including the Graham-Newman partnership. The Graham-Newman partnership bought 55% of GEICO for $736,000 in February 1948.10 Shortly thereafter, for regulatory reasons, the Graham-Newman partnership was forced to distribute its GEICO shares to its fund shareholders.11 Consequently, these shares became publicly traded on the over-the-counter market starting in July 1948.12

Figure 1: The series of Moody’s Bank and Finance Manuals we used to cross-check GFD data.

Several secondary sources cited $27 a share at its initial public offering.13 We began the search for primary sources (as we always do), starting with the Graham-Newman partnership reports. Walter Schloss, a student and mentee of Benjamin Graham and Warren Buffett’s contemporary, donated the Schloss Family Business Papers to the Columbia University Rare Book and Manuscript Library. The collection consists of articles, correspondence, and reports created by or saved by Schloss over his career, including all of the Graham-Newman partnership letters and periodic returns.

These documents were not available to check out and not readily available to the public. To gain access to these papers, we hired a Columbia graduate student who sent us scans of all the relevant documents in that trove. From the August 1948 Graham-Newman report, we learned that GEICO was valued at $18 a share on July 30, 1948. However, we knew from prior reports that GEICO was distributed in mid-July 1948. That July 1948 price would be the initial public offering price. So we kept digging.

Harvard Business School’s Baker Library holds three books on GEICO in the basement stacks. One book contains a 1966 speech given by Lorimer Davidson, GEICO’s president and chairman at the time, which noted that GEICO went public at $17.50 a share.14 This was corroborated by a book on GEICO by GEICO in 1994.15

GEICO’s initial public offering price was $17.50. Now, how did GEICO’s stock trade for the next 48 years?

Figure 2: Basement stacks at Harvard Business School’s Baker Library.

For that, we contacted Global Financial Data (“GFD”), which specializes in historical stock data compiled from primary sources. GFD’s GEICO data went back to January 1949, but the data still was (to be validated by primary sources) far better than traditional sources like the Center for Research in Security Prices, Bloomberg, FactSet, and CapIQ (which don’t go back much further than the late 1980s, except for the Center for Research in Security Prices, which goes back to the early 1970s but not nearly far enough for our GEICO needs). For GEICO, GFD compiled trading data from the Commercial and Financial Chronicle’s Bank and Quotation Record (for monthly prices from 1949) and Investment Statistics Library’s Daily Stock Price Index for Over-The-Counter Stocks (for daily prices from 1968). Both publications published data in real time in books, as was done pre-computer age. The Commercial and Financial Chronicle is available through the St. Louis Fed’s wonderful website, and we obtained the Investment Statistic Library data by taking page-by-page photos of the copies in the Baker Library’s basement. We cross-checked the data we pulled with what GFD provided and said came from the Commercial and Financial Chronicle’s Bank and Quotation Record and the Investment Statistics Library’s Daily Stock Price Index for Over-The-Counter Stocks, and it checked out. No fat finger errors to note there!

Figure 3: Cross-checking data inside the 1950 Moody’s Bank and Finance Manual in Baker Library.

Finally, we had to account for corporate actions over that time. The unadjusted stock price we painstakingly obtained could tell us only so much about GEICO’s performance over time. For dividends, stock splits, and other distributions, we turned to Moody’s Bank and Finance Manuals (hello again, Baker Library basement) and Financial Information Incorporated.

We compiled this data and calculated the split-adjusted GEICO return from 1948 to 1996 with and without dividends reinvested. One share of GEICO at its initial public offering, due to 31 stock splits over its 48 years as a publicly listed stock, became 7,184 shares by 1995. The results are astounding. From its initial public offering through September 30, 2022, GEICO has been a 401,000x without dividends reinvested. The market capitalization of GEICO went from $1.3 million in July 1948 to $4.7 billion by the time Berkshire acquired it in January 1996 and was approximately $66 billion by September 30, 2022.16 With dividends reinvested, GEICO was an 887,000x.17,18,19

Over a lifetime, all you need is one GEICO, Home Depot, Paychex, etc., owned in size and held in a fully aligned ecosystem with equanimity for astounding returns. Given our laser-focused, contextualized study of history (especially mistakes), heritage, company partnership, relationship with relevant management teams, ecosystem, etc., we will hopefully get more than our fair share!

Footnotes

  1.  Graham-Newman partnership reports and GEICO: The First Forty Years by William Klingaman.

  2.  Graham-Newman partnership 5x includes the distribution of GEICO at cost to Graham-Newman shareholders. Post-distribution, from July 1948 onwards, GEICO was not held by the Graham-Newman partnership due to the Investment Company Act of 1940, which barred the partnership from owning more than 10% of an insurance company.

  3.  Assumes with dividends reinvested in GEICO. Returns compiled were validated against several primary and secondary data sources. Analysis includes information from Graham-Newman shareholder reports and letters (1936-1958), GEICO: The First Forty Years by Klingaman (1994), speech by Lorimer Davidson on GEICO (1966), speech by John Byrne on GEICO (1980), The Intelligent Investor by Benjamin Graham (revised edition, 2006), Benjamin Graham on Value Investing by Janet Lowe (1994), Moody’s Bank and Finance Manual (1955-1958), Commercial and Financial Chronicle’s Bank and Quotation Record (1949-1967), Investment Statistic Library’s Daily Stock Price Index: Over-The-Counter (1968 to 1996), Global Financial Data, Center for Research in Security Prices, Bloomberg, and Financial Information Incorporated. Our journey is discussed in detail in the appendix: A note on our GEICO work.

  4.  Sources: July 1948 data from Worldly Partners analysis and Global Financial Data (GFD) from 1948 – 1996. In 1996, GEICO was acquired by Berkshire Hathaway. Our analysis assumes the value of GEICO following Berkshire’s acquisition in 1996 up to September 30, 2022 has increased at the same rate as the company’s growth in total insurance premiums written, which has grown by 14x. Source for total premiums written annually at GEICO is Berkshire Hathaway reports from 1996 – 2022.  

  5.  Sources: July 1948 data from Worldly Partners analysis and Global Financial Data (GFD) from 1948 – 1996. In 1996, GEICO was acquired by Berkshire Hathaway. Our analysis assumes the value of GEICO following Berkshire’s acquisition in 1996 up to September 30, 2022 has increased at the same rate as the company’s growth in total insurance premiums written, which has grown by 14x. Source for total premiums written annually at GEICO is Berkshire Hathaway reports from 1996 – 2022.  

  6.  In fact, when Ben Graham first published his postscript in the 1972 The Intelligent Investor, his words did not do justice to the value derived from GEICO at that time. Ben Graham began liquidating the partnership in 1956, and if one were to assume that the total value of the partnership at that time was put into the S&P 500 from then on until 1972, when Graham wrote the postscript, well the results speak for themselves…from GEICO’s IPO in 1948 to 1972, GEICO alone would have been 99% of total partnership dollars! Sources include Graham-Newman Partnership letters from the Schloss Family Business Papers, Columbia University Library archives, and Global Financial data.

  7.  Sources: Bloomberg, Global Financial Data, and Worldly Partners analysis.

  8.  Postscript first appeared in the 4th edition, revised by Graham in 1971-1972 and published in 1973.

  9.  Source is Berkshire Hathaway annual reports and translates to a 11% IRR. The assumption that the value of GEICO increased at only the rate of premiums written (14x) since 1995 is conservative when looking at GEICO’s history and Progressive as an analogy. From 1948 to 1995, GEICO’s premiums written increased 472x, versus its dividends reinvested return of 63,571x over the same time period and its dividends not reinvested return of 28,734x over the same time period. Clearly, GEICO’s stock price has not moved at the same rate of its premiums written when looking at historical data. Progressive, a GEICO competitor, continues to be publicly traded today. From 1995 to September 30, 2022, Progressive’s premiums written increased by 17x, similar to GEICO’s 14x increase over the same time period. Yet, Progressive has delivered a 50x for dividends reinvested and a 29x for dividends not reinvested from 1995 to September 30, 2022.

  10.  July 1948 Graham-Newman report and GEICO: The First Forty Years by William Klingaman.

  11.  The Investment Company Act of 1940 made it illegal for an investment firm to own more than 10% of an insurance company. The SEC ordered Graham and Newman to return the GEICO shares back to the Rhea family. The Rhea family refused to accept a reversal, and as a compromise, the SEC allowed the Graham-Newman partnership to distribute the GEICO shares directly to its shareholders. 

  12.  These over-the-counter shares did not trade on a traditional major exchange like the New York Stock Exchange. GEICO was traded via brokers and dealers who looked for buyers and sellers for GEICO shares, shares that became available because the Graham-Newman partnership distributed the GEICO shares to its shareholders. These newly minted GEICO shareholders were then able to trade these shares through brokers in the over-the-counter market.

  13.  Benjamin Graham on Value Investing by Janet Lowe and a case study on GEICO by MOI Global.

  14.  GEICO: A Brief History (1936-1966) by Lorimer Davidson.

  15.  GEICO: The First Forty Years by William Klingaman.

  16.  July 1948 market capitalization calculated as $736,190 (Graham-Newman investment) / 55% (Graham-Newman stake), was approximately $1.3 million. For 1996-September 30, 2022 under Berkshire Hathaway’s ownership, we assume the same valuation multiple that Berkshire Hathaway paid in 1995 on premiums written, which has increased by 14x. September 30, 2022 market capitalization = 14 * $4.7 billion (1996 market capitalization). Eagle-eyed partners will note that market capitalization increase of 50,000x from IPO to September 30, 2022 does not equal split-adjusted price increase of 401,000x. This is due to changes in shares outstanding at the company level that are not reflected by share splits, share issues, share buybacks, and other corporate actions on a per share level. For example, sale of new shares and share buybacks affect the number of shares outstanding at the company level and do not affect the number of shares the individual shareholder owns (but certainly the stock price). An illustration of this is as follows: Between May and June 1979, GEICO bought back 20% of its shares outstanding. In that same time period, the closing share price rose from $7.81 to $9.69, an increase of 24%. The share buybacks and the share price appreciation offset each other to result in a market capitalization that reduced by 1% ($143 million to $141 million), while a shareholder would have had a 24% return. 

  17.  Without dividends reinvested, this translates to a 19% IRR. With dividends reinvested, this translates to a 20% IRR. This is the incredible power of compounding. This is a difference of 1% over 74 years.

  18.  For 1996-September 30, 2022 under Berkshire Hathaway’s ownership, we assume the same valuation multiple that Berkshire Hathaway paid in 1995 on premiums written, which has increased by 14x.

  19.  We cross-checked GEICO and Progressive. As another spot check, Bloomberg (which has Progressive data from 10/19/1983) returns a similar result as GFD over the same time period. The difference between GEICO and Progressive’s total return comes down to the fact that GEICO has not been publicly traded since January 2, 1996 when Berkshire Hathaway acquired it and that GEICO has had an additional 21 years to compound versus Progressive (1948 versus 1969). The IRRs for GEICO between July 16, 1948 and January 2, 1996 (47.5 year period) with dividends not reinvested and dividends reinvested, respectively, are 24% and 26%. The IRRs for Progressive between November 28, 1969 and May 15, 2017 (47.5 year period) with dividends not reinvested and dividends reinvested, respectively, are 21 and 22%. 

Disclosures

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