I had the privilege to hear a recent presentation by Joseph Calandro Jr. He is a finance department member at the University of Connecticut and recently joined PricewaterhouseCoopers (PwC) as a managing director in the firm’s insurance consulting practice. Additionally, he authored a very popular book on value investing, “Applied Value Investing.”
NOTE: The views he expressed in his presentation, and that I describe below, were his own, and not necessarily those of PwC.
Although Joe is humble, he has received reports from great investors such as Seth Klarman for his work.
Joe focused on the topic of Warren Buffett’s acquisition of GEICO in 1976. The acquisition seemed unusual because Buffett likes to find bargains and GEICO seemed to be fairly priced. So why did Wall Street ignore the company, leaving it around for Buffett to scoop up?
The math behind the valuation is complex, but GEICO had some franchise value and a lot of goodwill, which many analysts just ignore.
Additionally, GEICO is a low-cost producer offering to a safe driver niche. Joe didn’t mention this in his speech but legendary investor Tom Russo mentioned another important point: Because of SEC reporting rules, GEICO had to report a $250 loss for every new insured customer.
However, the value of each customer was $1,500. No investor looked behind the complex math.
Joe tries to evaluate the GEICO acquisition at least once a year.
There is an important lesson for investors here. Investing looks a lot easier than it is. Doctors are notorious for being bad investors. Doctors think because they are generally smart they can pick out the best stocks; however, investing is much more complex.
Most individual and institutional investors would be better off buying an index fund that just mirrors what the broad stock market does.
However, most investors lack the discipline for this or find this too boring.
They are looking to find stocks which will produce phenomenal returns.
My first advice as always is to read “The Intelligent Investor.” However, my main advice here is that a lot of work is involved in investing successfully.
The market is mostly efficient but not entirely efficient. Some stocks are cheap for a reason. Something that looks like a bargain might be a company that is in terminal decline. Understanding a company involves a real depth analysis of what is driving those numbers. Calls to competitors, reading balance sheets and speaking to management are just some steps in this process.
In summary, investing isn’t a part-time job.
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