Monday, August 23, 2010

The End of an Era: Lou Simpson to Retire from Geico

Lou Simpson, the Chicago-based investor with such a stellar track record he once was considered the successor to Warren Buffett, is retiring at the end of the year after decades managing Geico's investment portfolio.

Geico is owned by Buffett's investment vehicle, Berkshire Hathaway. Simpson, 73, who grew up in Highland Park, is the only person other than Buffett who controls Berkshire investments.

"I wish he weren't" retiring, Buffett told me. "Obviously, I would keep him employed till he was 100. I was very surprised when he called me a month ago and said, 'At 74, I'd just as soon turn it over to somebody else.' It was not a happy day at Berkshire. But I'm happy for him."

The two have never delineated their stock picks; Geico's investments are described publicly as Berkshire's. So for about 15 years, reporters and Wall Street analysts often assumed Simpson's moves were Buffett's.

"People are always attributing to me what he's doing," Buffett said.

But here's how to figure it out: "If you see a purchase on a company in the $300- to $400-million range, odds are very good that's Lou's," Buffett said. "I'm going to want to buy at least $1 billion of whatever it is we buy. So Nike, those things are his, while Wells Fargo, Kraft, those will be mine."

While Simpson is not a household name, he is among the most well-connected men in Chicago's financial circles. He manages a $4 billion portfolio that posted annual losses only three times from 1980 to 2004, and outperformed the S&P 500 18 of those years. Berkshire has not reported Simpson's performance separately since 2004, but when pressed, Simpson said his stock portfolio has outperformed the S&P 500 in aggregate since then.

His monthly reports go to Buffett, 79, and Buffett will assume control of Geico's portfolio when Simpson retires, he said.

Buffett and Simpson have similar investing philosophies, although not on life. Both tend to buy and hold stocks. They scour for sturdy but sometimes obscure companies poised for growth. Any other method is considered "a fad."

As for whether Simpson runs investment decisions by Buffett, Buffett said never. But their value-investing approach has led to them on at least two occasions to make identical choices. Buffett said both began buying Tesco, a global food retailer, at the same time. And Simpson said both began selling Freddie Mac in 2001 because of concerns the company was overleveraged.

"My approach is eclectic," Simpson said. "I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management."

Simpson, unlike Buffett, avoids the spotlight. Since Berkshire bought Geico in January 1996, Simpson said he has given two on-the-record interviews, this one being his second.

"So many people broadcast what they buy or sell and it works against them," Simpson said. "I'm in favor of people not knowing what we're doing until the last possible time."

Simpson's priorities, friends say, have changed since he met his second wife, Kimberly Querrey, a chemical engineer, at a restaurant in Chicago. Neither was living here at the time; they were here on business.. She persuaded him to move from San Diego to Chicago, as she was looking for a city that offered her more consulting opportunities. They practiced yoga together until she ruptured her Achilles tendon, and now Simpson does so on his own. They intend to spend most of his retirement in Florida and use their Michigan Avenue condo as a second home.

Simpson attended Northwestern University for a short time and, unhappy there, transferred to Ohio Wesleyan and went on to graduate school at Princeton. (Today, he sits on the investment committee of Northwestern's board of trustees.)

Simpson had risen to chief executive of California-based Western Asset Management when his friend Leland Getz, the then-vice chairman of executive search firm Russell Reynolds, called on behalf of Geico in 1979. Simpson rebuffed him twice, acquiescing on the third try "only to get him off my back," he said.

"Geico, operationally, has made a profit most of the 31 years he has been here," said Geico CEO Tony Nicely. "That has given him great flexibility as to how to invest. He had the comfort of knowing he was not going to have to sell equities in an untimely way. But at the same time, his outstanding performance has caused our overall performance to look unbelievably good."

Simpson acknowledges that his more than 30-year association with Buffett and Berkshire has given him entre into circles that might otherwise have been inaccessible. He sits on the boards of two public companies and has been a director of at least nine others. He travels to Allen & Co.'s annual conference for "moguls" in Sun Valley every year.

Yet Simpson's life is simple. He supervises only two employees, an assistant and an analyst, working out of a small four-room office on Michigan Avenue. The walls are sparsely decorated with posters from art museum exhibits. He lives within walking distance of his office. His division's daily report covers less than one-quarter of a sheet of paper.

"Our dinner conversation, I think it's quite interesting, but some people will say quite strange," Querrey said. "Over the weekend, we actually talked about behavior in corporate America, and the behavior at Hewlett-Packard, and the arrogance of CEOs and why they think they are above enforcement of the board. I have investments in Vietnam. So we often talk about the economy in Vietnam versus the United States."

Simpson's compensation is not disclosed, but it is based on his returns over a three-year period. I told Simpson that Buffett often says there are Berkshire stockholders who should be on Forbes' list of the 400 wealthiest Americans but have been overlooked. I asked Simpson whether he is one of them.

"No," he said quickly. But with a sly grin, he added, "But I know who some of them are."

Chicago Tribune