Chapter 7. Insurance: Other People's Money

Our main business—though we have others of great importance—is insurance. To understand Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the long-term outlook for both of these factors.[86]

Warren Buffett

Berkshire's main business is insurance, and Warren Buffett can hardly hide his enthusiasm when he talks about GEICO, a Berkshire-owned insurer that primarily provides auto insurance. There is probably no better place to learn from Buffett about business and investing than from his long and successful involvement with GEICO. Buffett's professor and mentor Benjamin Graham at Columbia University was chairman of GEICO. A careful examination of Buffett's writings tells us why he bought GEICO shares initially and why GEICO has been successful. Buffett narrates the story of his desire to learn deeply about GEICO:

[O]n a Saturday in January 1951, I took the train to Washington and headed for GEICO's downtown headquarters. To my dismay, the building was closed, but I pounded on the door until a custodian appeared. I asked this puzzled fellow if there was anyone in the office I could talk to, and he said he'd seen one man working on the sixth floor. ... And thus I met Lorimer Davidson, Assistant to the President, who was later to become the CEO.[87]

Buffett reflects his enthusiasm ...

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