When investors think about

Warren Buffett (trades, portfolio), they usually think of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). The conglomerate has become synonymous with the Oracle of Omaha in recent decades, as it has grown from a struggling textile company to one of the largest groups on the planet.

Berkshire’s insurance business has been the engine room of the group since the early 1970s. The insurance industry has provided Buffett with capital to invest in the stock market and a steady stream of income to support other businesses. The leverage achieved by using the capital of the insurance group has helped boost Berkshire’s expansion over the years.

The best investment

Despite the company’s success, Buffett named Berkshire one of his worst investments ever. If Berkshire was his worst investment, then what was his best investment? Buffett explained at the 2005 annual meeting of shareholders:

“So we have – probably, in terms of what’s been done already and where it’s going over time, probably the best investment was the first half of GEICO, which we bought for $ 40 million.”

Buffett first became involved in the stock in the early 1950s. He invested over a third of his net worth in the business when he first discovered the opportunity. Based on this track record, it can be said that this company is his oldest investment and a company that he knows better than any other.

Indeed, he has now had some interaction with the company, in one way or another, for at least 70 years. This is one of the most notable examples of the what you know buying mentality and long term investment in the Berkshire portfolio.

In 2005, Buffett pointed out why he thought it was such a valuable acquisition. Although he said he learned a lot from See’s Candy and spent a lot of money to acquire other investments, his growth has always been relatively limited.

In comparison, GEICO’s cash generation and balance sheet have always offered more flexibility for growth. As the Oracle explained:

“But GEICO – some of our businesses have growth potential, some don’t. And we don’t need growth potential as part of a business. If a business is making a lot of money and we can using it to buy other businesses, one of the benefits of the Berkshire system is that we have a tax efficient, frictionless way of moving money to the best opportunities. And GEICO, in-house, has yet to ‘huge potential for growth. “

Over the past decades, GEICO has continued to expand across the country while reinvesting billions of dollars in the business to attract more customers. It is now one of the top three auto insurers in the country. There is still plenty of room for growth in the years to come.

And as Buffett explained in 2005, one of the reasons this insurer has been so successful is because it can move capital and diversify into other businesses, as well as provide capital for d ‘other parts of Berkshire.

This is one of the biggest advantages of the conglomerate over other companies. Its insurance division provides a huge amount of capital, which can then be used to buy other businesses, or transferred to other divisions to finance expansion and capital spending, thus removing the need to borrow on the market.

The market often overlooks this part of the Berkshire model. Without the leverage provided by the insurance business, it seems likely that the group would be nowhere near as large as it is today. This seems to be the reason why Buffett chose GEICO as his best investment in 2005.