Video Link: https://youtu.be/O_0422mni88
In this episode, Warren Buffett shared how he learned about insurance business with zero background in the industry and what did he do to learn about the business?
In this episode, you’ll learn:
What did Warren Buffett do to learn about insurance business?
What makes Warren Buffett interested in the insurance business?
How can you widen and deepen your circle of competence?
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~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
AUDIENCE MEMBER 00:08
Mr. Buffett and Mr. Munger, thank you very much for your hospitality. Excuse me, my name is Yvonne Edmonds (PH) and I’m from St. Petersburg, Florida. And thank you also for being so kind as to spend all this time answering our questions.
I have two related questions regarding insurance. The first is, I suspect that many of us know less about insurance than about equities and I wonder if you could please put some references for us on the Berkshire Hathaway website that might help us increase our knowledge about insurance.
The second question is, perhaps, related to the first, I just — the fact that I don’t understand it, but The Wall Street Journal, on March 19, published an article entitled, “When Insurers Pass Trash, Some Are Left Holding the Bag.” And that “some” included Berkshire Hathaway.
It focused on passing the workers comp trash to, among other groups, to Cologne Re.
And to make a long story short, the assistant general counsel for General Re, which, as I understand, now owns most of Cologne Re, said this is a classic example of an insurance company seeking growth in a very competitive market by writing business outside its area of expertise — namely within workers’ comp — when their area of expertise is life reinsurance.
Mr. Graham went on to say, and then I’ll stop, “Don’t write business you don’t understand. Second, proper controls are critical in the insurance business. Lastly, if a business opportunity appears to be too good to be true, it probably is.”
If this is true, could you tell us how this came about? What measures are being taken to see that it won’t happen again? And what might be the ultimate cost to Berkshire Hathaway shareholders? Because I gather that the — only the tip of the iceberg has been represented in the charge to Cologne Re.
WARREN BUFFETT 02:55
OK. Those are good questions.
And let’s take the first one first about the website and having a list of reference documents, or something that would help you understand insurance. You sound like you understand it pretty well already. The — (Laughter)
I can’t think of a good book that I’ve read on the subject. I got my knowledge of insurance by reading — well I got this huge head start by having a fellow named Lorimer Davidson, who is now 96, spend four hours or so with me one Saturday morning in January 1951, explaining to me how GEICO worked.
And I — it was a marvelous education, and it got me so interested, in not only how GEICO worked, but how its competitors worked, how the industry worked, that I just started reading a lot of other reports.
I never — I guess I took one course in school on insurance. I don’t remember a thing from it. I have no idea what the text book was or anything. It had no value to me.
So I never really had any background in insurance. My — you know, nobody in the family was in the insurance business.
And until I talked to Davy, I really — it just hadn’t been something that crossed my mind. The only reason I was down there was because I’d — my hero, Ben Graham, was listed in “Who’s Who” as being the chairman of Government Employees Insurance. That’s —
If he had been the chairman of, you know — he was also the chairman of the Market Street Railway Company in San Francisco.
Fortunately, I went down to GEICO instead of out to see the Market Street Railway Company. (Laughter) It was closer.
But I — my own education about insurance came from just reading lots of, lots of reports.
I mean, I would say that if I started the day fresh and I didn’t know anything about the insurance industry to speak of, and I wanted to develop some expertise, I would probably read the reports of every property-casualty company around.
And I would go back some time and I would read — I would probably get the best manuals and look at them.
I would just do a lot of reading. I used to go down to the Department of Insurance in Lincoln and go through the convention reports and the examination reports.
I’d — they’d give me some little table someplace and I’d keep asking them — (laughs) — for these reports and they’d have to go way down in the bottom of the Capitol to get them out for me. But they didn’t have much else to do so they were always happy to do it.
And that’s the way I learned about it. And it happened to be a productive field to learn about it that way. And I really think that something akin to that is the best way now. I can’t think of — you know, you can read some analyst reports.
I think you can learn something, frankly, by reading the Berkshire Hathaway annuals for 20 years and reading the insurance section. I think it’ll teach you something about the economics of insurance. So, I would do it by reading.
And if you can find somebody that knows the business well, who’s willing to spend some time talking to you about it, they can probably shorten the educational period and give you some help on that.