Warren Buffett’s failure to capitalize on the economic system’s digital shift over the past 20 years has harm his in any other case enviable monitor report as an investor. His blind spot relating to tech didn’t cease on the inventory market: It bled into how he ran Berkshire Hathaway’s working firms as nicely. Throughout a lot of his wholly owned companies, Buffett uncared for technological upgrades, and Berkshire’s enterprise worth has suffered because of this.
It’s essential to know this as a result of the vast majority of Berkshire Hathaway’s property are invested not in publicly traded securities, however in working subsidiaries like Burlington Northern Santa Fe Railroad, Berkshire Hathaway Vitality, and Geico. Whereas it’s true that Buffett invested aggressively in wind vitality, that was largely due to authorities tax incentives. In the principle, he most popular to take advantage of his working subsidiaries for money somewhat than reinvest in them for the digital age. Exhibit A is Geico, which due to an absence of IT funding has fallen behind Progressive because the nation’s main for-profit auto insurer.
Buffett has referred to as Geico his favourite little one, and for good cause. Because it started within the Nineteen Thirties, the auto insurer has used a direct-sales mannequin to maintain working prices the bottom within the trade. In a commodity enterprise like insurance coverage, that’s a significant aggressive benefit. Within the Nineteen Nineties, after he purchased all of Geico, Buffett discovered a second moat when he started to model Geico as a trusted, even beloved American firm. The gecko, the caveman, the camel who celebrated hump day—all these had been advertising and marketing masterstrokes, ones straight derived from Buffett’s deep understanding of the mass brand-mass media industrial complicated. The mascots additionally spotlight how, whereas Buffett was snug investing in advertising and marketing, he was deeply uncomfortable with, and due to this fact didn’t perceive, investing in tech.
When Buffett took management of Geico in 1996, he octupled its advertising and marketing price range. This worn out virtually all of Geico’s earnings from a GAAP accounting standpoint, however Buffett was assured that growing promoting outlays at this time would result in extra worthwhile prospects tomorrow. And so it was: Below Buffett’s management, Geico’s market share grew from underneath 3% in 1996 to 12% in 2020, and it went from the No. 7 auto insurer to the #2 auto insurer, behind solely State Farm.
Up to now, so good—however whereas Geico was investing in advertising and marketing, its rival Progressive was investing in expertise. Based solely a yr after Geico, Progressive started to improve its IT techniques as early because the late Seventies. Within the Nineteen Eighties, it purchased its brokers computer systems and despatched them floppy discs so they might higher match worth with danger. In 1996, Progressive turned the primary auto insurer to permit customers to purchase insurance coverage on-line, and it regularly streamlined its backend techniques in order that it may precisely quote new enterprise. Right now, Progressive brags that it has tens of billions of worth factors and that its tech stack permits the corporate to regulate its charges a lot sooner than its competitors—almost as soon as each enterprise day. “We are a tech company that happens to sell insurance,” is one among Progressive’s inside mantras.
Driving the corporate’s tech funding was an perception that was maybe much more astute than Buffett’s advertising and marketing perception. Due to its no-agent, no-commission mannequin, Geico loved a six-percentage-point price benefit vs. Progressive in its working prices. As a result of half of its enterprise is thru insurance coverage brokers, Progressive is unlikely ever to catch up right here. However Progressive CEO Peter Lewis, who led the corporate from 1965 to 2000, understood that an auto insurer’s largest price heart is the claims it should pay policyholders—4 to 5 occasions larger, in actual fact, than its administrative and promoting prices. If Progressive may handle these “loss costs” higher than the competitors, Lewis reasoned, then it may change into the de facto low-cost auto insurer.
The important thing to managing loss prices was expertise in all its superb selection. Again-end techniques at headquarters that might parse worth and danger for every driver had been essential, however so had been entrance line improvements like Snapshot, a shoebox-sized system that within the Nineteen Nineties Progressive started putting in into the vehicles of prepared prospects. Snapshot, now an app in your cell phone, tracks a buyer’s driving habits; multiple in three Progressive prospects shopping for insurance coverage straight from the corporate opts in for “usage-based” premiums. Due to Snapshot and different improvements, Progressive merely is aware of extra about its drivers than some other insurer, and this creates a virtuous circle wherein the corporate is aware of which to reward with reductions, which to punish with surcharges, and which to purge altogether.
Thus, whereas Progressive’s working prices have traditionally been six factors worse than Geico, its loss prices have been 11 factors higher, which signifies that Geico’s low-cost moat has been breached by tech. In distinction to Progressive’s streamlined system, Geico has greater than 600 legacy IT techniques. It didn’t begin engaged on a Snapshot-like product till 2019, twenty years after Progressive started.
Buffett preferred to say that when the tide goes out, you see who’s swimming bare, and COVID was the right storm to disclose how little Geico had paid consideration to its digital wardrobe. Throughout COVID, folks all of the sudden stopped driving, after which, when the pandemic ended, they drove greater than ever and extra recklessly than ever. On the identical time, the worst inflation in forty years hit all sectors of the economic system, together with auto-repair outlets. Such quickly altering situations favored insurers with sturdy monitoring instruments, like Progressive, and punished insurers with out them, like Geico. Since 2020, Progressive has virtually doubled its private auto coverage depend—however Geico has misplaced almost 15% of its private insurance coverage base. Progressive, not Geico, is now the nation’s quantity two auto insurer.
It seems that whereas the branding of the gecko was essential, it wasn’t almost as highly effective as using subtle digital instruments. Geico is an efficient instance of what occurs when an organization, even a robust one, fails to reinvest in its future. Relatively than a virtuous cycle—tech funding main to raised pricing and higher merchandise, which drives extra earnings, which might then be reinvested to drive the cycle on—Geico appears caught in the identical vicious cycle that afflicts Common Motors, Macy’s and different legacy firms.
