GEICO

"The cast of characters was of critical importance in this investment. I ascribed the odds of Walter Scott Jr. lying as being well under 1 percent. When Jim Crowe makes statements in press releases or at the company’s annual meeting, it is pretty much the same as Walter Scott Jr. making those statements. The odds I ascribed to Jim Crowe blatantly lying in a very public forum was under 1 percent as well. Wall Street did not even attempt to handicap this important fact. For them, the entire sector was in meltdown, and the people and what they were saying didn’t matter. Well, they do matter. 2. If Jim Crowe was not lying, then it follows from that statement that they would try their hardest to stay out of bankruptcy. This was not a company that would throw in the towel and file until every stone had been turned. This meant that they’d conserve their dry powder of $2.1 billion until the company got to being cash flow positive. The $2.1 billion of liquidity meant that Level 3 debt holders would receive interest payments for at least three years. 3. Good management gives you upside options for free. Walter Scott Jr. had a pristine reputation. Level 3 was in a situation very much like GEICO found itself in the early 1970s. Warren Buffett’s injection of money into GEICO then did two things: (a) it took away the liquidity crisis they were facing, and (b) with the liquidity cloud gone, the stock rallied and traded on underlying fundamentals. Once Mr. Buffett invested in GEICO, he could not lose money on the investment. If Level 3 had more cash on hand, its debt would trade at par and its ability to get marquee customers would be significantly enhanced. With friends like Warren Buffett and the goodwill that Walter Scott Jr. had, Level 3 had many levers it could pull to erase any liquidity issues. Over the next few years, on the backs of the reputation of the cast of characters, it did pull several of these levers. 4. While I had no way of knowing how this would play out, in 2003, Level 3 did use its goodwill. It did a private convertible debt offering, and its friends (Berkshire Hathaway, Longleaf Partners, and Legg Mason Value Trust) invested hundreds of millions in the business. Now, once Warren Buffett, Bill Miller, Staley Cates, and Mason Hawkins publicly backed the business with their dollars, the odds of Level 3 going bankrupt pretty much went to zero. The halo these investors provided meant that if Level 3 needed more capital, it could easily get more from a plethora of investors. Once this offering was done, the bonds rallied and I exited. As I write this in 2006, Level 3 has not had to file for bankruptcy. On the contrary, most of Level 3’s bonds are trading above par. The overhang is completely gone."

"I don’t want an easy business for competitors. I want a business with a moat around it. I want a very valuable castle in the middle and then I want the duke who is in charge of that castle to be very honest and hardworking and able. Then I want a moat around that castle. The moat can be various things: The moat around our auto insurance business, GEICO, is low cost.6 —Warren Buffett"

"GEICO was a Texas brainstorm from the 1930s. Its creator, Leo Goodwin, added two brilliant features that distinguished this auto insurer from the white bread version. GEICO sold policies by mail, cutting out the expensive sales brigade. It only sold to government geeks. Goodwin once read a study that showed federal, state, and local bureaucrats caused fewer car wrecks than blue-collar or corporate types. A bureaucrat might be boring as a date, but he or she was a dreamy client for an insurance company.Lower expenses and fewer accident claims formed a winning combination for GEICO. Ben Graham figured this out and bought half-ownership in the company in 1947. GEICO soon went public, so anybody could buy the stock by 1951, the year Buffett got interested in it. One Saturday that year, Graham's star pupil hopped a train from New York to Washington to behold GEICO in person. Finding the place locked, Buffett banged the door and roused the janitor. The 23-year-old grad student talked his way around the janitor and into a four-hour interview with the CEO."

"As a result, I met Lou Simpson, whom Buffett had handpicked to invest GEICO’s money in stocks and whom he once described as “the best I know.”"