Selling Too Soon: Buffett's $1.3 Million Mistake with GEICO

By sagebytes — 03 Apr 2025

Based on Buffett's 1995 letter to Berkshire Hathaway shareholders, here are the key investment principles he advocates:

Business Fundamentals

Focus on businesses with excellent economic characteristics - Buffett looks for companies with sustainable competitive advantages or "economic castles protected by unbreachable moats."
Invest in well-managed companies - Seek businesses run by outstanding managers who are talented, honest, and have a strong attachment to their companies.
Understand what you're buying - Buffett doesn't rely on financial projections from sellers, noting "in the production of rosy scenarios, Wall Street can hold its own against Washington."

Maintain rational pricing discipline - Don't proceed in an "ordained direction" that leads to silly purchase prices.
Compare opportunities across options - Always mentally compare any potential acquisition against dozens of other opportunities, including buying small pieces of great businesses through the stock market.
Be wary of "dealmaking" - As Peter Drucker noted, "Dealmaking is exciting and fun, and working is grubby," which leads to many deals that "make no sense."

Aim for permanence - Berkshire buys to keep, which attracts sellers who care about what happens to their companies and people.
Be patient with great businesses - "Our favorite acquisition is the negotiated transaction that allows us to purchase 100% of such a business at a fair price. But we are almost as happy when the stock market offers us the chance to buy a modest percentage of an outstanding business at a pro-rata price."
Avoid selling winners - Buffett regrets selling GEICO shares early, noting he learned "a lesson about the inadvisability of selling a stake in an identifiably-wonderful company."

Appreciate the value of "float" - In insurance, float (money held but not owned) creates immense value when obtained at low cost.
Monitor aggregate exposure - While accepting reasonable volatility for better returns ("we prefer a lumpy 15% to a smooth 12%"), always keep your worst-case scenario at a comfortable level.
Avoid bad contracts - "A bad reinsurance contract is like hell: easy to enter and impossible to exit."

Be skeptical but not cynical - While questioning acquisition activities of most managers, Buffett and Munger retain the ability to act decisively when they see genuine opportunity.
Remain rational and objective - Emotional discipline matters more than complex strategies or "master plans."
Embrace an eclectic approach - Being "Woody Allen-like" in thinking, Buffett tries to increase marketable investments in wonderful businesses, while simultaneously buying similar businesses in their entirety.