Source: Smart Investors
As everyone is counting down to the conclusion of Warren Buffett’s legendary tenure, news came that Todd Combs, investment manager and CEO of GEICO, is leaving Berkshire Hathaway.
And it was, quite unexpectedly.
December 8 $Berkshire Hathaway-B (BRK.B.US)$ An official press release announced leadership appointments for the company’s non-insurance businesses, insurance operations, and corporate headquarters. The most notable among these was Todd Combs’ departure.
After leaving Berkshire Hathaway, Combs will join JPMorgan, where he has served as a director since 2016. $JPMorgan (JPM.US)$ 。
In the press release, Buffett stated: 'Todd has served as CEO of GEICO since 2020 and is now resigning to take on an exciting and significant new role at JPMorgan, with further details soon to be announced on their website. Todd has brought many talented individuals to GEICO and broadened the company’s horizons. JPMorgan has once again made a wise choice.'
Todd Combs joined Berkshire Hathaway in 2010, a year before fellow investment manager Ted Weschler.
Exhausted from running his own hedge fund, Castle Point Capital, Combs met Charlie Munger in 2010. Their shared interest in obscure books and diverse topics led to deep discussions about stocks with Warren Buffett, earning his high regard.
A decade after joining Berkshire Hathaway, he took over as head of Geico, the auto insurance company, and gained widespread acclaim for successfully reversing the company’s decline.
In this year’s February shareholder letter, Buffett wrote: 'Our insurance operations have achieved remarkable profit growth, with GEICO standing out in particular. Over the past five years, Todd Combs has implemented significant reforms at GEICO, enhancing operational efficiency and modernizing underwriting processes. This long-standing “gem” truly needed polishing, and Todd worked tirelessly to complete this task. While not yet fully finished, the progress made in 2024 has been astonishing.'
This also made him a leading candidate to succeed Ajit Jain, the septuagenarian head of the insurance division.
Todd Combs, after stepping down, will serve as a special advisor to JPMorgan CEO Jamie Dimon while resigning from his previous role as a director.
In a statement on Monday, Dimon commented: 'Todd is one of the finest investors and leaders I have ever known. He has co-managed investments alongside Warren Buffett, one of the most respected long-term investors of our time. He has a deep understanding of JPMorgan and shares our mission to make the world safer and better.'
Combs is reportedly set to manage an initial $10 billion investment under the new initiative, with JPMorgan stating that the plan will eventually allocate $1.5 trillion to drive economic growth and 'make the world safer.'
The initiative will also establish an external advisory board, comprising members such as Amazon founder Jeff Bezos, Dell Chairman Michael Dell, and former government officials.
Regardless, Todd Combs, upon leaving Berkshire Hathaway, will continue to play a pivotal role in the investment field.
Finally, we share with you the delightful story of how Todd Combs first met Warren Buffett and Charlie Munger—two astute judges of character—and how he 'won them over.'
The story of their 'first encounter' goes like this.
In 2010, Todd Combs, exhausted from running his own firm, Castle Point Capital, was planning his next steps. Around the same time, he happened to meet another investor who knew Charlie Munger, sparking a serendipitous connection.
With Munger soon to be in Los Angeles, Combs decided to call the office of the Berkshire vice chairman to try arranging a meeting.
‘I didn't think I would actually get to meet him, but why not give it a shot? So I called and ended up chatting with his voicemail system, which was hilarious.’
It was actually a recording of Charlie Munger that answered Coombs' call. The voice on the phone asked, 'What do you want? Because everyone always wants something.' I said, 'I really don't want anything.'
After confirming that Coombs had no requests, Munger later sent him an email, inviting him to breakfast at the California Club, scheduled for 7 a.m.
The two ended up talking for nearly six hours.
Coombs said, 'Dealing with someone like this for the first time and trying to maintain that state is really exhausting. For him, it's as easy as playing tennis, but for me, it's obviously very, very stressful.'
During their first meeting, the two discussed the BP PLC Deepwater Horizon oil spill. Then they moved on to the topic of the universe.
Coombs talked about a book he had read, 'I saw six numbers, and these six numbers must align perfectly for the universe to exist, just like gravity being a 60-digit number, with the last digit also being 6. If that number were 7 or 5, the universe wouldn't exist, and if unable to escape its own constraints, it would fall apart.'
Munger said, 'I just read that book too.'
Bear in mind that this is an obscure book, possibly selling only 100 copies, and in Coombs' view, very few people would know about it! Yet the two discussed this topic at length.
When returning to the Deepwater Horizon topic, Coombs began speaking at length because he could apply his familiar insurance thinking.
The Deepwater Horizon oil spill was an offshore oil spill incident in the Gulf of Mexico that occurred on April 20, 2010.
The cause was a blowout and explosion at a deep-sea drilling platform named 'Deepwater Horizon,' leased by BP PLC, which led to an oil spill incident.
According to subsequent investigations, BP PLC and Halliburton reduced the amount of cement injected into the well during the implementation of the well's cementing project in order to cut costs, resulting in safety issues.
Combs said that the core issue here is a mismatch in timing because a CEO’s term typically lasts only four years. When the probability of a problem occurring is only 1%, few CEOs are willing to spend the money on prevention.
“In essence, what BP did was sell put options at a very low price,” Combs said.
Munger asked with great interest, “What did you just say?”
Though somewhat hesitant, Combs repeated, “They were essentially selling a large number of put options.”
Munger praised, “That metaphor is brilliant. That’s exactly what they did!”
Combs added, “It’s like the Ford Pinto. They didn’t want to spend an extra $0.02 to prevent car explosions. Whenever these cars were rear-ended, they would almost always explode. They could have solved the problem with a $0.02 part, whereas for Deepwater Horizon, it would have cost $2.
But the company refused to do it. It’s absurd that they could have spent such a minimal amount to protect themselves from potential disaster!”
In any case, Combs expressed his thoughts on the matter as well as on insurance, frequency, and severity.
It is important to note that Coombs’ second job was at Progressive, specifically in the data analysis department, where his mathematical talent was fully utilized. His interest in investment also began here.
As for his decision to return to school for a business degree after three years of work, and then leverage his profound understanding of the insurance industry to enter the investment field with great success, that is a longer story.
The two bookworms hit it off and discussed Mark Buchanan's book Ubiquity, which explores power laws and the trade-offs between frequency and severity, among other topics.
A week later, Charlie Munger called Coombs, and the two talked for several more hours on the phone. Munger also invited Coombs to visit him next time. Thus, there was another reason for them to meet again.
After more than ten conversations, Munger finally asked Coombs about his next steps.
When Coombs mentioned his intention to acquire an insurance company as a permanent source of funding for his investments, Munger suggested he speak with Warren Buffett.
Coombs thought at the time, 'That’s great,' but had no idea that Munger was actually testing him.
I thought they were planning to acquire some of the companies in my portfolio, so I flew out to meet Warren. I didn’t realize this was actually just a great opportunity for casual conversation, without any need for pretense—just a simple talk.
Unlike Munger, who enjoys discussing books and philosophical thinking, Buffett was keen to dive into discussions about stocks right from the start.
Coombs held shares in Bank of America, MasterCard, and Visa, while Berkshire Hathaway had significant stakes in Wells Fargo & Co and American Express. Their portfolios were actually quite similar.
"Why MasterCard instead of American Express?" Buffett asked Combs, guiding him to reflect: "Under what circumstances would this idea be wrong? When would American Express be the better option?"
Combs said, "Charlie and I immediately connected on science, principles, and philosophy, while Warren and I really hit it off on capital allocation—things like risk assessment, upside, downside, and so on—plus insurance."
Buffett asked Combs, 'Is Progressive better or worse than GEICO?' Combs replied, 'Better.'
Buffett countered him. But Combs rebutted, "GEICO is better at marketing and brand promotion, while Progressive is more like a data company. In the long run, data will prevail. But clearly, neither company excels in technology."
Combs later admitted that, evidently, he didn’t understand GEICO’s technical attributes as well as he does now. By the way, on December 23, 2019, Combs was officially announced as the CEO of GEICO.
Buffett appreciated Combs' candor because, as a CEO, it's all too easy to be surrounded by yes-men.
"Frankly, I don't care about that. I'm very straightforward; that's my opinion. You can take it or leave it—it doesn't matter to me. I don’t need to agree with you, and I’m not here to agree with you. Likewise, you’re not here to agree with me."
Reflecting on his frankness more than ten years later, Combs said, "I might have been wrong, but that’s just how it was—at least I was honest."
In terms of being 'straightforward,' Combs really is quite similar to Buffett.
Buffett and Munger were clearly won over.
They hired Combs at the end of 2010, followed by Ted Weschler in 2012, and gradually entrusted them with increasing responsibilities.
By 2021, the duo managed over $34 billion in investments, accounting for nearly one-tenth of the total value of Berkshire Hathaway's equity portfolio at that time.
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Editor /rice