Buffett protege, 70, has future

Investor's qualities serve as template for change at Berkshire

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April 24, 2007|By New York Times News Service

CHICAGO -- Warren E. Buffett is hardly a man of mystery.

But when investors gather in Omaha, Neb., in two weeks for the Berkshire Hathaway annual meeting, there will be a nagging question mark over the head of the 76-year-old chairman: Who might someday replace him in each of the two roles he plays - chief executive of Berkshire Hathaway, and its chief investment officer?

A bit more is known about the choice of a future chief executive. Buffett has said there are three candidates from various Berkshire-owned companies. The bigger mystery is who will become the chief investment officer.

Buffett says he does not know himself. On this point of succession, "frankly, we are not as well prepared," he wrote in his 2006 shareholder letter last month.

Here is a clue, though. He or she will probably be a lot like Louis Simpson.

Simpson, 70, has long overseen the investment portfolio of Geico, the insurance company Berkshire owns, which is now valued at more than $4 billion. He is also the only man other than Buffett who has managed stock investments in Berkshire's portfolio.

Buffett is a big fan. "He is the kind of person we are looking for: smart, classy, loyal," he said of Simpson in a telephone interview Friday.

Applicants would do well to learn from Simpson, which is easier now that he has agreed to his first interview since Berkshire Hathaway gained total control of Geico in 1995.

In many ways, Simpson, whose title at Geico is chief executive for capital operations, is a lot like his boss. The two have the same general distaste for technology stocks. They both favor intensive research to find attractive companies to invest in, and they share a willingness to bet on returns from just a handful of stocks.

In terms of style, though, there are some major differences. Simpson, a deliberate, slow-talking executive, has maintained much lower visibility. "I have always felt I could do a better job in adding value by being somewhat removed from the circus and parimutuel atmosphere of the market," he said.

Simpson works in Chicago, where he moved from the La Jolla district of San Diego two years ago because his second wife, Kimberly, a chemical engineer, missed the energy of urban life.

Though he is well-connected among Chicago's power brokers, he tends to describe people in terms like "fancy" if they are not the plain-spoken types that populate Berkshire's host of companies.

Simpson's work life is similarly low-key. On a recent spring day, he sat in his three-room office suite on North Michigan Avenue here, where he works with a small staff, explaining that it had been a particularly busy time.

Busy, though, is relative. There were no researchers running around, no Bloomberg terminals, and no interruptions. "We are sort of the polar opposites of a lot of investors," Simpson said. "We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting, and not a lot of thinking."

He does not crow about Geico's performance except to say that "it has been very, very good," and he is disarmingly honest about investments that have not worked out.

"Pier 1 was a horrible mistake," he acknowledged. "It was our own doing. They were totally out of touch fashion-wise, and it was a disaster."

Such mistakes notwithstanding, his track record has even led Buffett to boast about him periodically. In 2004, the only time that Berkshire ever stated Geico's performance separately, Simpson over 24 years had posted a 20 percent average annual gain.

"He has an amazing record," Buffett said in the interview. "He does not make a lot of noise about it. He is a very sensible, sound, decent guy."

To find stocks, Simpson does not read analysts' reports. "They have their own agenda," he said.

Sometimes he speaks with Buffett several times a week and sometimes not for a month or two. Simpson makes his own decisions and essentially works alone.

"The more people you have, the more difficult it is to do well," he said. "You have to satisfy everybody. If you have a limited number of decision makers, they are more likely to agree."

Simpson, who grew up in Chicago and has three sons, began his investing career at Stein Roe & Farnham. During a heady investment period in the late 1960s, he learned the perils of market timing when he worked for Shareholders Management, then a hot fund company run by Fred Carr. But when the market turned, Shareholders' Enterprise Fund took a nose dive, and there were substantial redemptions. Simpson resigned. "I viewed myself an investor, and they were trading-oriented," he said.

From there, he joined Western Asset Management - now part of Baltimore's Legg Mason Inc. - where he rose to chief executive. Still, that firm basically followed analysts' recommendations.

It was not until Geico's chairman, John J. Byrne, called him in 1979 to become its chief investment officer that Simpson found a niche where he could put his ideas to work. Berkshire Hathaway was a shareholder in Geico, and Byrne sent several candidates to see Buffett about the management job. After a four-hour interview with Simpson, Buffett called Byrne. "Stop the search," Bryne recalled him saying. "That's the fellow."

Does the fact that Buffett seeks a younger heir for the long term upset him?

"If he would have asked me to take over the investments for Berkshire, I certainly would have done it," Simpson said, "but I certainly did not seek it out or wait for it to happen."

That kind of patience has proved to be its own reward. "Lou can keep running money as long as he wants," Buffett said.

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