Tuesday, August 14th 2018

Warren Buffett Chastises Himself in $50 Million Berkshire Hathaway (NYSE:BRK-A) Loss Via Geico


Saturday, February 27th, 2010

Implying he was older and wiser than his people at Geico, Warren Buffett pressured them to develop a credit card offering for their people that they were against but which Buffett was sure would be a money-winner for Berkshire Hathaway (NYSE:BRK-A) and Geico. Buffet was wrong!

The credit card was offered within the car-insurance division of Geico, and called "The Geico Platinum MasterCard." Executives at Geico resisted the idea but Buffett prevailed. A few years later and with the price tag of $50 million dollars, Buffett has learned another business lesson, which he owns completely as his own.

Buffett close down the credit card business after pretax losses surged to $6.3 million. He sold the receivables for the business for 55 cent on the dollar, which generated even more losses.

The reasoning behind Buffet's foray into the credit card business was his thought that Geico customers would probably be good credit risks, which of course he was completely wrong on.

One thing most of us appreciate about Buffett is his lack of fear in exposing his business mistakes, which reminds others in business they're human as well and will also make mistakes.

Buffett revealed his part in his misguided adventure in the latest release of his annual letter to shareholders, which almost everyone in business eagerly awaits; not only to see what is happening in Berkshire, but to listen to the Oracle of Omaha dispense his wisdom, even if it's wisdom learned the hard way, which it usually is.

As far as Geico itself, that Berkshire holding generated a nice underwriting profit in 2009 of $649 million, making the loss of $50 million over an approximate six-year period not that big of a deal. But when you listen to Buffett, the fact that he knows he pushed too hard on it and overrode his trusted people, and that, probably more than anything, bothers him more than simple losses.

Geico has grown at an extraordinary pace since the early 2000s, adding an additional 4 million policyholders during that time, which seems to be the impetus behind Buffett's credit card idea.

Not only has Geico grown, but it has a solid base of loyal customers which Buffett was attempting to tap into as an extra source of income.



Article by Gary B

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



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Tags: berkshire hathaway, credit card, geico, warren buffett

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