Kellogg Insight: Interview With Lou Simpson

Kellogg Insight recently published a short interview with Lou Simpson, the former chief investment officer of Geico (a Berkshire Hathaway subsidiary) and the current chairman of SQ Advisors. He has been called “one of the investment greats” by Warren Buffett. Kellogg Insight is the research & ideas magazine of the Kellogg School of Management at Northwestern University.

Some paraphrased highlights / excerpts below:

  • On investment philosophy: The key is simplicity. “If you’re a professional investor, the question [to ask] is: How can you add value? The more you trade, the harder it is to add value because you’re absorbing a lot of transaction costs, not to mention taxes.”
  • On concentrating your investments in your best ideas: You can only know so many companies. “The more decisions you make, the higher the chances are that you will make a poor decision.”
  • On portfolio rebalancing: “One thing a lot of investors do is they cut their flowers and water their weeds. They sell their winners and keep their losers, hoping the losers will come back even. Generally, it’s more effective to cut your weeds and water your flowers. Sell the things that didn’t work out, and let the things that are working out run.”
  • On the skill set needed to be a successful investor: It’s a combination of quantitative and qualitative skills. Most people now have the quantitative skills but, even so, “you’re better off being approximately right than exactly wrong.” The qualitative skills develop over time.
  • On decision making: “There’s a negative correlation between the number of people making the investment decisions and the results. If you have a lot of people involved, you tend to have the least competent person making the decision, because you need consensus.”
  • On any interesting differences between him and Warren Buffett: “The biggest difference between Warren and me is that Warren had a much harder job. He was managing 20 times the amount of money [he was at Geico].”