Todd Combs Retrospective?

Disparate thoughts

The story of Todd Combs can be written as such:

• Nontraditional background guy (FSU, insurance adjuster) gets his start in the insurance business.

• This nontraditional background converges with a traditional background, (CBS, sellside ERA), later creates a Greenwich-based long/short hedge fund that does well through the GFC operating as a financials specialist. Notable calls include shorting Fannie Mae and AIG, and being long Progressive and Mastercard (post-demutualization)

• Combs gets hired by Berkshire in 2010/2011 after getting involved with Munger and vibing with him. This was when Lou Simpson was still running equities at GEICO and Ted Weschler had yet to be hired.

• Post-hiring, we have only received bits and pieces about Todd’s career comfortably insulated by BRK senior management.

It’s difficult to come to any conclusion about Todd’s performance over the last 14 years in his publicly traded equity portfolio. This post is most speculation and a collection of data points.

Lately, Reddit and Twitter have been picking at the scab to identify blunders and missteps in the wake of GEICO’s recent underperformance— Todd was named CEO on Jan 1 of 2020— and has made questionable decisions since his appointment. Consensus among folks who know both Progressive and GEICO is that GEICO is far away in terms of implementing technology into pricing using telematics and other instruments. GEICO is losing on cost as a “dinosaur”. GEICO is probably the most long-term financially consequential responsibility of Todd, but there have been several publicly quasi-verifiable decisions outside of GEICO that Todd is seemingly responsible for.

• Precision Castparts was acquired by BRK in 2015. Todd was “instrumental” in the deal, per WEB. WEB named Todd to the board. WEB would later admit to “paying too much” for PCC.

• At the 2019 AGM, Buffett admitted that 1 of the 2 investment managers had underperformed the S&P, leaving out which one specifically hadn’t.

• Snowflake, a public portfolio investment, not acknowledged as an investment by either portfolio manager (but initially alluded to as a Todd investment per CEO Frank Slootman) has been one of the biggest portfolio detractors since its IPO in 2020.

• WEB blew out of his ORCL investment in early 2019 on the advice of “one of his lieutenants.” Not confirmed this is Todd but Todd had software investments throughout this period.

• Todd’s venture with JPM and AMZN, as well as Atul Gawande, was a failure in disrupting corporate health insurance and corporate sponsored health care. Can hardly place the blame squarely on Todd or any one person here, but it’s worth mentioning on the report card.

• Aforementioned GEICO results since his appointment in 2020.

On the positive side:

• WEB acknowledged that Todd had been an influence in his AAPL investment, the largest moneymaking operation in the history of public markets.

• Todd got a seat on the board of JPM, which is certainly a vouch for both Todd’s IQ and people skills, and potentially useful to BRK.

• Todd’s experience with financials certainly has useful overlap with BRK portfolio names as well as owned subsidiaries.

As a Berkshire shareholder I would be concerned. It has been 13 years, and I can’t think of a good reason not to publish both Todd and Ted’s investment results. Lou Simpson had a track record of his own that Buffett would allude to. Why can’t we know how they’ve done over the past 13 years?

Todd is under fire now for his performance at GEICO. OK- most likely deserved, but I get the feeling that righting the ship at GEICO is going to take more than 5 years. Particularly for a guy who hasn’t been a CEO before.

We should also be able to see Ted’s results! The role Buffett has carved out really should be an index fund, at the size they operate at. Absent a large special dividend or other return of capital, the already unwieldy equity portfolio across insurers within the BRK empire will asymptotically approach a 1.00 correlation with the S&P500. Have Todd and Ted proven they can beat the market at that size? If not, just buy the index! Or recreate it internally and cut out Vanguard. Berkshire should do as follows:

1.) Prove that Todd and Ted can beat the market at their size.

2.) If unable to do so, pay out a special dividend to shareholders that right-sizes the capital to a point where alpha is feasible (as state regulators would allow for the insurers).

3.) If unwilling to do that, recreate the S&P500 with the current sized portfolio in an effort to minimize taxes.

4.) Totally separate, but spin-out the regulated utilities into a listed entity. With the ambulance chasers putting various utilities into bankruptcy with outrageous judgements by the courts, the BRK holdco becomes a target. I don’t know how the government would do it, but the money is at the holdco, and, not to go all tinfoil hat, John Dillinger’s axiom holds here. The money is at the holdco, and if Berkshire Hathaway Energy should ever come into the crosshairs in a similar manner to PG&E or Hawaiian Electric, the government/plaintiff’s attorneys will find a way to get it.