Coronavirus picks part 6: Progressive Insurance
Disclaimer: I own a position in the symbol discussed, and I am not offering investment advice, merely explaining my purchasing decision.
I've considered buying stock in Geico (better known to investors as Berkshire Hathaway) on many occasions, but every time I look into it, I'm no longer convinced that it's still a great company. When I thought about stocks that I didn't think people would immediately realize benefited from the lockdown (after I realized that people would underestimate how much Waste Management was hurt buy the lockdown), Berkshire Hathaway became one of the first stocks I considered, and then I quickly changed my mind. I think Progressive is a much better company.
Insurance is a strange business when it comes to branding and marketing. You don't want to appeal to everybody equally. A great ad for a car insurance company is one that makes good drivers think favorably of the company and bad drivers think unfavorably of the company. I'm a terrible driver, and I hate Progressive ads, and I love Geico ads. I stress out pretty easily and can be pretty up tight, and I'm pretty sure these two things are related, and I'm pretty sure that they also relate to me being a bad driver. I'm also pretty sure that they relate to my natural aversion to ditzes. Progressive ads are ditzy. I hate them. They are some of my least favorite ads. Which is great. No auto insurance company should ever want me as a customer. Geico ads are clever anti-humor which appeals precisely to people like me. Geico has determined that highly intelligent people with high incomes and good test scores are on average much better drivers than people without those things. (It's illegal to directly filter on these things, so they can't do that, but they can filter on membership to organization, including Mensa.) My sense of humor correlates extremely strongly with intelligence and income and membership in organizations like Mensa, but it also correlates pretty strongly with being very judgmental and uptight. Anti-humor is the humor of people who enjoy making fun of what other people find funny. Geico does it exceptionally well, and I'm sure it helps steer their customers to the demographic they are targeting. But I'm not sure they are targeting the right demographic.
By the way, as an investor, I think Allstate has the worst ads. I don't think they realize that advertising introduces selection bias in their customers. Advertising accident forgiveness is a good way to win market share by appealing to an untargeted segment of the customer base, but it's the segment that they should least want to attract as customers. Allstate does a similarly terrible job with branding its spokesperson. Both of these things appeal to people who want to feel like their mistakes are outside of their control. The manner in which I'm a terrible driver is that I fail to respond to mayhem correctly because I think about it instead of just reacting. The guy who represents "mayhem" is a better customer than the people who want to be protected from him. (Granted, Allstate does sell accident forgiveness as an ad-on, so it's possible that they make up for the selection bias with higher rates.) If Farmers was advertising auto insurance instead of homeowners insurance with its ads about the most ridiculous claims it has received and paid out, those would be great ads. The optimal insurance customer only wants to be protected from the things that are actually outside of their control. The worst customer wants to be told that their mistakes aren't really their fault.
By now, you've probably realized that I think a lot about branding when it comes to my investment decisions. I think it's hugely important, and severely underrated, and that most companies do far too little to think about what their branding is really saying. This is something that both Apple and Microsoft have always done well. Apple's "I'm a mac, and I'm a PC" ads were brilliant until someone at Mircrosoft figured out an ad to be better than that ad: https://www.youtube.com/watch?v=HrmF-mPLybw. This is in my opinion, the single best ad I've ever seen. Cool people are often marginalized, and this ad made it feel like Microsoft was on the side of the actual cool people while Apple was just on the side of the snooty jerks.
Apple understood that snooty jerks have money. Microsoft understood that cool people build the future and eventually buy enterprise software.
Now, there's coronavirus. Insurance companies typically make their profits on float. What this means is that they try to pay out the amount that they take in, and make their money on investment returns in the mean time. Coronavirus with its lockdown is a perfect storm for the auto insurance industry. Fewer people are driving and getting into accidents, so they have actual profits from operations during this time when their business is really just built around the concept of generating profits from float, and moreover; meanwhile, stock prices are depressed. Berkshire Hathaway was one of the first companies I thought of as an investing idea once this combination of facts occurred to me. One reason I was particularly excited is because Warren Buffet has significant cash reserves that he has been holding for a market sell-off. But this made me also nervous that he might not consider the current sell-off sufficient to invest. He should have been investing throughout the bull market and wasn't. At this point, it's pretty unambiguous that some of his concerns were invalid. The earnings multiples really haven't been expanding much since the point when Buffet decided to sit out because they were too high, but the stock market has been growing. His key metrics that he likes to look at make far less since than they used to. The increasing use of share buybacks as an alternative to investing in further growth and the rise of globalization have decoupled American GDP from the performance of the American stock market. Rising margins have also done similar things. When the world's most valuable companies have extremely high margins like Google and Microsoft do, they aren't generating GDP throughout the rest of the economy at a rate proportional to what a company like GM would have done back when GM was the most valuable company in the world. As margins increase, we should expect the stock market's valuation to increase relative to GDP.
Additionally, the concept of the "stock market" is not valid over long time spans. We normally measure it by the S&P 500. The regulatory regime of recent years has been very permissive to mergers and acquisitions; whereas, the regulatory regime when Warren Buffet started doing his trading and came up with his metrics was far more actively anti-trust. As a consequence, the largest 500 companies today represent a larger share of the U.S. economy than they would under a different regulatory regime.
The more I thought about Berkshire Hathaway and what I know about Buffet's investment style, the less I trusted them to benefit from the market opportunity the coronavirus presented. However, after I'd spent a couple days thinking about this, I remembered that I was a really bad driver who should own stock in Progressive because I know I'm a bad driver who is personally repulsed by Progressive's commercials for reasons that I think have something to do with my bad driving. And I don't have any reason to believe that Progressive will fail to capitalize on this opportunity. I don't think that they consider outsmarting the market to really be their core competence.
This is not to say that I expect Progressive to be bad at investing. They have an enormous incentive to be good at it, and I expect that they focus attention on being good at it. Arrogance precipitates downfall, and Warren Buffet has gotten arrogant.
As far as I can tell, Progressive is still a company that is still just a good company and hasn't come to consider itself to be the undisputed masters of its field. (And for what it's worth, Buffet was never that good of an investor. Jim Simons is a good investor.)
Comparing Progressive's market cap to Berkshire's, I think Progressive Insurance has plenty of room to outperform the market by a factor of more than 10x over the next few decades, and I think right now is likely the best buying opportunity that will ever present itself for getting into their stock.
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