Munger on the perfect turnaround
GEICO is a very interesting model. It’s another one of the hundred or so models you ought to have in your head.
I’ve had many friends in the sick business fix-up game over a long lifetime. And they practically all use the following formula—I call it the cancer surgery formula:
- They look at this mess.
- And they figure out if there’s anything sound left that can live on its own if they cut away everything else.
- And if they find anything sound, they just cut away everything else.
- Of course, if that doesn’t work, they liquidate the business.
- But it frequently does work.
And GEICO had a perfectly magnificent business submerged in a mess, but still working. Misled by success, GEICO had done some foolish things. They got to thinking that, because they were making a lot of money, they knew everything. And they suffered huge losses.
All they had to do was to cut out all the folly and go back to the perfectly wonderful business that was lying there.
And when you think about it, that’s a very simple model. And it’s repeated over and over again.
And, in GEICO’s case, think about all the money we passively made…. It was a wonderful business combined with a bunch of foolishness that could easily be cut out.
And people were coming in who were temperamentally and intellectually designed so they were going to cut it out.
That is a model you want to look for.