Battered Stocks?

Recently, someone referred to "battered stocks." There hasn't been much battering lately, but it is where the big gains can often be found.

GEICO is one of Buffett's largest and longest-held stock positions. GEICO has done so well for so long that it is difficult to imagine its "battered" origins. In 1975, GEICO reported a loss of $7.13 per share, dropping its equity value from $8.13 to $2.08. This loss of about 75% of the net worth of an insurance company in 12 months is horrendous. During the following year, while GEICO was reporting another $1.51 per share in loss, Mr.Buffett began purchasing the stock at $3.18 per share. This price paid seems high (greater than book value) for a company teetering on bankruptcy.

The results were spectacular. During the following 20 years, Mr.Buffett's return on GEICO stock was 27.2% per year. He profited two-fold: the inherent high quality growth of the GEICO business and the deep discount he paid rose to its inherent worth.