LIKE MANY PEOPLE who read HumbleDollar, I greatly respect Warren Buffett’s opinions and insights. I’ve even attended Berkshire Hathaway’s annual shareholder meeting in Omaha. Now that it’s broadcast, I reserve the Saturday of the meeting to watch it on the web.
Seeing it from a distance means I miss out on the terrific deals various Berkshire companies offer shareholders who attend in person. By attending virtually, however, I don’t have to navigate the crowds or spend six hours driving to Omaha and another six hours returning home.
I almost always spend the entire meeting nodding in agreement with the comments made by Buffett and Berkshire Hathaway Vice Chairman Charlie Munger. This year’s meeting started similarly. Then I heard an opinion with which I disagreed.
During a question about Berkshire’s insurance company, Geico, Buffett said something that jolted me from my chair and had me shouting at the monitor. What could cause such an outburst?
When speaking of Geico’s competitor, State Farm Insurance, Buffett said, “The largest auto insurance company in the United States was started over in Illinois by a guy who didn’t know anything about insurance particularly. And it’s a mutual company. It’s not supposed to succeed in capitalism.”
Not succeed in capitalism? These words startled me because I’ve always been a huge believer in cooperatives and mutual companies. The reason goes back to my early childhood.
I first learned about cooperatives when I was a young boy visiting my grandfather’s farm. My father made sure to fill our car with gas at the local co-op. Why? Grandpa would get back some of the money we’d spent in the annual dividend payment made to the co-op’s members at year-end.
What a great idea, I thought. Local farmers had banded together to purchase costly goods at wholesale prices. Why should they pay somebody else more?
To me, this fits well with 18th century economist Adam Smith’s “invisible hand,” where many benefit when each person looks after his or her own economic interest. Co-ops and mutual companies are both built on the philosophy that cutting out the middleman can mean better results for members.
Buffett said this runs counter to what he learned in college. “If you go to business school,” he said, “they teach you that only because you have incentives and compensation… can companies succeed. Nobody’s really gotten rich off State Farm. They’ve sat there, and they are the largest insurance company.”
Perhaps an outside investor can’t profit much from mutual companies and co-ops, yet I’ve seen that they can be extremely successful businesses. The insurance industry used to have many mutual companies owned by policyholders. Just think of how many have mutual in their name: Mutual of Omaha, Liberty Mutual, Mass Mutual.
Many savings and loans were organized as mutual companies, too. Although many have failed, the cause of their demise was not their form of organization. Rather, many closed after making poor lending decisions, a sign that mutuals are still governed by the hard rules of capitalism.
Other co-ops are nationally known. REI, the outdoor equipment retailer, is a co-op that was started to purchase climbing rope at wholesale prices. Both Best Western hotels and Ace Hardware are cooperatives. Two of the largest mutual fund firms in the U.S. are mutual companies—Vanguard Group and TIAA.
Most cooperatives are relatively small, like my local credit union and Mississippi Market—the neighborhood co-op where I buy locally sourced meat and organic vegetables. There’s a huge number of co-ops in the agriculture business. Land O’Lakes is a producer cooperative that makes everything from its self-named cheese, butter and milk, to Purina animal feeds. Other dairy co-ops include Borden Dairy, Blue Bell Creameries and Kemps.
Buffett may not consider the success of any of these firms as particularly likely in a capitalist system, but I’d argue that their success shows that cooperative and mutual firms deserve a place. Each co-op is simply making decisions in the best interest of its members, while also creating jobs and services that make our lives better.
When I buy goods or services, I always check to see if a mutual company or a cooperative are possible suppliers. Sometimes they are and sometimes they aren’t. Either way, I figure they have a place in our economy.
Kenyon Sayler is a retired mechanical engineer. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. Kenyon’s brother Larry also writes for HumbleDollar. Check our Kenyon’s earlier articles.
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Vanguard is not a mutual company. Vanguard is not owned by the investors in its mutual funds. Vanguard’s mutual fund investors do not choose, elect, or have a say in who serves on the board of directors of Vanguard Group.
In its filing with the SEC, Vanguard does not claim to be a not-for-profit business.
Some companies list either non-voting shares and many have shares with fewer voting rights. They are still public in that the shareholders are entitled to profits. As pointed out, Vanguard is not a non-profit. They choose to return the profits by lowering fees. They could charge higher management fees and issue people a check at year end like a cooperative. But many mutual companies choose to pass the anticipated profits to the owners via lower prices
You are correct. The idea that mutual companies (including mutual insurance companies) are “owned by their policyholders” (to quote the author) is highly misleading. While mutual insurance company policyholders do, theoretically, have the opportunity to elect board members, true ownership entails the right to sell or transfer your stake in a company — something mutual insurance policyholders cannot do.
I like free markets and competition, and am happy with my accounts at Vanguard, State Farm, and two credit unions. Warren is free to pay extra fees to placate stockholders. I think he is very able to do so.
I wholeheartedly agree with everything pointed out.
One of the interesting quirks of some mutual companies is that since they are member owned, they can sell very cheaply, but technically aren’t allowed to sell things at a loss. (Depending on the bylaws and such.)
For instance, the aforementioned Vanguard is not allowed to create products to compete with Fidelity’s “Zero funds”
because those funds have an operating expense that are absorbed by the company for promotional purposes.
Just an interesting quirk that I learned about on the Clark Howard podcast a few weeks ago.
I completely agree about the value of mutual companies. My wife works for a mutual life insurance company (OneAmerica) and I retired from a public health insurance company (Anthem) that was previously a mutual company.
I believe having customers and owners as the same aligns the interests of the company with those of the consumer. Thank you for your article.
Kenyon, thanks for this article. I didn’t realize how many cooperatives, and in such diverse businesses, there are.
I agree that when one has a choice, a co-op solution is often the better deal. Where I live in the southwest a large utility provides electricity. Getting solar panels on one’s home is an expensive proposition, and one is forced to deal through 3rd party “approved” vendors. Meanwhile, 65 miles away in a small community whose utility is a co-op the process is simple and cost effective as the co-op directly provides all services to install solar panels. The difference is night and day.
I agree. Our electricity (just west of Austin) is provided by Pedernales Electric Cooperative and they’re a first class outfit.