The “Secret” Key To Buffett’s Success… One Of The World’s Most “Boring” Businesses… (And How We Can Profit)
When I meet someone new, and they ask what I do for work, I normally keep it pretty general.
In most cases, I just tell them that I’m in the financial publishing business. In my experience, it’s just easier that way. You see when people ask you this, there’s a chance they don’t really care all that much. It’s the nice thing to say.
But on the off chance they do care, they usually want to know what that means.
“Oh, we sell newsletters about the stock market. So, I write and edit a bunch of stuff and follow the market all day.”
If it gets to this point, this is where I usually end up a little disappointed. You see, most people want some kind of stock tip. Or they want to know what I think about meme stocks, cryptocurrencies, or the latest penny stock they heard about.
But they really don’t want to know what I think about it. They want validation. Most of these people would be better of buying, say, Apple, and calling it a day. But they don’t want to hear that. The same goes if I give them a real tip, like “you should learn about Buffett and follow some of his moves”.
But every once in a while, a new acquaintance will want to talk about Buffett… things they’ve learned from him, what they own that he does, etc. I’m always glad when this happens — especially with younger investors.
Buffett’s not perfect — and he’ll be the first to admit that — but he’s also rarely wrong when it comes to the market. That’s why, whenever I encounter the rare person who truly wants to become a good investor, the first thing I tell them to do is look at Berkshire Hathaway’s portfolio. And then, I tell them to start reading Buffett’s shareholder letters.
By studying Buffett’s career, you can learn not only about what makes a great investor — but also gain a heap of business and common sense. An older colleague encouraged me to do this whenever I broke into this business many moons ago, and I’ve been better for it ever since.
The Secret Key To Buffett’s Success
Now, looking at Buffett’s stock picks is one thing. You honestly can’t go wrong with that. But if you truly want to understand his success – and emulate it yourself – you need to take it a step further.
That’s why the next thing I tell interested younger investors – you can tell I’m really fun at parties – is to closely examine the relationship between Berkshire Hathaway and its insurance operations.
Insurance is the lifeblood of Buffett’s empire. It’s the financial engine that has consistently propelled Berkshire’s expansion since 1967.
Since purchasing National Indemnity for $8.6 million in 1967, Buffett has acquired all kinds of insurance operations, filled with smart, dedicated managers. The most notable among these is GEICO, but there’s also Berkshire Hathaway Reinsurance Group and General Re, to name a few.
This is where the concept of insurance float comes into play. Float is the amount of premiums an insurance company collects. It may have to pay that out as customers file insurance claims, but of course it never hopes to. In the meantime, they are free to invest this at their discretion.
Combined, Berkshire has $150 billion in insurance float. Think about that for a second. That’s a lot of firepower, and it’s the closest thing to (legal) free money you’re going to get.
The key is to have a good underwriting team as well as a group of folks who deploy that capital in a wise and efficient manner.
It’s easier said than done. But the good news is that you don’t have to have a setup like Berkshire to profit from insurance, either. Well-run insurance companies are fantastic investments in and of themselves. They’ve proven to deliver some of the best long-term returns to investors.
We’ve Profited Big-Time From Insurance Stocks
For example, in this interview with my colleague Jimmy Butts, we talked about one of his holdings over at Capital Wealth Letter: American Financial Group (NYSE: AFG).
After adding this stock to their portfolio, Jimmy and his subscribers racked up a total return of 216% since August 2020 – crushing the broader market’s 25%. And in a rising-rate environment, there’s no reason why that shouldn’t continue.
But that’s not the only example. Take W.R. Berkley (NYSE: WRB).
The company is known for its strict underwriting discipline. In fact, when WRB reported financial results for fiscal 2022, its combined ratio was 89.3%.
The combined ratio is a key metric in the insurance business. It tells you whether they are making an underwriting profit or a loss. Anything below 100 is good, and anything below 90 is great. It means the collecting far more in premiums than they paid out in claims.
Other highlights for 2022 include: record underwriting income ($1 billion), record net income ($1.4 billion), return on equity of 20.8%, as well as a record $2.4 billion in premiums, up 6.7% year over year.
It should come as no surprise then that WRB has been another triple-digit winner for Jimmy and his premium subscribers — to the tune of 289% at last count. And all from a “boring” insurance stock.
If the one and only thing you took away from this is that insurance stocks can be wildly profitable, then my work here is done.
But there’s a lot more we can say about Buffett and the things we can learn from him. Do yourself a favor, if you haven’t already, then carve out some time to read Buffett’s shareholder letters.
You can find the letters on Berkshire’s website, or you can buy a handy e-book and read them all yourself on your Kindle or iPad.
I’ll leave you with one last thought…
Buffett himself has said that individual investors (like you and me) have a clear advantage over guys like him. You read that right.
Buffett has been very clear that it’s harder than ever for Berkshire to earn outsized returns. That’s due to the law of large numbers. To really move the needle, Buffett has to make massive deals – the kind that only come along every so often. In fact, in 1999, he said that if he were a younger or smaller investor, he would focus on smaller companies with outsized potential due to the fact that they often tend to be overlooked.
That’s where our latest predictions report for 2023 comes in…
This annual report is easily one of the most hotly-anticipated pieces of research we release. From the U.S. dollar to driverless trucks to breakthrough cancer treatments and more… If you’re looking for ideas that could turn a modest investment into a small fortune, this is where you’ll find it.
We can’t guarantee that every idea will pan out. But if history is any guide, it could be one of the most profitable things you read all year…