April 2016 Press On Research Issue

April 2016 Press On Research Issue

Below is an excerpt from the unfinished 40 page April 2016 Press On Research issue to release exclusive to subscribers tomorrow April 19th.  If you'd like to subscribe to Press On Research go to the links above or below.

Press On Research High Def

Investing In The Greatest Investment Secret In The World Again

To Earn Up To 71%

April 2016 Press On Research Issue

By Jason Rivera

Press On Research Volume 2 Issue 1

If you ever think of insurance companies like I do – yes I know this is odd 🙂 - one of the first things that may come to mind is catastrophes.

Everything I’ve ever read about the business of insurance has talked about catastrophes both natural and manmade.  And how insurance companies lessen the risks of these disasters.

Disaster is the business of insurance.  But insurance companies insure against risk to protect clients.  And reinsures against them to protect themselves from financial disaster.

Until humans can control hurricanes, tornadoes, fires, death, theft, floods, health issues, and other disasters the business of insurance will be a great one to invest in.

And I love investing in businesses that should remain great for generations.

This is one of the many reasons I love insurance companies.  And today this is the industry we’re heading back to again.

As an investor I try to stay away from risk as much as possible but the entire insurance industry is based on the probabilities of risk.  When something bad will happen not if it will happen.

There’s no way to avoid risk in insurance.  This is because the business of insurance is all about shifting risk to other parties so you’re not crushed when disaster strikes.

When investing in insurance companies you have to make sure the company reserves its premiums well and conservatively.  That you can trust management to keep doing this.  And that management is more focused on underwriting profits than growing revenue.

These are the most important things when evaluating insurance companies.  Because if a company doesn’t do these things well it will go out of business at some point.

Today’s pick does all these well.

It’s a (MARKET CAP REMOVED) million life and property and casualty insurer that pays a 1% dividend.  Is undervalued by 28.8% to 71%. Has produced an underwriting profit in six of the last nine years.  And has produced cumulative redundancies every year of the last nine.

I’ll explain all this below but it’s all great.  And this isn’t all that’s great about the company.

Its float supports 3.49 times its operating assets or 349% of its operating assets.  And its float is also better than cost-free because of the company’s ability to consistently produce underwriting profits.

This acts as a better than cost-free loan the company can use to invest and grow the business.

Another advantage we have over other investors is that we’re willing and love to invest in insurance companies.  Most others hate this business.

Investing In Insurance Part 2

Most people won’t research insurance companies.  I wouldn’t early in my investing journey.  And many professional analysts stay away too.

This is because insurance companies are hard to understand at first.  Have new and confusing terminology to learn.  And normal profit metrics don’t matter for them.

But if you learn how to evaluate them not only will you learn they’re easy to evaluate once you know what you’re doing.  But you can use the same repeatable process on every insurance company.

And Buffett has continued to buy into insurance – his favorite industry – constantly over the decades.  This is one reason he’s so successful.

In reality insurance companies are easy to understand.

Insurance companies take premiums as payment for insuring things like businesses, equipment, health, life, etc.  Premiums are the insurance version of revenue.

The insurance company doesn’t have to pay you a dime of the money it earns over the years until there’s some kind of damage or theft of whatever’s insured.

When this happens they pay the agreed upon insurance rate out to the policyholder minus a deductible from you when you make a claim.

While the company continues to earn money – premiums again - it invests some of it so it can pay back your policy in the future.  And also make a profit in excess of the amount earned, invested, and paid out.

If the company writes its policies and invests well over time it will earn underwriting profits.  This is the main profitability metric to care about when evaluating insurance companies.  And grow the assets it can use to write policies and invest more money.

When done well this can turn into a virtuous circle for insurance companies and shareholders producing great profits and returns for both.

When done poorly this can also turn into a negative cycle for those involved.

If it doesn’t do things well the company will go out of business when a major disaster strikes.

Think of insurance companies like investment management companies.  But instead of only earning management fees insurance companies earn underwriting profits on top of investment earnings.

These effects can double profits over time…  If management is great at what they do.

The insurance business while easy to understand is one of the hardest businesses to be great at.

Other than being a low-cost operator like GEICO owned by Berkshire Hathaway.  There are no competitive advantages in this industry.  And it also experiences wild swings of huge profitability than massive losses on a regular basis.

But if the company writes policies and invests money well over a long period they can grow to great sizes at almost no extra costs.  The only new costs may be to hire more staff.

Insurance companies also hold the greatest secret in the investment world…  Float.  This is how Buffett built his fortune.  And how we’ll start to build ours.

But before we get to this we need to know why float is so important.

Brief Berkshire Hathaway History

Buffett began buying Berkshire Hathaway stock in 1962 when it was still a textile manufacturer.  And when he still ran his investment partnership.

He bought Berkshire stock because it was cheap compared to the assets it had.  Even though the company was losing money.

He continued to pour millions of dollars into Berkshire to keep up with foreign and non-union competition.  But none of this worked.

In time Buffett realized he was never going to make a profit again in the textile industry.  So whatever excess funds Berkshire produced he started buying other companies.

The first insurance company Berkshire Hathaway bought was National Indemnity Company in 1967.

Since then Berkshire’s float grew from $39 million in 1970 to $84 billion in 2014.

Float compounds like interest does if you use and invest it well.  But not only does float compound, if you use it well it also compounds the value of the company that owns the float.

Since buying National Indemnity in 1967 Berkshire’s stock price has risen from $20.50 a share to today’s price of $210,130.  Or a total gain of 10,250%.

This is the power of insurance companies when operated well.  And today’s recommendation is an insurance company that operates the right way too.

But before we get to that I need to explain how float makes this possible.

The Biggest Investment Secret Revealed Part 2

‘Float is money that doesn’t belong to us, but that we temporarily hold.”  Warren Buffett

Float is things like prepaid expenses.  Billings in excess of expected earnings.  Deferred taxes.  Accounts payable.  Unearned premiums.   And other liabilities that don’t require interest payments.

But they are the farthest thing from “normal” liabilities.

With normal liabilities you have to pay an agreed upon amount within a certain period or your customers and suppliers will stop paying you.

Float are things you won’t have to pay back for a while the company uses in the mean time to grow the business.

Instead of paying this money out now like normal liabilities.  Companies can use these “liabilities” to fund current operations.

Float is positive leverage instead of negative leverage like debt and interest payments.

Think of float as the opposite of paying interest on a loan.  Instead of paying the bank for the cash you’ve borrowed.  The bank pays you interest to use the money you loaned.  And you can use this money to invest.

A nice example is long-term debt versus unpaid premiums.  Both liabilities listed on the balance sheet.  But each is far different from a real world perspective.

With long-term debt you get money in exchange for agreeing to pay back to loan at an agreed upon rate for an agreed upon period.  If you don’t you can go into bankruptcy and/or go out of business.

With unpaid premiums you get paid a monthly amount from a customer – say for house insurance – and only have to pay back any amount when a disaster occurs.

If your clients don’t make big claims for a long time – or ever over the life of an individual policy – the company keeps using this “liability” to continue investing and growing the business.

Now let’s keep going with this example…

If you own a home with a mortgage you have home insurance in the United States.  The ranges of this vary but let’s say you own a home and pay $300 a month towards home insurance costs.

This $300 a month - $3,600 a year or $36,000 after 10 years – goes to the insurance company every month.  Year after year even if you never claim any insurance.

The insurance company holds this money on the balance sheet as a liability because the assumption – probability – is you’ll make an insurance claim at some point.

In the mean time the insurance company invests this money to grow assets.  This way it makes sure it has enough money to pay claims when it has to.

Now imagine this multiplied by thousands, tens of thousands, hundreds of thousands, or even millions of customers.

If the insurance company produces underwriting profits on top of the float it gets and invests this money well over a long period this money compounds exponentially.

This is how Buffett and Munger grew Berkshire to the giant it is today.

Using better than cost-free float to fund operations can improve margins by up to a few percentage points each.  And this happens when a company produces consistent underwriting profits.

The best way to explain why float is so important is with the following quote:

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of free – other peoples money – in highly productive assets so that return on owners capital becomes exceptional.”  Professor Sanjay Bakshi adding to something Warren Buffett said about great businesses.

I said in a past issue: “When a company’s float/operating assets ratio is above 100% it means the company is operating with “free” or cost-free money.”

But this isn’t true with insurance companies.

For an insurance company to operate on a cost-free basis it has to produce underwriting profits for a sustained period.

I look for underwriting profits of at least five years straight to consider its float cost-free.

And the company I’m going to tell you about today has earned an underwriting profit in six of the last nine years.

Cost-free float and the power of positive leverage it generates is explained more in my posts in a still ongoing series about float:

When you come across companies that generate all the above on a consistent basis you should expect exceptional returns in the future.

This is because when a company operates its entire business on a cost-free basis it means several things. 1)  It’s a great business.  2.)  It’s an efficient business.  And 3.) That float magnifies margins which will compound value in the company for shareholders over time.

So what is the wonderful company that checks all my – and Buffett’s – marks for a great insurance company?  But also fits into the criteria of Press On Research focusing on small companies?

***

I go on from here to reveal and detail the company in full in this 40 page issue.  I also compare it to a past Press On Research pick and some of its competitors

To find out what this great company is subscribe to Press On Research.

And if you're a Value Investing Journey subscriber remember you also get a 50% discount on a one year Press On Research subscription.  Or you can join for only $49 to get tomorrow's released issue and all back issues.

Similar newsletters to Press On Research sell for several thousand dollars at a big newsletter company so you're getting a great value here.

If you have further questions about Press On Research please go to the link in this sentence or email me at jasonrivera@valueinvestingjourney.com.

The Worst Run Company I’ve Ever Seen? ICON Case Study Part 2

The Worst Run Company I've Ever Seen? ICON Case Study Part 2

We've all got our favorites in life... Favorite sports teams, colors, movies, etc.

When I started investing I didn't think there was any way I would ever have a favorite type of business to invest in.  I thought I looked at every company "unbiased" and hoped for the best when evaluating something.

This was naïve...

We all have our biases no matter how much we learn about and try preventing them.

Maybe its human nature.  Maybe its happy thoughts from prior past experiences that lead to these biases.  Or maybe its something inherent in our brain structures that lead us to do things we know we like.

I think it's a combination of the above.  And this isn't necessarily bad because biases aren't always awful when investing.

The value investing concept of circle of competence is a form of bias in that it helps separating out your favorite businesses to invest in and which you want to avoid.

Biases can keep you away from things you don't - or don't want to - understand.  For example one of the industries I'm biased against as of this writing are banks.

My mind goes numb reading through all the legalese BS in their filings.  I get annoyed reading their financials every time I try because it seems like they're written to make sure there are as many ways as possible for them not to get sued.

They seem purposely convoluted and confusing and this further annoys me until I stop reading the financials.

These are several of the reasons up to this point I still haven't taken the time to understand how to evaluate banks.

Does this make logical sense?  It doesn't even to me since banks and insurance companies are similar in how they make money and I love insurance companies.

But I've taken the time to understand insurance companies that I've not taken with banks.  Maybe I will some day.

For now I'm fine sticking to my circle of competence - my biased favorite businesses to invest in - when searching though companies.  And even in my circle of competence I do have favorites I love to invest in.

In no particular order they are:

  • Insurance Companies.
  • Companies that earn royalties.
  • Asset managers.
  • And businesses based on consulting.

Of the four types of companies above only one - insurance companies - are hard to operate well in a healthy way.  And the difficulty in operating insurance companies is mostly from having strict discipline making sure you underwrite policies that can be profitable in the future.

The other three are in the easier to operate category where you have to concentrate on growing sales and contracts more than having in-depth technical knowledge.

I'm not saying the three non insurance kinds of companies listed above are easy to operate and grow.  But I am saying they're easier to run than most other companies.

As long as you don't have morons running the company insiders should do well for themselves and shareholders over the long-term.

This goes back to another bias/checklist item of mine that Warren Buffett always says: “Always try to invest in a company that a monkey could run and still reward shareholders because eventually a monkey will run it.”

The three non insurance kinds of companies pass this test which is another reason I love them.  As long as you don't have morons running the business they should do well over time.

But what Buffett doesn't talk about in his quote above is what happens when you have someone or a group of people through hubris, incompetence, corruption, or some combination of these things are worse than monkeys at running a company.

When this is the case even the best business models can be ruined.  This is what's happened to ICON the past few years.

Who knew a company based on collecting royalties which produces the biggest FCF/Sales margin I've ever seen would have been better run by monkeys than the people who have run it.

ICON Case Study Part 2 - Digging Into The Financials

In part 1 of this case study I did my preliminary analysis and showed that while ICON produced a 48.8% FCF/Sales margin.  The best I've ever seen.  The company had way too much debt for me to consider investing in it.

I kept the case study going because the high FCF/Sales margin and huge debt load intrigued me.

Most of the time when a company produces a ton of free cash it allows the company to have low or no debt.  And since I also knew ICON was a royalty based company I knew their costs were low so I was wondering why its debt load was so high.

I assumed the worst and even my worst case expectations weren't bad enough.  ICON's turned out to be the worst run company I've ever evaluated.

To find out why click below to get the 20 pages of notes on I took on ICON.

20 Pages of ICON Financial Notes

Or if you want to evaluate the company yourself go to the following pages for the financials I dug through.

The only company I’ve come across that’s even close to this bad was Koss and its business model was a lot more difficult to manage than ICON’s.

As a company that collects royalties ICON could have just sat back, collected those royalties, done nothing else, and made a ton of money for themselves and shareholders.

Monkeys could have run this company better than its current and recent managers who've driven it near bankruptcy.

For now ICON takes that cake as the worst run company I’ve ever researched.

Thank you Professor Andrew for sending this recommendation to me to do a case study on.  It was a great learning experience on what not to look for when evaluating an investment.

A great use of Charlie Munger’s principle of inversion.

Normally I would value the company next but ICON is so bad I won't even value it.

No matter what my numbers say, with everything I know about it I would place a value of zero on the equity.

This is because unless something changes radically and fast there is a high likelihood of default/bankruptcy here.  And as mentioned in the notes this would mean the first lien holders would take full control of the company and shareholders would be left holding nothing.

Let me know in the comments below your thoughts on ICON.  If I missed anything.  If you disagree with my analysis.  Or if you have any questions about the analysis.

***

Remember if you want access to my exclusive notes, preliminary analysis, a chance to win future giveaways, and access to all posts as they come out you need to subscribe for free to Value Investing Journey.  And this isn't all you'll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

And you can subscribe to Press On Research for only $49 if you're a free Value Investing Journey subscriber.

If you have further questions about Press On Research go to its FAQ linked in this sentence.  Or email me at jasonrivera@valueinvestingjourney.com

The Winner Of The Book Giveaway Is…

The Winner Of The Book Giveaway Is...

Announcing The Winner of $300+ of Books

When I started learning about value investing I had no one to turn to for help or guidance except the infinite internet.  I sifted through thousands of articles, websites, books, videos, and other etc. information to get to where I am today.

Now that I have a solid knowledge base built I'm helping other value investors so they don't have to struggle as much as I did when starting.

One of the ways I help is by giving away valuable books for free to subscribers.  And today more than $300 worth of books are going to a lucky subscriber.

I'm a huge believe in Charlie Munger's Mental Models and Worldy Wisdom philosophies that the more we read the more we can know.  And the more we know the closer we are to reaching our goals, making a ton of money, and changing the world.

These books represent knowledge, power, goal and wealth attainment, and much more.  True knowledge is one of the most powerful forces in the world.  But few hold this power...

My goal is to help spread this power to as many as possible.  And today a lucky subscriber is getting a step closer to their goals by winning the following 20 books valued at more than $300.

The winner of the above $300 worth of knowledge for free is David.  Your email address starts with dzdown.  I'll reach out to you soon to get your full name and mailing address.

Hopefully these books will help you get closer to whatever goals you have.

Thank you to all subscribers of both Value Investing Journey and Press On Research.  There will be more giveaways so if you haven't won one of the three up to this point  make sure to stay subscribed.

I'll leave you with an amazing quote I found from Helen Keller as I wrote this post..

Remember if you want access to my exclusive notes, preliminary analysis, a chance to win future giveaways, and access to all posts as they come out you need to subscribe for free to Value Investing Journey.  And this isn't all you'll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

And you can subscribe to Press On Research for only $49 if you're a free Value Investing Journey subscriber.

If you have further questions about Press On Research go to its FAQ linked in this sentence.  Or email me at jasonrivera@valueinvestingjourney.com

Giving Away $300 Worth Of Books Next Week

Giving Away $300 Worth Of Books Next Week

It's been a while since I've updated this... September 22nd 2015 to be exact or almost five months ago as of this writing.

Between the move from South Dakota to Tampa Florida.  Getting behind on work.  And then catching up on everything - finally - I'm reading again more.  And remembered I was giving away books to subscribers last year.

To say sorry for this delay I'm giving away $300 of books next week.  Even if we're not at 500 total subscribers between Press On Research and Value Investing Journey combined.

This was the original cut off to give away more books but I feel bad for neglecting the giving away of valuable knowledge for so many months.

What do you have to do to have a chance to win these books?

If you're already subscribed to either of the above services you don't have to do anything.  But if you're not subscribed to either you'll need to by March 25th to be entered to win.

And if you're chosen as the winner you'll get the books for free.

I will mail all the books to you at my cost.  All you have to do is supply me your name and address and you'll get all the books for free.

But this still isn't all...

When we left off last September there were 14 books worth more than $250 dollars in the prize pool already.  These books are below.

If you want my reviews and thoughts on the books go to these links as well.

Since then I've found/read another six great books to giveaway bringing the total prize pool over $300.  The new books are below.

Andrew Carnegie by David Nasaw

I've not read this book yet.  It's been in my ever growing to read pile for a while now though as I've heard nothing but great things about the book.

But I came across a cheap copy of the hardcover and had to buy it to give away.

Below is the description of the book from Amazon.

Celebrated historian David Nasaw, whom "The New York Times Book Review" has called "a meticulous researcher and a cool analyst", brings new life to the story of one of America's most famous and successful businessmen and philanthropists - in what will prove to be the biography of the season.

Born of modest origins in Scotland in 1835, Andrew Carnegie is best known as the founder of Carnegie Steel. His rags to riches story has never been told as dramatically and vividly as in Nasaw's new biography.

Carnegie, the son of an impoverished linen weaver, moved to Pittsburgh at the age of thirteen. The embodiment of the American dream, he pulled himself up from bobbin boy in a cotton factory to become the richest man in the world. He spent the rest of his life giving away the fortune he had accumulated and crusading for international peace.

For all that he accomplished and came to represent to the American public - a wildly successful businessman and capitalist, a self-educated writer, peace activist, philanthropist, man of letters, lover of culture, and unabashed enthusiast for American democracy and capitalism - Carnegie has remained, to this day, an enigma.

Nasaw explains how Carnegie made his early fortune and what prompted him to give it all away, how he was drawn into the campaign first against American involvement in the Spanish-American War and then for international peace, and how he used his friendships with presidents and prime ministers to try to pull the world back from the brink of disaster.

With a trove of new material - unpublished chapters of Carnegie's Autobiography; personal letters between Carnegie and his future wife, Louise, and other family members; his prenuptial agreement; diaries of family and close friends; his applications for citizenship; his extensive correspondence with Henry Clay Frick; and, dozens of private letters to and from presidents Grant, Cleveland, McKinley, Roosevelt, and British prime ministers Gladstone and Balfour, as well as friends Herbert Spencer, Matthew Arnold, and Mark Twain - Nasaw brilliantly plumbs the core of this fascinating and complex man, deftly placing his life in cultural and political context as only a master storyteller can.

Playing For Keeps

Michael Jordan and the World He Made

This is a fantastic book detailing the rise of Michael Jordan from being cut by his high school basketball team.  To becoming the greatest basketball player ever.

The book also details a lot of the behind the scenes stories of how he negotiated his contracts and endorsement deals.  The infighting that led to the dismantling of one of the best NBA teams ever.  His decision to retire from basketball to play baseball after his father's death and much more.

While none of this book is directly related to investing many of the lessons on Michael Jordan's drive, determination to be the best, persistence, and passion are things we all need to learn from as we aspire and work toward our greatness.

And as you know I've written a lot about failure and greatness here.

I give this book a 5/5.

Diplomacy By Henry Kissinger

I've not read this book yet either.  But as with Andrew Carnegie above came across a copy of the hardcover and had to buy it to give away as I've heard it's great.

Below is the description of the book from Amazon.

A brilliant, sweeping history of diplomacy that includes personal stories from the noted former Secretary of State, including his stunning reopening of relations with China.

The seminal work on foreign policy and the art of diplomacy.

Moving from a sweeping overview of history to blow-by-blow accounts of his negotiations with world leaders, Henry Kissinger describes how the art of diplomacy has created the world in which we live, and how America’s approach to foreign affairs has always differed vastly from that of other nations.

Brilliant, controversial, and profoundly incisive, Diplomacy stands as the culmination of a lifetime of diplomatic service and scholarship. It is vital reading for anyone concerned with the forces that have shaped our world today and will impact upon it tomorrow.

The Partnership

The Making of Goldman Sachs Updated and Revised Edition

This is an amazingly in-depth look at the rise of Goldman Sachs.

It details many of the most important decisions made - and the process behind those decisions - that led Goldman Sachs from a small shop to becoming the world power it is in finance.

It talks about many of the most important people throughout Goldman's history.  And it's failures and triumphs.  This is one of the best company history books I've ever read.

I give this book a 5/5 and have added it to the Recommended Reading and Viewing page as a MUST READ!!!

The Black Swan

I've not read this book yet either yet like the couple mentioned above.  But I came across a copy of the paperback and had to get it to give away.  Heard nothing but great things about this book as well.

Below is the description of the book from Amazon.

A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences.

In this groundbreaking and prophetic book, Taleb shows in a playful way that Black Swan events explain almost everything about our world, and yet we—especially the experts—are blind to them. In this second edition, Taleb has added a new essay, On Robustness and Fragility, which offers tools to navigate and exploit a Black Swan world.

The Art Of Profitability

I've not read this book yet either yet like the ones above.  But I came across a hardcover copy and had to get it to give away.  Heard nothing but great things about this book as well.

Below is the description of the book from Amazon.

Presented in 23 compact lessons, THE ART OF PROFITABILITY features an ongoing tutorial between two fictitious individuals: the old and wise teacher, David Shao, the business master, and his pupil, Steve Gardner, a young and ambitious manager.

Along the way, Zhao goes through a number of business models and pushes his student to examine how a variety of businesses go about making money. Through Zhao's teachings, Steve begins to see how profits can be improved simply by taking a step back and gaining a new perspective.

***

There are now more than $300 worth of book up for grabs and all you have to do to get a chance to win them all is subscribe to either Value Investing Journey for free.  Or subscribe to Press On Research.

Doing either of the above will enter you to win the above prizes but you'll also get a lot more.

Remember if you want access to my exclusive notes, preliminary analysis, and access to all posts as they come out you need to subscribe for free to Value Investing Journey.  And this isn't all you'll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

And you can subscribe to Press On Research for only $49 if you're a free Value Investing Journey subscriber.

If you have further questions about Press On Research go to its FAQ linked in this sentence.  Or email me at jasonrivera@valueinvestingjourney.com

March 2016 Press On Research Issue Released Tomorrow

Below is an excerpt from the March 2016 Press On Research issue to release exclusive to subscribers tomorrow March 15th.  If you'd like to subscribe to Press On Research go to the links above or below.

Press On Research High Def

What Do You Do When A Company You Own Drops In Price?

March 2016 Press On Research Issue

By Jason Rivera

Press On Research Volume 1 Issue 10

What do you do when a company you own stock in drops in price?  What about when it drops a lot in price?

Do you panic and get anxious?  Do you buy or sell more without doing any extra work?  Do you ask your buddies what they think of the company even if they know nothing about investing?

If you do any of these things don’t worry as you’re not alone.  This is how most investors react when something they own drops significantly in price.

But the goal of Value Investing Journey and Press On Research is not only to find the best investments possible to build long-term wealth.  But also to teach so we can become better investors and thinkers.

And a major trait of any great long-term investor is the ability to control emotions.

If you can’t control your emotions it doesn’t matter what you invest in because you’ll always buy and sell at the wrong times.  This is what most investors do.

Study after study shows most normal – average – investors buy at the height of stock prices and sell at the bottom of the price swing.

This is awful and is one reason most people don’t beat the market over time.

So how can you stop being an average investor?

There are several ways but today I want to talk about how to control emotions.

If you can’t control your emotions it doesn’t matter how great of an analyst you are you’ll still be a terrible investor.

In April 2015 I recommended what I thought was a great asset manager NAME REMOVED.  Since then the stock price has dropped ~35% depending on what price you bought at.  And I’ve gotten email from several readers asking for an update on the company.

Because of this today’s Press On Research isn’t a normal recommendation issue.

We’re going to reevaluate NAME REMOVED to see if I made a mistake in my analysis last year.  And to show you the step by step process I take when reevaluating companies I own to take emotion out of my decision making processes.

***

I go on from here to reanalyze the company in full and show the step by step process I use so you can learn to do this yourself.

I found that while the company has dropped in absolute dollar terms and the economics have deteriorated a bit that the company is cheaper now than it was last April compared to its profits.  And the business model and economics are still fantastic.

The company has an FCF/Sales of 40.3%.  Pays a huge dividend.  Is selling at only ~2 times its estimated 2015 full year profits.  And is now selling below its book value by a significant margin.

I found nothing new that would destroy the investment thesis I laid out last April.  And I was so happy after reevaluating the company that I recommend subscribers up their position in the company.

To find out what this great company is and to learn a valuable lesson on what you need to do when reevaluating a company you own subscribe to Press On Research.

And if you're a Value Investing Journey subscriber remember you also get a 50% discount on a one year Press On Research subscription.  Or you can join for only $49 to get tomorrow's released issue and all back issues.

Similar newsletters to Press On Research sell for several thousand dollars at a big newsletter company so you're getting a great value here.

If you have further questions about Press On Research please go to the link in this sentence or email me at jasonrivera@valueinvestingjourney.com.

Buffett’s Alpha Notes – The Power of Float – On Float Part 3

Buffett's Alpha Notes - The Power of Float - On Float Part 3

The goal of this blog is to help us all improve as investors and thinkers so we're a little wiser every day.  The hope being that our knowledge will continue to compound over time so we'll have huge advantages over other investors in the future.

The aim of today's post is to continue this process by talking about a topic few investors know about.  And even fewer understand.

Most people overlook float when evaluating companies because they either don't know what it is.  Don't know the power it can have within a business.  Or don't know how to evaluate it.

This won't be an issue here.

Press On Research subscribers already know this as I talk a lot about float in many of the issues I've written.  But I want to begin talking about it more here because float is one of the most powerful and least understood concepts of business analysis.

Today's post is a continuation of the earlier posts: Charlie Munger On Deferred Tax liabilities and Intrinsic Value - On Float Part 1. And What is Float? On Float Part 2.

Today I'm going to illustrate how powerful float is over time.

Buffett's Alpha Notes - The Power Of Float

My notes aren't in the quoted areas unless in parenthesis.  Bolded emphasis is mine throughout.

“Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks.”

“We show that Buffett’s performance can be largely explained by exposures to value, low-risk, and quality factors.”

“Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Buffett has a higher Sharpe ratio than all U.S. mutual funds that have been around for more than 30 years.

Sharpe ratio is a measure for calculating risk adjusted returns. I don’t use this metric but It’s talked about a lot in the Buffett’s Alpha PDF so you need to understand what it is to understand the context of the article even if you never use it.

Alpha is another metric I don't use... It's a measure of risk adjusted performance.  It's the return in excess an investor/business generates when compared to an index.

For example if your stock picks have returned 20% every year over the last ten years while a comparable index has returned 10% every year for those ten years you've generated an alpha of ten percentage points every year.

“So how large is this Sharpe ratio that has made Buffett one of the richest people in the world? We find that the Sharpe ratio of Berkshire Hathaway is 0.76 over the period 1976-2011. While nearly double the Sharpe ratio of the overall stock market, this is lower than many investors imagine.

Adjusting for the market exposure, Buffett’s information ratio is even lower, 0.66. This Sharpe ratio reflects high average returns, but also significant risk and periods of losses and significant drawdowns.

If his Sharpe ratio is very good but not super-human, then how did Buffett become among the richest in the world?”

“The answer is that Buffett has boosted his returns by using leverage (FLOAT) and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale or a career shift. We estimate that Buffett applies a leverage of about 1.6-to-1, boosting both his risk and excess return in that proportion.”

Thus, his many accomplishments include having the conviction, wherewithal, and skill to operate with leverage and significant risk over a number of decades.”

If you read the article linked below ignore the academic talk of beta, efficient markets, and other academic terms that have little to no relevance in value investing.

“Buffett’s genius thus appears to be at least partly in recognizing early on, implicitly or explicitly, that these factors work, applying leverage without ever having to fire sale, and sticking to his principles. Perhaps this is what he means by his modest comment:”

Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary resultsWarren Buffett, Berkshire Hathaway Inc., Annual Report, 1994.

“However, it cannot be emphasized enough that explaining Buffett’s performance with the benefit of hindsight does not diminish his outstanding accomplishment. He decided to invest based on these principles half a century ago. He found a way to apply leverage. (FLOAT) Finally, he managed to stick to his principles and continue operating at high risk even after experiencing some ups and downs that have caused many other investors to rethink and retreat from their original strategies.”

I disagree with the high risk mentioned in this entire article.

The academic version of risk is a lot different from what we as value investors think of risk.  Most of the “excessive risk” mentioned throughout the article is attributed to volatility.  Which isn’t risk in what we do.

Why then does Buffett rely heavily on private companies as well, including insurance and reinsurance businesses? One reason might be that this structure provides a steady source of financing, allowing him to leverage his stock selection ability. Indeed, we find that 36% of Buffett’s liabilities consist of insurance float with an average cost below the T-Bill rate.” (FLOAT)

In summary, we find that Buffett has developed a unique access to leverage that he has invested in safe, high-quality, cheap stocks and that these key characteristics can largely explain his impressive performance.

Buffett’s large returns come both from his high Sharpe ratio and his ability to leverage his performance to achieve large returns at higher risk. Buffett uses leverage (FLOAT) to magnify returns, but how much leverage does he use? Further, what are Buffett’s sources of leverage, their terms, and costs? To answer these questions, we study Berkshire Hathaway’s balance sheet, which can be summarized as follows:

We would like to compute the leverage using market values (which we indicate with the superscript MV in our notation), but for some variables we only observe book values (indicated with superscript BV) so we proceed as follows.

The above means the estimated 1.6 to 1 leverage the paper states Berkshire gets from its float is a low estimate.  This is because they had to use book values as estimates for the wholly owned Berkshire subsidiaries.

These book values don’t represent any growth in value of the subsidiaries only the original purchase price in most cases.  And knowing what kind of companies Buffett buys these companies have gained a ton of value over time meaning more leverage according to the papers logic.

The magnitude of Buffett’s leverage can partly explain how he outperforms the market, but only partly. If one applies 1.6-to-1 leverage to the market, that would magnify the market’s average excess return to be about 10%, still falling far short of Berkshire’s 19% average excess return.

Berkshire’s more anomalous cost of leverage, however, is due to its insurance float. Collecting insurance premia up front and later paying a diversified set of claims is like taking a “loan.”

Table 3 shows that the estimated average annual cost of Berkshire’s insurance float is only 2.2%, more than 3 percentage points below the average T-bill rate.

 Hence, Buffett’s low-cost insurance and reinsurance business have given him a significant advantage in terms of unique access to cheap, term leverage. We estimate that 36% of Berkshire’s liabilities consist of insurance float on average.

Based on the balance sheet data, Berkshire also appears to finance part of its capital expenditure using tax deductions for accelerated depreciation of property, plant and equipment as provided for under the IRS rules. E.g., Berkshire reports $28 Billion of such deferred tax liabilities in 2011 (page 49 of the Annual Report). FLOAT

Berkshire Hathaway’s overall stock return is far above returns of both the private and public portfolios. This is because Berkshire is not just a weighted average of the public and private components. It is also leveraged, which magnifies returns.

While Buffett is known as the ultimate value investor, we find that his focus on safe quality stocks may in fact be at least as important to his performance. Our statistical finding is consistent with Buffett’s own words:

I could give you other personal examples of “bargain-purchase” folly but I'm sure you get the picture: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 1989.

Given that we can attribute Buffett’s performance to leverage and his focus on safe, high-quality, value stocks, it is natural to consider how well we can do by implementing these investment themes in a systematic way.

In essence, we find that the secret to Buffett’s success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails.

Indeed, we find that stocks with the characteristics favored by Buffett have done well in general, that Buffett applies about 1.6-to-1 leverage financed partly using insurance float with a low financing rate, and that leveraging safe stocks can largely explain Buffett’s performance.

This is the power of float illustrated over a long time period.

The above means his excess returns are attributed only to smart use of float and buying cheap great businesses over a long period.

This is why we must understand what it is and how to use it to our advantage to become better investors.

If you want to read the full 45 page PDF that includes the math, examples, and references download the paper Buffett’s Alpha here.

Most of Buffett's and Berkshire's float comes from insurance companies.  But float can be found at any company.  And next up I'll show you how by analyzing a company's balance sheet to find float.

***

Remember if you want access to my exclusive notes, preliminary analysis, and access to all posts as they come out you need to subscribe for free to Value Investing Journey.  And this isn't all you'll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

What Is Float? On Float Part 2

What Is Float? On Float Part 2

The goal of this blog is to help us all improve as investors and thinkers so we're a little wiser every day.  The hope being that our knowledge will continue to compound over time so we'll have huge advantages over other investors in the future.

The aim of today's post is to continue this process by talking about a topic few investors know about.  And even fewer understand.

Most people overlook float when evaluating companies because they either don't know what it is.  Don't know the power it can have within a business.  Or don't know how to evaluate it.

This won't be an issue here.

Press On Research subscribers already know this as I talk a lot about float in many of the issues I've written.  But I want to begin talking about it more here because float is one of the most powerful and least understood concepts of business analysis.

Today's post is a continuation of the earlier post Charlie Munger On Deferred Tax liabilities and Intrinsic Value - On Float Part 1.  And we're going to answer the question today, what is float?

But before we get to that next is an excerpt from the July 2015 Press On Research issue where I talk about float extensively.

The Biggest Investment Secret In The World

How Warren Buffett Got So Rich And How You Can Too

Warren Buffett’s admired around the world for his philanthropy as he’s going to donate 99% of his $70 billion plus net worth to charity when he dies.

He can donate so much money because of how great an investor he is.  But almost no one knows how Warren Buffett made his fortune.

Yes, most investors know about his investments in Coke (KO), Johnson & Johnson (JNJ), and Wells Fargo (WFC).  But this isn’t how he built his fortune.

Investor’s who’ve studied Buffet know he built his partnership, and then Berkshire Hathaway, buying small companies.

But this still isn’t the true secret to Warren Buffett’s success.

Today I’m going to tell you how he grew $100,000 into more than $70 billion.  And tell you how we can start doing the same.

But before we explain the exact companies Buffett built his fortune on.  We need to talk about why Press On Research concentrates on small caps.

A University of Kansas student asked Buffett about this in 2005:

“Question: According to a business week report published in 1999, you were quoted as saying: “It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?”

Here’s Buffett’s answer emphasis is mine:

“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access."

Yes, I’ve said this before many times.  But it’s an important concept to understand.

Small ultra safe investments that produce a ton of cash.  Have little to no debt.  Pay dividends and buy back shares.  And are cheap are my favorite investments.

These kinds of businesses are what Value Investing Journey and Press On Research is all about.

Today’s recommendation has no debt.  Owns more cash and cash equivalents than its entire market cap.  And just its net cash and cash equivalents make up 77% of its market cap.

This doesn’t count any of its property, plant, and equipment, future premiums earned, or cost-free float.  And this company is undervalued by 29% to 70%.

But this still isn’t all…  It’s also much more profitable than competition.

Today’s pick isn’t just a great company with all the above traits.  It’s also in Buffett’s favorite industry to invest.

Investing In Insurance

Most people won’t research insurance companies.  I wouldn’t early in my investing journey.  And many professional analysts stay away too.

This is because insurance companies are hard to understand at first.  Have new and confusing terminology to learn.  And normal profit metrics don’t matter much for them.

But if you learn how to evaluate them not only will you learn they’re easy to evaluate once you know what you’re doing.  But you can use the same repeatable process on every insurance company.  And Buffett has continued to buy into insurance – his favorite industry – constantly over the decades.  And it’s why he’s so successful.

In reality insurance companies are easy to understand.

Insurance companies take money – premiums, the insurance version of revenue – as payment for insuring things like businesses, equipment, health, life, etc.

The insurance company doesn’t have to pay you a dime of the money it earns over the years until there’s some kind of damage or theft of whatever’s insured.

When this happens they pay the agreed upon insurance rate out to the policyholder.

While the company continues to earn money – premiums again - it invests some of it so it can pay back your policy in the future.  And also make a profit in excess of the amount earned, invested, and paid out.

If the company writes its policies and invests well over time it will earn underwriting profits.  And grow the assets it can use to write more policies and invest more money.

If it doesn’t, the company will go out of business when a major disaster strikes.

Think of insurance companies like investment management companies.  But instead of only earning management fees.  Insurance companies earn premiums on top of investment earnings.

These effects can double profits over time…  If management is great at what they do.

The insurance business while easy to understand is one of the hardest businesses to be great at.

Other than being a low-cost operator like GEICO.  Owned by Berkshire Hathaway.  There are no competitive advantages in this industry.  And it also experiences wild swings of huge profitability than massive losses.

But if the company writes policies and invests money well over a long period they can grow to great sizes at almost no extra costs.  The only new costs may be to hire more staff.

Insurance companies also hold the greatest secret in the investment world…  Float.  This is how Buffett built his fortune.  And how we’ll start to build ours.

But before we get to this we need to know why float is so important.

Brief Berkshire Hathaway History

Buffett began buying Berkshire Hathaway stock in 1962 when it was still a textile manufacturer.  And when he still ran his investment partnership.

He bought Berkshire stock because it was cheap compared to the assets it had.  Even though the company was losing money.

He continued to pour millions of dollars into Berkshire to keep up with foreign and non union competition.  But none of this worked.

In time Buffett realized he was never going to make a profit again in the textile industry.  So whatever excess funds Berkshire did produce he started buying other companies.

The first insurance company Berkshire Hathaway bought was National Indemnity Company in 1967.

Since then Berkshire’s float has grown from $39 million in 1970 to $77 billion in 2013.

Float compounds like interest does if you use and invest it well.  But not only does float compound, if you use it right it also compounds the value of the company that owns the float.

Since 1967 when Berkshire bought National Indemnity, Berkshire’s stock price has risen from $20.50 a share to today’s price of $210,500.  Or a total gain of 10,268%.

This is the power of insurance companies when operated well.  And today’s recommendation is an insurance company that operates the right way too.

But before we get to that I need to explain how float makes this possible.

The Biggest Investment Secret Revealed

‘Float is money that doesn’t belong to us, but that we temporarily hold.”  Warren Buffett

Float is things like prepaid expenses.  Billings in excess of expected earnings.  Deferred taxes.  Accounts payable.  Unearned premiums.   And other liabilities that don’t require interest payments.
But they are the farthest thing from liabilities.

MY UPDATED NOTE HERE... I'LL TALK ABOUT THIS MORE IN DEPTH IN A LATER POST AND DETAIL WHAT I MEANT TO SAY AND DIDN'T EXPLAIN WELL ENOUGH HERE.

Instead of paying this money out now like normal liabilities.  Companies can use these “liabilities” to fund current operations.

Float is positive leverage instead of negative leverage like debt and interest payments.
Think of float as the opposite of paying interest on a loan.  Instead of paying the bank for the cash you’ve borrowed.  The bank pays you interest to use the money you loaned.  And you can use this money to invest.
Using cost-free float to fund operations can improve margins by up to a few percentage points.

MY NOTE HERE: I'LL EXPLAIN THIS BETTER IN A FUTURE POST TOO.
The best way to explain why float is so important is with the following quote:

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of free – other peoples money – in highly productive assets so that return on owners capital becomes exceptional.”  Professor Sanjay Bakshi adding to something Warren Buffett said about great businesses.
I said in last month’s issue: “When a company’s float/operating assets ratio is above 100% it means the company is operating with “free” or cost-free money.”

But this isn’t true with insurance companies.

For an insurance company to operate on a cost-free basis it has to produce underwriting profits for a sustained period.

I look for underwriting profits of at least five years straight to consider its float cost-free.

And the company I’m going to tell you about today has earned an underwriting profit every one of the last 10 years.

When you come across companies that are able to do this on a consistent basis you should expect exceptional returns in the future.

This is because when a company operates its entire business on a cost-free basis it means several things. 1)  It’s a great business.  2.)  It’s an efficient business.  And 3.) float magnifies profit margins.

So what is this great company?

I go on here to detail the company I recommended - and bought for the portfolios I manage - in July to subscribers.

So What Is Float?

To summarize the above float is anything listed in the liabilities section of its balance sheet you don't pay interest on.

Interest based liabilities - NOT FLOAT - include capital leases, and short and long-term debt.

Most of the time these are the only interest based liabilities on a company's balance sheet.  Make sure by checking the off-balance sheet transactions and total obligations notes - if any - in the companies footnotes.

Examples of non interest based liabilities - FLOAT - include prepaid expenses, accounts payable, taxes payable, accrued liabilities, deferred tax liabilities, unearned premiums, etc.

These vary more but remember if the company doesn't have to pay interest on the liability it's float... Money the company has to pay later but in the mean time can use to invest in and grow the business.

Think of float as normal debt without the negative effects.

In the short to medium-term - long-term for most insurance companies - float while listed as a liability on the balance sheet should be considered an asset to the company.  Why?  Because while the company owns the float it can use these "liabilities" to invest and grow the business.

How though?

Because while the company lists the liability on its balance sheet - and still owns the liability - it can use the float as positive leverage to grow the company or invest in other businesses.

Sometimes at a better than cost free basis as mentioned above... But we'll talk about this in a future post on float.

Next up I'll go through a company's balance sheet to separate float from non float.  And show you how to value and evaluate it.

What do you think of float at this point?  Do I need to explain anything better?  Let me know in the comments below.

***

Remember if you want access to my exclusive notes and preliminary analysis you need to subscribe for free to Value Investing Journey.  And this isn't all you'll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.