One Day Until Next Press On Research Issue
Tomorrow I’ll release the next Press On Research monthly issue. And below is an unfinished excerpt from the 27 page issue.
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 (K), 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.
“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:
“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, cash equivalents, and short-term debt equivalents than its entire market cap.
And just its net cash, cash equivalents, and short-term debt 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 $84 billion in 2014.
Float compounds like interest does. 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.
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.
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?
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