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.

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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.

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