October 15, 2024
A Warren Buffett Secret You Need to Know About
Dear Subscriber,
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| By Nilus Mattive |
Warren Edward Buffett’s story isn’t quite a rags-to-riches tale. His father was a stockbroker and four-term representative in the U.S. House of Representatives.
Still, the younger Buffett demonstrated a keen interest in business and investing from a very young age, and there are plenty of interesting vignettes from those early years.
But Buffett’s meteoric rise really began after his investment firm purchased a struggling textile company Berkshire Hathaway … liquidated its core business … and made a major acquisition that took things in an entirely different direction.
The target company?
An insurer named National Indemnity.
Here’s how Buffett explained that purchase in his 2017 letter to shareholders:
“Before I discuss our 2017 insurance results, let me remind you of how and why we entered the field. We began by purchasing National Indemnity and a smaller sister company for $8.6 million in early 1967. With our purchase we received $6.7 million of tangible net worth that, by the nature of the insurance business, we were able to deploy in marketable securities. It was easy to rearrange the portfolio into securities we would otherwise have owned at Berkshire itself. In effect, we were ‘trading dollars’ for the net worth portion of the cost.
The $1.9 million premium over net worth that Berkshire paid brought us an insurance business that usually delivered an underwriting profit. Even more important, the insurance operation carried with it $19.4 million of ‘float’ — money that belonged to others but was held by our two insurers.
Ever since, float has been of great importance to Berkshire. When we invest these funds, all dividends, interest and gains from their deployment belong to Berkshire.”
Essentially, Buffett recognized that insurance businesses typically had statistical advantages that led to regular profitability.
Better yet, these businesses collected huge amounts of money upfront year in and year out — money that Buffett could use to make further investments in other businesses he’d like to own.
So yes, Buffett’s tremendous acumen and his strict discipline have allowed him to achieve an unparalleled track record of success.
But his early focus on selling insurance is what gave him the capital he needed to succeed on a grand scale.
This is why he has called insurance “the engine that has propelled our expansion since 1967.”
Buffett has happily traded other people’s risk for upfront cash, then reinvested that money — known as “float” — in very calculated risks of his own.
It’s a fundamental strategy that he continues to follow right up to the present.
In fact, while Buffett has been taking more and more money out of the stock market as valuations get stretched, he has simultaneously been buying shares of yet another insurance company.
The reason why is simple: Insurance businesses remain great investments in all economic environments.
Today, Berkshire Hathaway gets most of its attention from Buffett’s various investment moves … but that’s not where it makes most of its money.
In 2023, the company reported operating earnings of roughly $37 billion and the largest share of that actually came from its insurance-related businesses. (Just barely edging out the earnings from a wide range of its other businesses.)
At the time, Buffett noted this was because “underwriting earnings are not correlated to earnings elsewhere in the economy and, beyond that, property-casualty insurance prices had strengthened.”
It’s true. As much as most of us resent insurance companies, we continue paying our bills no matter what — whether you’re talking about car insurance, health insurance, property insurance or life insurance. The same goes for businesses.
And sure, we have been seeing plenty of catastrophes — especially fires, floods and other weather-related events — but those costs just end up getting put back onto customers, too. Or the insurance companies stop writing policies altogether.
The bottom line is that sometimes insurance companies take annual hits on their underwriting but over time they come out ahead … while investing the float year in and year out no matter what’s happening.
This is why Berkshire didn’t stop with National Indemnity. The company bought Geico in 1996 and General Re two years later. And as I mentioned a moment ago, Buffett has bought yet another insurer very recently.
His target? Chubb (CB).
So far, Berkshire has spent roughly $6.7 billion buying more than 26 million shares of the company. Berkshire did so under so-called “confidential treatment” from the SEC, which allowed it to avoid publicly disclosing its purchases while they were happening.
Also remember: Berkshire made these purchases around the same time it was selling 10 million shares of Apple (AAPL) and right after it dumped 80 million shares of HP (HPQ).
Trading richly valued tech stocks for a recession-resistant, cash-gushing business? Makes perfect sense to me!
In fact, I just told my readers to buy a different insurance company that pays much bigger dividends … offers substantial Instant Income … and looks poised to deliver substantial capital as well!
Obviously, it wouldn’t be fair if I shared the name here. But what I can tell you is that focusing on companies and strategies that have the odds in their favor is a Buffett tactic that you should certainly consider employing in your own portfolio, especially at a time like this.
Best wishes,
Nilus Mattive
P.S. If you want the ultimate strategy that puts the odds in your favor — one that Buffett has also used to rake in billions of extra dollars from the stock market — then you should watch this special video that I put together with Dr. Martin Weiss.
In it, I explain exactly how the strategy works … why I taught my own family about it … and how you can start using it to make $1,000 or more starting this Friday. Just click here for all the details now.
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