THE ONLY STOCKS I’LL TEACH MY KIDS TO BUY
insurance company in America. He could see that some of these companies were simply minting money. Insurance, as I’m sure you realize, isn’t normally that great of a business. For example, on the whole, the companies involved in auto insurance don’t collect enough money in premiums to cover the claims their policyholders file each year. That’s in part because auto insurance is heavily regulated. And it’s also because there’s so much competition. To make money these companies have to invest their “float” – the money they’re holding in paid premiums before claims are submitted – wisely and earn enough on those investments to cover their underwriting shortfall. Shelby’s key insight was that not all insurance companies suffer from this expected outcome . Some insurance companies, the ones that focused on unregulated sectors of P&C, could earn far more in premiums than they had to pay out in claims. For these companies, capital was flooding in the door and staying. These firms had a completely legal way to acquire enormous amounts of money by routinely overcharging, by large amounts, for the insurance they were providing. And thanks to his position as deputy superintendent of insurance, he knew exactly which ones. In 1947, he bought a dozen of them and promptly retired from politics. What’s the ‘rest of the story,’ as Paul Harvey used to say? After Shelby retired from politics, he started a small boutique brokerage firm. He was trying to get other investors interested in
these companies – because nobody on Wall Street understood the economics of these businesses. Among the investors Shelby met with was Benjamin Graham – the famous value investor and mentor to Warren Buffett. Shortly after Shelby purchased his portfolio of insurance stocks, Graham decided to follow him into one of the companies in his portfolio, a company called Government Employees Insurance Co. You know the firm today as GEICO, a wholly owned subsidiary of Berkshire Hathaway (BRK-B). Graham started buying GEICO in 1948. He kept buying and eventually owned half of the stock, investing about $700,000 in the late 1940s. GEICO was, by far, the largest investment he’d ever made with his investment partnership. Within 10 years, Graham made 200 times his capital. He made so much money from his investment in GEICO that he retired from active management and lived comfortably on GEICO dividends. Within 25 years, Graham had made 500 times his initial investment. Graham, who is probably the second-most famous investor of all time after Warren Buffett, was an active investor and money manager from the early 1920s until the late 1950s. He made hundreds of good investments over the span of his career. But it was GEICO, a P&C insurance company, which made him rich. Graham made more money on GEICO than he made on all his other investments combined. As Graham said about the deal: “In 1948, we
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