made our GEICO investment and from then on, we seemed to be very brilliant people.” The story of Shelby Davis and our knowledge of Graham and Buffett’s involvement with GEICO led me to ask a simple question... If the world’s best investors made their very best investments in P&C, do those kinds of opportunities exist anymore? To find out, I had to build an analytical team capable of analyzing the entire industry. I knew the key to our success would be finding companies that could successfully grow their book of business without losing underwriting discipline. To achieve extremely good financial results, you must find companies that consistently take in more in premiums than they pay out in claims. It’s the compounding nature of these businesses – their investment capital just grows and grows and grows – that leads to massive wealth. Our insurance team is led by Bryan Beach, a former auditor and corporate controller who has been an active investor his entire adult life. I’d argue no one in the world is more passionate about insurance stocks or knows more about the publicly traded equity in the space. In 2012, Beach began building our own proprietary database (our P&C Insurance Monitor) and carefully studying the quarterly results from every company in the sector. Our P&C Insurance Monitor has just turned six years old... We now have enough data and time to know with a lot of confidence that our approach
is working. So far, our recommended stocks from the sector have beat the S&P 500 by 2.4% annually – with far, far less risk. Our approach also is beating the S&P 500 Insurance Industry fund by 3.1% annually, and again, with less risk. Over the last six years, our recommended insurance stocks have produced annualized gains of 20%. I do not believe another investment strategy anywhere in the world will deliver gains of this magnitude, this consistently, with so little risk. Our investments in P&C insurance stocks have a built-in winning advantage: They’re consistently taking in more money in premiums than they are paying out. Over time, this advantage simply becomes unbeatable. Interestingly, our results would have been even better if, like Shelby Davis, we’d simply hung on. Using trailing stops on this sector doesn’t work. That’s because investors always overreact to short-term news about the size of potential claims. Meanwhile, of course, increases to claims in one year simply lead to higher premiums in the next. First, our highest-rated P&C stock – American Financial Group (AFG) – was the best performer over the past five years. It’s clear that we can pick winners: We picked the best stock to own and our recommended stocks beat the market and the insurance index. But our team faces another test: Just as we were building our research in the space, two famous billionaire investors did the same thing. David One more point about our approach...
I do not believe another investment strategy anywhere in the world will deliver gains of this magnitude, this consistently, with so little risk.
38 May 2018
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