THE ONLY STOCKS I’LL TEACH MY KIDS TO BUY
Einhorn (Greenlight Capital) and Daniel Loeb (Third Point) are two of the best-known and most respected hedge-fund managers in the world. At virtually the same time we started our coverage of the insurance sector, they launched their own new insurance companies . Dozens of articles have featured these new insurance companies, and a lot of newsletter writers (even a few we know well) have recommended these insurance stocks. The story was irresistible: Hedge-fund geniuses are applying Buffett’s proven formula to make massive wealth in insurance. Who wouldn’t want to own these stocks? Well, us. We knew something the market didn’t... When we launched our P&C Insurance Monitor in 2012, there were 40 large U.S.- based P&C and reinsurers (give or take). In the six years since, Third Point and Greenlight have ranked 38th and 40th, respectively, in terms of share-price appreciation. That is, these super-popular stocks are the worst and third worst-performing stocks in the P&C universe. Greenlight is one of just two companies on our Monitor to have its shares lose value from 2012 to today – down 34%. We’ve continuously told people (including several peers in the newsletter world) to avoid these stocks. Our contrarian view was fully based on the clear evidence presented to us through our proprietary research. We were not only able to predict which stocks would do the best... But our monitor told us to avoid the ones that did the worst, even when they’re the most popular and had the best reputation.
There’s one more thing to point out about the Greenlight/Third Point insurance debacle... You’ll notice that Shelby Davis, Ben Graham, and Warren Buffett did not break into P&C insurance by starting an insurance company from scratch. Shelby Davis bought a handful of good underwriters, including GEICO. Graham bought half of GEICO. And Buffett started by buying National Indemnity. It’s a lot harder than it looks to start a new insurance company. Relationships with insurance brokers are a key advantage, as is understanding which operators are likely to have the smallest claims. We don’t recommend insurance stocks until they can prove themselves. Remember that the next time a Wall Street tycoon announces a new venture in insurance. My advice is simple to follow. And it’s exactly what I’m going to teach my children... Make profitable underwriting (via well-run P&C insurance companies) the core of your portfolio. In bull markets or bear markets, these companies will continue to have a huge advantage over every other company that must pay for capital. That’s an unbeatable advantage . Porter Stansberry is the founder of financial research firm Stansberry Research and a regular American Consequences contributor. His P&C Insurance Monitor is available to lifetime subscribers of his flagship research service, Stansberry’s Investment Advisory .
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