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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Shane M who wrote (828)	12/27/1998 10:07:00 PM
From: cfimx	Respond to of 4691

Well this is a concept from Train's "The Midas Touch." He actually only spends two pages on this topic which he calls "The Leverage of Insurance Companies," but I think this is one of THE keys to Buffet's success. Think about when WEB bought his first insurance company. All that float that was likley parked in five year bonds. That was new money for him, above and beyond what he paid for the business. Briefly, Buffet's leverage is the float of his ever expanding insurance empire. Train points out that an insurance company is capitalized much like a "super" margin account. Most insurance companies simply buy five year bonds with the bulk of the float. In the hands of a master investor, the float can be leveraged, however, into 20% plus returns. The insurance businesses allow Berkshire to control more securites than Berkshire or Buffet could purchase were it a straight industrial. Think back again to his FIRST insurance purchase. An insurance company like Geico that has an underwriting profit simply magnifies the leverage. Buffet, as evidence by his purchase of GRN's huge bond portfilio is still playing this game. Other savvy investors like Henry Singleton and Larry Tisch figured this out too. A solid insurance company in the hands of a GREAT investor is a much more valuable insurance company. See The Midas Touch for more elaboration.