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This P&C insurance cycle


Partner24
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23% over 23 years - 1985-2009 - sounds familiar eh?

 

Another company has generated 16% compound annual growth in stock price over the past 25 years, but the CEO expects his company to "comfortably" exceed these returns going forward.

 

 

Anyone know what company they're talking about here?

 

Good Article!

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Hmmm....Markel has compounded it's book value per share at a 17% CAGR over the last 20 years. It's not far from it's 25 years number, but I don't remember having heard Markel CEO's RECENTLY talk about confortably exceeding this return going forward.

 

In a 2004 or 2005 interview with the Motley Fool, if my memory about that fact is not wrong, Steven Markel made some calculations and came to the conclusion that it might be able to compound book at a 19% CAGR rate going forward. He was with Tom Gayner in that interview.

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A few smaller companies that I'm aware of that have done quite well are RLI & MKL.

 

Although I think stock price compounding is a nice, I would use growth in book value over the long-term as a more important metric if I were the author of the note.

 

I think the Davis Dynasty is one of the best books to read if you want to see how one individual compounded his weath by just owning insurance companies.

 

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"I think the Davis Dynasty is one of the best books to read if you want to see how one individual compounded his weath by just owning insurance companies".

 

dcollon, absolutely! Beside leverage, when I red that book, the light went on. I would not recommend this book as a start to learn about value investing, but when you understood the basic concepts, it's a terrific read. Some concepts fit with you, while other don't. Most of basic tenets of the "Shelby C. Davis way" paved my own little yellow brick road.

 

Cheers!

 

 

 

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Partner,

 

Good points.  I'm glad you liked it as much as I did.  I took a ton of notes while I was reading it and will definitely go back and re-read it at some point in the near future.

 

Take care,

David

 

 

I'm going through some of it on google right now, looks like you guys have been holding back on us! 

 

There is even a interesting tidbit in the beginning about Davis's wife working for World Book

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Does anybody know the top ten insurance companies in the "WARD'S 50" list? 

RLI (superb underwriting results but clearly less so superb in investing the float) is one of them.

 

@Partner24 and dcollon: Can you share some insights to the "Shelby C. Davis way"? Is it true that only the last chapter is about investing principles?

 

Thank you for your contributions

 

 

 

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What are some of the basic Concepts if you dont mind me asking.

 

Well, first of all, be frugal. It might seems obvious, but if you read that book, you get a feel that the Davis family takes that very seriously and you have some good real life examples in it.

 

Then, regarding investing directly, it goes that way (I just underline some of the basics):

 

- Avoid cheap stocks. Most "cheap" stocks deserve to be cheap and no CEO will say "Hey guys, our results will not improve over the next few years".

 

- Avoid expensive stocks. Even it's a great business, don't overpay. Take a fast growing company that have a "high expectations" price tag and just one quarter of bad news is necessary to drive down the stock significantly.

 

- Buy reasonably priced stocks at that grow at a moderatly fast pace. Ex.: 10 times P/E companies growing at 13% per annum.  Better yet, sometimes you'll find fast growing compagnies selling at these prices, but because they operate in "boring" industries, they do not have a high price tag. Just a short math exercice here: if you buy a company that grows it's intrinsic value by 12% CAGR, you bought it at a 30% discount to it's intrinsic value and the shares trade at a fair price in 5 years. What is your 5 years return?

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- Wait until the price is right. If you like the business, but not the price, wait patiently. Davis used to say "Bear markets make people a lot of money, they just don't realize it at the time". Sometimes, it's all the market that goes bearish, sometimes that's an industry bear (banking in the 80's, health care in the 90's, etc.).

 

- Keep your winners for the long haul. Buy them at a discount and when they reach fair value, keep them if they are winners that keep growing at a reasonable pace. Buy and hold: lower taxes, lower transaction costs, avoid frequent trading mistakes, etc.

 

- Invest in great managers.

 

- Ignore the rear-view mirror.

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Oldye,  I used a calculator and got 20% CAGR; 2.5 x.  My head isn't always that reliable.  :-).

A.

 

I know what I did wrong!  For some reason I kept thinking you double your money every 5 years at 12%...Not sure why I had that in my head ;0.

 

 

 

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The purpose of this exercice is to help realize what reasonable growth at a good price can accomplish.

 

I guess a 30% discount to estimated intrinsic value doesn't attract some of the deep value investors out there and I also guess that 12% per annum growth doesn't attract some of the people that search for fast growing companies.

 

But hey, if you can have both, you can achieve a very decent return. By asking for a high expected probability of 12% growth over the next 5 years, it might help to avoid some of the value traps out there and asking for at least a 30% discount it helps to avoid growth traps as well.

 

At least that concept fits with me and I'm happy that someone, as an individual investor, turned 50 000$ into nearly 1 billion over approximately 45 years of investing by applying the principles above (and yes, with some leverage).

 

Cheers! 

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The purpose of this exercice is to help realize what reasonable growth at a good price can accomplish.

 

I guess a 30% discount to estimated intrinsic value doesn't attract some of the deep value investors out there and I also guess that 12% per annum growth doesn't attract some of the people that search for fast growing companies.

 

But hey, if you can have both, you can achieve a very decent return. By asking for a high expected probability of 12% growth over the next 5 years, it might help to avoid some of the value traps out there and asking for at least a 30% discount it helps to avoid growth traps as well.

 

At least that concept fits with me and I'm happy that someone, as an individual investor, turned 50 000$ into nearly 1 billion over approximately 45 years of investing by applying the principles above (and yes, with some leverage).

 

Cheers! 

 

Fortunately for him:

 

1) he started investing that money when everyone had given up on stocks

2) his wife's family was loaded (and in government bonds) so he wasn't sweating bullets when the portfolio was down

 

Then of course good for him for pulling it off.

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I have been reading the book this week... apparently Davis used the maximum margin the SEC allowed, which the book describes as "the maximum the SEC allowed--slightly more than 50 percent".

 

He owned a seat on the NYSE, so his firm had access to cheap margin rates and looser margin restrictions.

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