My dad worked all the time when I was a kid. But early on
Saturday mornings, he'd wake me while it was still dark and take me
to the office with him.
And about once a month, we'd slip away to the farm where he grew up
and there he worked just as hard, doing farm chores in blue jeans
instead of business deals in a suit and tie. Other times we'd visit
oil wells, look at farm properties or cattle. He liked to drive and
talk, and sort things out.
Listening to my old man unwind was a phenomenal business education.
On one of these trips, Dad was talking about some rental property
he and a partner were going to buy together. He explained the
nuances of deal's financing and then he looked up at me.
"You know the best way to build equity, don't you, son?"
Bear in mind that I was maybe 7 years old, but I knew the
difference between debt and equity. But as I pondered Dad's
question, I came up short.
I shook my head. "I don't know, Dad," I said.
He smiled my favorite smile, a sort of sideways, in-the-know,
"gotcha" diabolical smile. "The best way to build equity, my boy,"
Dad held forth, "is with someone else's money."
His point was that, over time, the tenants would do the heavy
lifting -- paying themortgage and expenses while he and his partner
got some income, increased their equity and, potentially, also saw
the value of their property rise.
A couple of years later, Dad took me on a trip to Nebraska. We went
to a big conference hall where two old men sat at a table. They
looked like every small-town banker I had ever met and, once they
started, they talked non-stop for almost the whole day. Dad sat
there and took notes. I was bored.
Finally, I heard the man talk about the investment portfolio. He
kept using a word that would haunt me for days. Then I made my
"You know what he's doing, don't you?" I asked, waving a copy of
theannual report .
"What who's doing," my mother asked.
"That guy in Omaha. That Mr. Buffett!" I said. "He's building
equity with other people's money!"
My old man smiled and nodded. He looked like he was about to burst
Other people's money
The word that haunted me was "
." But it didn't describe the verb I found listed in the dictionary
on my bookshelf. This float was a noun, a type of money. In an
insurance context, "float" refers to money held for policyholders
to cover their claims.
The purpose of an insurance company, from a customer's perspective,
is to offer protection from financial loss. For this coverage,
drivers pay premiums. But if it ended there, most insurance
companies wouldn't make aprofit -- policyholder claims generally
exceed premiums paid.
So to really understand insurance companies, you have to look at
them from the board of directors' perspective. It's then that you
see the purpose of an insurance company isn't to provide coverage,
it's to borrow money and invest it -- a lot of money.
After all, if you have 10 million policy holders paying $100 a
month for car insurance, then that's $1 billion piling up every 30
days. That money is the "float." Most, if not all, will eventually
be paid out. The key word there is "eventually." In the meantime,
the insurance company is free to continue to collect premiums and
invest the float for its own benefit.
The question, of course, is precisely where is all that money
invested? When investing such a large sum, professionals spread it
around and seek to
from all sorts of investments.
As many of you know, I'm the editor of
. I'm always looking for those securities on the "fast-track" to
triple, or quadruple-digit gains.
So knowing what stocks the big insurance houses are buying doesn't
go far enough for me. A lot of what insurance companies are buying
are large, stable companies that provide a relatively predictable
rate of return.
What I'm looking for is the portion of each stock portfolio
allocated to smaller companies with greater potential for
exceptional returns. These picks have been vetted by some of the
sharpest minds in finance -- insurance companies hire top managers
to tend to their trillions.
Action to Take -->
Here's a small sample of what I found:
State Farm has a roughly $40 billion stock portfolio that covers
only 95 securities. This is a relatively narrow universe of picks
for such a sum, so I'd say State Farm is willing to make some
pretty bold picks. While its largest holdings are no surprise --
Johnson & Johnson, ExxonMobil, IBM, Hewlett-Packard, Archer
Daniels Midland -- there was one company that looked promising:
Medidata Systems (Nasdaq: MDSO)
Factory Mutual Insurance Co.
Factory Mutual is more commonly known as FM Global, and it's a
go-to insurance provider for companies that need to cover major
pieces of property. Its stock portfolio is worth $4 billion and
covers about 160 securities. While nearly every one of these stocks
is a mega-cap company, one small company has made the cut,
Cadence Design Systems (Nasdaq: CDNS)
Allstate's $1.6 billion portfolio is spread across more than 1,000
stocks. One gem that stuck out in this sea of small positions was
Remember that no matter the broader market, there are always
winning stocks to own.
to read the details of some of the biggest winners over the past
decade... and a few opportunities I'm seeing now.]
P.S. -- I added Medidata Systems to my Fast-Track Millionaire
model portfolio back in November. It now trades at $26, so we're up
34.8%. My target is $50 a share.
Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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