Tariq Ali of Street Capitalist Interviews Dave Carlson About Insurance Stocks

Tariq Ali of Street Capitalist has a great interview with Dave Carlson of Tourmaline Advisors about insurance stocks. You may remember, I interviewed Tariq a while back.

The interview is full of helpful advice, like when Tariq asked Dave what metrics investors should use to analyze insurance stocks:

Price to book and combined ratio are good starting points. Return on equity, underwriting leverage ratio and investments to equity are other metrics that I look at. On combined ratio, it is also useful to look at the difference between what is reported on a GAAP basis and what is reported on a statutory basis. The “stat” basis is more conservative than GAAP, it’s what the regulators look at, and is a better measure.

Dave mentions 3 insurance stocks: Penn Millers (PMIC), Donegal Group (DGICA), and Seabright Holdings (SBX).

He also talks a bit about Prem Watsa’s Fairfax Financial Holdings (FFH):

As for relying on investment income, yes, Fairfax does rely on it more than most. In their annual report, Prem Watsa mentions the net premiums written to statutory surplus ratio, a.k.a. the underwriting leverage ratio. The ratio at the end of 2009 was around 0.5 for Fairfax whereas most insurers are well over 1.0 and closer to 1.5. Watsa has purposely structured Fairfax so that the underwriting contributes less to results. That’s a good thing because it is a lousy business! This also means that the Fairfax insurance companies are overcapitalized relative to premiums written. Once they satisfy the regulatory/rating requirements for safe investments, they are free to invest the excess capital in things besides bonds. The Fairfax business plan comes straight from Buffett.

Read the full interview at Street Capitalist.

Talk to Geoff About Insurance Stocks…

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ayback Machine Archive For Gannon On Investing: Geoff’s Posts From 2005-2008

Today I’m going to do something scary. I’m going to take you back in time. Way back.

Over at Gurufocus – where I spend most my time writing daily articles – someone asked about an old post I wrote. When I say old, I mean old. Real old. Like 5 years.

The first thing I ever wrote on the internet was on Christmas Eve 2005. This fellow was asking about a post I wrote just two weeks later. To show you how much my posts have changed – I was under the impression blogging meant tons of short, opinionated posts – here’s my January 2006 post “On Chicken Stocks”:

Chicken stocks were in the news yesterday as Pilgrim’s Pride warned of poor earnings. These stocks may appear cheap, but appearances can be deceiving. It is not a question of if margins will contract; it is a question of when margins will contract. Some value investors will take Pilgrim’s announcement as a buying opportunity. It may be just that.

However, I wouldn’t be buying Pilgrim’s Pride (PPC). When trouble comes, the much smaller, much more conservatively financed Sanderson Farms (SAFM) will be in the stronger position. Sanderson Farms has the better recent record when it comes to earning a good return on capital. On the other side of the scales, Sanderson Farms does trade at a higher price to sales ratio than Pilgrim’s Pride. In a business like this, price to sales can be an important number, because there is little reason to expect any one company to consistently maintain a wider profit margin than the rest of the industry.

I won’t pretend I understand this industry. I don’t. I won’t pretend I have any clue as to what these firms will earn over the next few years. I don’t. What I do know is that if I were looking at chicken stocks, I’d start with Sanderson Farms. I suggest you do the same.

You’ll notice there are no numbers in that post. Back then, I thought readers hated numbers. Do they? I’m still not sure. All I know is that I love writing numbers. So readers will have to take my posts with numbers mixed in or go find themselves another blog to read. You’ll also notice there are no dashes in the post. There’s even a semicolon. Maybe I was going through a Herman Melville stage. Yes, even my punctuation has changed. Half a decade of writing for the internet will do that.

Anyway, here is the Wayback Machine archive for Gannon On Investing. You can read my old posts and see all the things I got wrong. History is a harsh mistress.

Talk to Geoff About his Old Posts…

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What Jobs Prepare You for Running a Value Fund? – Geoff’s Advice to a College Senior

A reader sent me this email:

I am currently a senior in college and well underway with my job search. I have, since grade school, been devoted to the works of those prominent within value investing…Since about the same time I have managed a personal portfolio geared toward their ideas. Ideally, I see myself within the next ten years starting a value-oriented hedge fund. The issue that I have been pressed with lately is what type of job to get now, knowing… managing people’s money through a fund is eventually what I want to be doing…do you have any perspective or advice in terms of the types of jobs that would better prepare me for eventually running my own fund?

It’s hard to know what experience will be worthwhile.

Graham started as a bond salesman. He was a terrible salesman. But he learned Lawrence Chamberlain’s bond book. You can read Graham’s early writings and see that all Graham really did was apply the ideas of bond investing to common stock investing. That was revolutionary. If Graham had learned stock investing the way it was practiced in his day, would he have taken the same revolutionary approach?

Probably not.

Peter Lynch was an analyst. That probably taught him how to run a fund his way. Lynch was big on meeting with management and finding the exact moment when a company’s fortunes were turning. That’s analyst stuff.

Charlie Munger was a lawyer. Michael Burry was a doctor. What does this tell us? Nothing really. The important thing is that at some point you get completely and totally focused on investing. What you did professionally – even if it was in finance – is often very secondary. It might be meaningless. A lot of investors learned more in their off hours than at their job.

But can you combine learning investing and a career?

You can certainly try.

Here’s how…

Find people you respect. Phil Fisher was not a value guy. Warren Buffett had a lot of respect for him. Try to work for someplace you think does what they do well.

My other advice is to choose someplace smaller and younger.

You can always go to a bigger place later. If you have a choice, pick someplace where they might actually let you do something. Go someplace where there’s more work than workers.

And then just stay in touch with all the value people you meet. Don’t just send me one email. Keep emailing me whenever you have an idea.

Write down the names of any bloggers, analysts, reporters, fund managers, anyone you come across that you respect. You like an insight of theirs or whatever. Write the name down and keep the name. Contact them. If you can make it about a specific stock and tell them something they don’t know, they’ll listen. Keep talking. Do the maximum amount of socially acceptable conversing about stocks.

Make it a rule to never say “no”. If someone asks you to do anything …

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Tim Welland: 4 Great Investing Articles For You – From a Seeking Alpha Contributor

In an earlier post I said: “Feel free to send me anything you write. I’ll give you my thoughts. If it’s good – I’d be happy to share it on the blog.”

Well, Tim Welland – a contributor at Seeking Alpha – sent me 4 things he wrote. They’re all very good. So – like I said – I’m sharing them on the blog.

Obviously, you’re most interested in reading the articles to learn about the stocks Tim analyzes: Aerosonic (AIM), Hallwood (HWG), AmSurg (AMSG), and Air T (AIRT).

Should I buy? Should I sell? All that stuff.

Then go ahead and read them now:

Aerosonic: Rough Past, Bright Future

Hallwood Group: Compelling Valuation but Dangers Lurk

AmSurg: A Healing Investment

Why I’m Not Buying Air T (Right Now)

But for anyone reading this blog who happens to write their own investing blog – or is thinking about it – Tim’s articles are really good examples of really good investment writing. A lot of the stuff at Seeking Alpha – and elsewhere – is pretty weak. Very superficial.

I’ve been writing about Barnes & Noble (BKS) lately. You’re probably sick of hearing about it. Maybe you disagree with me. That’s fine. I don’t mind people disagreeing with me.

I do – however – mind a lot of the coverage of the Barnes & Noble story. When you’re doing investment writing you can’t just write from the top of your head. You can’t give us the same stuff everybody else gives us. You can’t say “my read of the market is…” without maybe, you know, citing some facts or figures. Or at least giving us a new line of analysis. Give us a new question to ask. A new stock to dig into. Give us something we can use.

Tim does that.

Each of these 4 articles is really, really good. And I’m not saying that because Tim was nice enough to read my blog and send me his articles. I’m saying it because part of what I do all day is read investment writing. And most of it is bad. Most of it is worse than bad. It’s financial furniture polish.

Honestly, I think we need more investment writing. And if you’re reading this blog and not doing some of your own writing, please consider it. We need you.

If you’re a terrible writer, I absolve you in advance. I’ve read investment articles by some pretty awful writers and I’ve enjoyed doing it. And I’ve read some investment articles by some pretty good writers and I’ve hated doing it.

So what is good investment writing?

Investment writing is thinking aloud.

All you have to do is write the way you think. Not the way writers write. Not the way you talk in real life. Just lay out your thoughts on the page. That’s it.

The tough part is the prep work.

More time goes into getting ready to write an investment article than the …

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Bill Ackman Tells Borders (BGP) to Bid $16 a Share for Barnes & Noble (BKS)

Just wrote an article for GuruFocus, so you may want to read that first.

Bill Ackman – the hedge fund manager who runs Pershing Square – just filed a 13D with the SEC saying he wants Borders (BGP) to buy Barnes & Noble (BKS) for $16 a share. Ackman would provide the cash. Borders itself could never pull off this kind of deal. They are in much worse shape than Barnes & Noble.

These are the two biggest booksellers in the U.S. The third place player – Books-a-Million (BAMM) – is a very distant third. There are a couple interesting angles to this story. Obviously, as a Barnes & Noble shareholder I tend to focus on that side. Barnes & Noble is auctioning itself off right now. And Ackman’s offer will let us see if there are any other bidders. It will certainly encourage Riggio and Burkle to get off the fence.

If it looks like such a combination really was going to happen, it would also mean some soul searching for companies like Bertelsmann. Do we really want a single customer that big? Do we really want only two real retail paths – Barnes & Noble and Amazon – to our readers. And, of course, those two paths would be both print and digital.

I think we can say that if Borders merged with Barnes & Noble the idea of any serious e-reader other than Kindle and Nook is dead. I’m talking from the publisher’s perspective here. I’m sure we’ll see other devices. But as a realistic distribution system, it would only be Amazon and Barnes & Noble. It’s a scale business. And you need both the content and the relationship with the reader. I’m sure other folks will engineer e-readers of exquisite technical excellence. It won’t matter.

I have a gold coffee filter at home. I put a paper filter in it. Gold is pretty. Paper does the job I ask.

Anyway, this has me thinking about the likely and immediate scenarios and the less likely more long-term scenarios. Obviously, actually consummating a marriage between Borders and Barnes & Noble for $16 a share in cash is an unlikely and distant scenario. The immediate issues are the reactions from others at Borders and the reaction from Barnes & Noble. Barnes & Noble is tenuously controlled by Riggio – he had a narrow majority of the September vote and since then the stock price has gone down with a lot of Nook spending and little news on the buyout front.

There was also a report in the New York Post that Riggio wasn’t very interested in buying the whole company. If that’s true, coming out at the very beginning and making a big show of the fact that he might be a bidder is unlikely to have endeared him to the few outside shareholders who supported him.

And, obviously, if Barnes & Noble is in play, then basically no one has control of the company. You need …

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Getting Started: What Should a New College Graduate Do to Get a Career in Investing? – 2 Tips

A reader sent me this email:

I graduated college this past May and I am working in finance in Manhattan…What type of work experience would you recommend for a recent graduate other than reading SEC filings and managing their own portfolio?

#1 Write a blog.

Each of the 5 investing bloggers I interviewed said blogging makes them a better investor. Write about the stocks you’re studying. Tell people what you find in the SEC reports. And tell them what you think it means.

If you give out your email address – like I do – you’ll get emails. Trust me. You’ll hear from professionals, amateurs, students and everyone in between. And if you blog about a stock they own: they’ll tell you what you got right and what you got wrong.

I don’t allow comments on this blog. That’s not because I’m trying to limit speech. It‘s because I‘m trying to increase the number of emails people send me.

When the subject is stocks: most people are more comfortable emailing you. Most the bloggers I interviewed had the same experience I did. You’d get comments. But the best comments came from emails. Some of this is legal. Most of it is cultural. People like to talk stocks in private.

#2 Write Research Reports

When Benjamin Graham came to Wall Street he was a 20 year old college grad. He’d been offered 3 teaching positions at Columbia: Math, English, and Philosophy. He was clearly suited for an analyst job. Guess what? The firm that hired Graham made him a bond salesman.

So how did Graham get an analyst job?

He wrote a research report about the Missouri Pacific Railroad. No one paid him to do it. He just did it. A friend of his shared it with another firm – not the one Graham worked for – and they liked it. But they weren’t interested in shorting the Missouri Pacific. It wasn’t the idea they liked. It was the author. They offered Graham a job as an analyst.

Graham’s bosses realized they had to make Graham an analyst if they wanted to keep him.

And I didn’t tell you the most important part of the story. The firm Graham worked for didn’t have a statistical department before Graham. They didn’t have analysts. They created a new job for him. Because they saw he was good and wanted to keep him.

The job you have now probably doesn’t let you do the work you want to do. It probably doesn’t let you show people what you’r best at. So use your free time to do the work you want to do. If you’re good at it: someone will pay you for it one day.

It’s hard for people to see you’re good at something if the job you’re in doesn’t let you show those skills.

Make report writing a hobby. It will make you a better analyst. It will make you a better writer. And it will give you something to …

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Investing Ideas: Where Does Geoff Get His Investing Ideas? – Screens, Blogs, and 4 Examples

A reader sent me this email:

“So, where do you get your investing ideas?”

I can’t answer that.

Some fiction writer – I’m going to say it was Stephen King in On Writing but I’m probably wrong – said writers can’t tell you where they gets their ideas. All they can really do is tell you where they got this one idea.

It’s the same with investing ideas. I can tell you where I got a specific idea. I can’t tell you where I get my ideas generally. Because I don’t know.

 

Idea #1

I got the idea for Bancinsurance (BCIS) from a screen.

Back in 2006: I screened for insurers trading below book value. I threw out most insurers that passed the screen. I wanted an insurer with a long history of low combined ratios.

Bancinsurance had a low combined ratio – that means a high profit margin – in most years. And it had a niche.

This was during Bancinsurance’s bail bond reinsurance problem. So I just followed the stock. I didn’t buy. I kept Bancinsurance in mind. It got real cheap during the 2008 crash. But I was busy looking at other stocks. Then: the bargain stock herd was thinned by the 2009 rally. So my options were limited. My opportunity cost was low.

The SEC dropped their investigation. And I bought Bancinsurance stock.

The original screen was simple:

Industry = Property/Casualty Insurance

Price-to-Book < 1

 

Idea #2

Where did I find Solitron Devices (SODI)? Easy. I got it from Greenbackd. There was a guest post on Greenbackd. It was good. So I looked into the stock.

 

Idea #3

I got the idea for George Risk Industries (RSKIA) from another blog post. This one was by Ravi at Rational Walk. It sounded interesting. The stock was stupid cheap. So I expected to find George Risk’s actual business was worthless. I looked at the 10-Q and the past 10-Ks. I saw the business was worth a lot. The stock price was 95% covered by George Risk’s stocks, bonds, and cash. If you bought the stock: you got the business for free. So I bought the stock.

 

Idea #4

I got the idea for Birner Dental Management Services (BDMS) from a screen. Actually: 2 screens.

I always screen for stocks that buy back enough stock to lower their share count year after year. And I screen for stocks that have free cash flow year after year. One day: I combined the two criteria. Birner passed the screen.

So where do I get my investing ideas?

I got 2 of the 4 ideas I talked about in an earlier post from blogs. I got the other 2 from screens.

I don’t know if that’s a good sample.

I’ve checked the last 10-Q and 10-K for thousands of stocks. I’ve glanced at their 10-year histories. If that’s an investing idea: I’ve had thousands of them.

But that’s not an idea. An idea …

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Going Private Transactions: Should You Buy a Stock To Make 4% in 3 Months? – Bancinsurance

A reader sent me this email:

Hi Geoff,

I read about your investing experience with BCIS. Congratulations with the success. I am considering buying Bancinsurance (BCIS) at $8.14 in order to make $8.50 when the deal closes for a 4% gain in a few months. Not a very high return but it looks like the deal is going through. Could you give me your opinion on the deal?

Regards,
Walter

I think the deal will happen.

The annualized return is good if you buy at $8.14. We’re talking about 21% annualized. The non-annualized return is low: about 4.4%.

I don’t buy anything where the non-annualized return is less than 10%. Because:

a) There is always a small chance the deal won’t happen and

b) There is always a big chance the deal will take longer than you expect.

In this case: the buyer is the CEO and the buyout price is low.

The low price – 89% of book value – makes the CEO want to get the deal done. Also: Bancinsurance will save money by stopping its reports to the Securities and Exchange Commission (SEC). On the other hand: Bancinsurance is a controlled company.

If the CEO runs into trouble with financing – or something like that – he won’t worry about taking a long time or bailing. There’s no one competing with him. Bancinsurance’s CEO doesn’t want to sell the company. And he owns most of the stock. That means it’s his bid or no bid.

The big risk is a delay. That happens a lot.

In this kind of investing: all the surprises are bad surprises. I don’t expect a higher offer. That’s why I sold. I had other opportunities. I didn’t want to wait for the last 4%.

I’m all about the first 30% to 50%. I don’t wait around for the last 10%.

But – yes – I expect the deal will happen. Most likely: you will make a 4% profit in 3 months or less.

However: a delay is always possible.

When a board says 3 months: I calculate the annualized return as if they said 6 months. When they say 6 months: I act like they said a year.

And I pass on deals where the non-annualized return is less than 10%. Sometimes a 3 month deal closes in 1 year. I have better places to be.

In terms of pure odds: Yes. The deal will probably get done at $8.50 a share in cash by January 1st, 2011.

Talk to Geoff about Going Private Transactions…

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Net Current Asset Value Bargains: How Do You Screen For Them? – Retained Earnings

A reader sent me this email:

I’m…curious how you start your searches for new ideas and what methods you use. Is there a starting parameter you choose to look at first, like 52wk. low or stocks trading below 50% of book value, etc.?

No.

But I do keep lists.

I keep a list of stocks trading below net current asset value.

Net Current Asset Value = Current Assets – Total Liabilities

When you buy a stock where the net current asset value is more than the stock price: you get the customer relationships, brands, and factories for free.

Benjamin Graham bought stocks at 2/3 of net current asset value and sold them when the stock price hit its net current asset value. If the net current asset value didn’t change: Benjamin Graham made 50% on his investment.

Most net current asset value screens are bad. You need human eyes. Two good blogs that cover net current asset value bargains are: Greenbackd and Cheap Stocks.

I only keep track of stocks priced less than net current asset value if they:

a) Have more past profits than past losses or

b) Are planning to liquidate

The quickest way to check if a stock has more past profits than past losses is to look at retained earnings. Retained earnings are on the balance sheet. If retained earnings are positive: the business has more past profits than past losses. If retained earnings are negative: the business has more past losses than past profits.

This retained earnings trick can backfire. Spin-offs screw it up. It’s not perfect. But it’s quick. In seconds: retained earnings show you the net current asset value bargains worth studying.

Talk to Geoff About Net Current Asset Value Bargains…

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Investing Blogs: 17 Blogs Geoff Reads – And Paul Krugman

A reader sent me this email:

“Which blogs do you usually look at?”

I use Netvibes to keep track of 45 blogs. When any of those 45 blogs posts something new, I read it.

Lately: I’ve been using Twitter too.

I read mostly investing blogs. I prefer stuff where the writer is covering stocks I don’t know. Small is good. Foreign is better. I like stock specific analysis. I have no interest in stuff about the market.

There is one exception: I read Paul Krugman. Krugman doesn’t make me a better investor – worse probably – I just like his writing.

I’ve interviewed the authors of 5 blogs: Greenbackd, Street Capitalist, SINLetter, Cheap Stocks, and Fat Pitch Financials.

I love: The Interactive Investor Blog and Variant Perceptions.

You should also read: ShadowStock, Above Average Odds Investing, and Petty Cash.

Two blogs that are a little different – but definitely worth reading – are: Market Folly and The Official Activist Investing Blog.

One blog I’ve really been getting into lately is: Can Turtles Fly?.

A lot of these names aren’t surprises. I’ve linked to them before.

I don’t know what my favorite blogs are. Don’t ask. Some blogs give me great info but don’t have a voice. I forget to list those. And some bloggers I like don’t write much. Their names may be missing too.

Here are 3 more: Rational Walk, Ragnar is a Pirate, and Greg Speicher.

I could go on forever. I won’t.

One more: Canadian Value Investing.

Done.…

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