I (Jeff Havenstein) have spent a lot of time thinking about what the greatest business in the world is...
The fact is that there is no single business considered the "best in the world." Ask 100 analysts and you'll likely get 100 different answers.
Still, there are traits that all great businesses share...
The reason I've been trying to find the best businesses in the world has to do with Stansberry Research founder Porter Stansberry.
You see, Porter was the keynote speaker at our 2021 Stansberry Conference and Alliance Meeting in Las Vegas this past October. He took the stage and began talking about the importance of "economic goodwill."
I'm sure most of you might be thinking that economic goodwill doesn't sound like the most riveting topic for an 8 a.m. start time... But trust me, it was a can't-miss talk.
Porter described economic goodwill as an asset that doesn't show up on the balance sheet. It's an asset that can't be purchased. It must be earned.
Basically, all the excess value of a company – all the stuff that isn't property, equipment, and inventory – goes into goodwill. Specifically, I'm talking about a company's reputation for quality, consistency, value, and customer service.
At the conference, Porter said that companies that have the ability to grow their earnings dramatically over time ‒ without comparable capital investments ‒ are considered capital-efficient. And the ability to be capital-efficient is tied to goodwill...
In Porter's eyes, capital-efficient stocks are the ones to buy if you want to own the best stocks in the world.
He went on to talk about one of the very first capital-efficient companies that he recommended, which has a ton of goodwill ‒ chocolate maker Hershey (HSY)...
Porter would argue that Hershey should be in contention for the best business in the world. It's a stock you can buy and hold and never have to plan on selling. It will just compound your wealth year after year.
In Porter's initial November 2007 recommendation in Stansberry's Investment Advisory, he noted how capital-efficient Hershey is...
Over the last 10 years, the company's annual capital spending has remained essentially unchanged. In 1997, the firm invested $172 million in additions to property and equipment. By the end of 2006, the annual capital budget had only increased to $198 million – a paltry 15%. Meanwhile, cash profits and dividends nearly doubled.
This is the beauty of capital-efficient businesses: As sales and profits grow, capital investments don't. Thus, the amount of money that's available to return to shareholders not only grows in nominal dollars, it also grows as a percentage of sales. In 1999, dividends paid out equaled 3.4% of sales. But by 2006, the company spent $735 million on dividends and share buybacks, an amount equal to 14.8% of sales.
Today, even with a market cap of $46 billion, capital expenditures are only about 5% of sales.
Since Porter recommended buying the stock in November 2007 (right before the financial crisis), shares have returned about 15% a year with dividends reinvested – all with little volatility.
Another group of companies that Porter has called 'the best businesses in the world' is property & casualty (P&C) insurance.
While P&C insurance sounds boring to most folks, the underlying business is anything but.
Porter and his team explained the beauty of insurance in the October 2012 issue of Stansberry's Investment Advisory...
Insurance is the only business in the world that routinely enjoys a positive cost of capital. In every other business, companies must pay for capital. They borrow through loans. They raise equity (and most pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.
But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually be paid to accept it. Insurance companies are all paid a fee to manage capital. All of them. The best insurance companies make sure the fees they charge for capital are in excess of the risks they accept by extending insurance. These companies actually make a profit on their underwriting. They earn money by taking the capital of their customers. It's incredible. These firms compound their equity by simply opening their doors every morning. They don't have to do anything else. Nothing else in business is like it.
The beauty of insurance is that you can get paid to use capital. That's a fantastic way to become very wealthy. And it's precisely how (along with several great stock picks) Warren Buffett became the world's most successful investor.
Porter has gone so far as to say that if individual investors could buy only insurance companies and nothing else, they would greatly increase their average annual returns.
Let me explain why it's hard to argue with that statement...
If you're paying insurance – on your house, your car, or your jewelry – you're getting the raw end of the deal.
You pay a premium month after month and you will likely never file a claim. Your house never burns down, your car doesn't get wrecked, and your jewelry never gets stolen. So the money you pay in premiums is just money down the drain.
But, of course, you're happy to pay for the peace of mind that having coverage provides.
Insurance companies make their living by cashing in on people's fears. Folks fear burglary. They fear natural disasters. They fear misplacing their valuables. And because of that fear, they're willing to pay up for insurance.
While insurance companies sometimes have to shell out cash to policyholders to satisfy claims, most of the time they collect your premiums, invest it, then watch it grow. It's a fantastic business... when done correctly.
Insurance is done correctly when companies don't sell home insurance to arsonists... car insurance to crash-prone teenagers... and jewelry insurance to someone with a history of losing diamond rings.
Insurance companies need to be selective about who they offer their services to. They need to do their homework or charge higher premiums to offset the risk for certain individuals.
When they do that, insurance can be extremely profitable.
Owning insurance businesses is how Warren Buffett has made a good chunk of his fortune. Just recently, Buffett's company Berkshire Hathaway announced that it would acquire insurance company Alleghany for $11.6 billion.
Buffett understands the beauty of insurance – boring or not.
Again, you'd do very well by just owning P&C insurance companies... It is one of the best groups of businesses in the world.
I'm writing today to urge you to get into the insurance game for yourself – and all from the comfort of wherever.
You see, the best investors I know sell insurance just about every month. And it's the greatest source of income I've ever come across.
Now, you or I couldn't start our own insurance firm tomorrow... The barriers to entry in the insurance industry are immense. There are strict regulations and significant capital requirements.
But I'm not talking about selling insurance for things like homes or cars... I'm talking about selling insurance to folks who fear falling stock prices.
Given that market is in the midst of a correction, with inflation at a multidecade high, a war in Ukraine, and the Fed raising interest rates... There is no shortage of investors who are fearful of their portfolio imploding.
Everyone, it seems, is talking about when the next big downturn will come. Analysts keep flip-flopping about whether we'll see a recession or not in the next 12 months.
Here's how starting up your own insurance company works...
I convince a worried investor to pay me a premium for market protection every month and – the majority of the time – I simply keep their premiums and never get a claim. Since I'm paid upfront, I can use the cash I receive and invest it – just as the P&C insurance companies invest their float...
The worried investor, of course, gets to wash away his worry. And if I do ultimately have to pay a claim, all I have to do is buy shares of my favorite stocks.
It's really a no-lose situation if you do it correctly.
The returns of selling insurance on individual stocks to investors can be fantastic. You'll likely see 20% annualized gains most years – just like you would see when investing in P&C insurance stocks.
My boss Doc Eifrig has perfected the strategy of selling options. I can attest that selling options is one of the greatest sources of income you will ever find – again, if you do it correctly.
Just recently, Doc put together a presentation that explains option selling in plain English. Doc also gives you all of the details of why now is one of the best times in recent memory to use this strategy.
What We're Reading...
- Berkshire's $11.6B Alleghany deal expands insurance business.
- How Warren Buffett used insurance float to become one of the richest people in the world.
- Something different: North Korean hackers target gamers in $615 million crypto heist.
Here's to our health, wealth, and a great retirement,
Jeff Havenstein with Dr. David Eifrig
April 20, 2022