Hailed by The New York Times as a "guru to Wall Street's gurus," value investing expert Bruce Greenwald takes some time to offer his insight and advice to The Motley Fool. A professor at Columbia University's Graduate School of Business, Greenwald has also authored multiple books, including Value Investing: from Graham to Buffett and Beyond.
A lot of the best investors are involved with insurance companies. Greenwald points out that the stream of premiums offers a stable investor base, and discusses a recent trend that started with Travelers and is spreading throughout the industry.
Matt Koppenheffer: Thinking about the insurance sector, you mentioned Chris Davis is very great in the insurance sector...
Bruce Greenwald: And Warren Buffett is pretty good in it.
Koppenheffer: Warren Buffett is, but actually my question was that there are a lot of great investors; Prem Watsa up in Canada, you've got Tom Gayner at Markel, you had Lou Simpson working with Warren Buffett at Berkshire Hathaway.
What do you think it is that attracts value investors -- and these are all value investors in particular, or most of them -- what attracts them to that business?
Greenwald: I think what you're describing is an optical illusion. I'm going to say something nice about The Motley Fool, so you can always edit it out.
The Motley Fool has a terrific, I think, performance record because it's fundamentally value oriented, and it's flexibly value oriented, which I think is very important. You know that the Russo Gardner & Russo, that the Gardner, which is a famous value firm -- or it's Gardner Russo & Gardner, sorry -- is the uncle of the Gardners who are your founders.
I think the people they would look at in the insurance business are the people who are the value-oriented investors, but who invests the money at Met Life? Who the hell knows? Who invests the money at Prudential? Who the hell knows? Who invests the money at AIG? Who the hell knows?
Koppenheffer: Good point.
Greenwald: Don't forget, it's a vast industry out there.
Now, there are other no-name companies that actually have pretty good value orientations. Northwestern Mutual is a terrific operator, but they're also value-oriented investors. It's just they never sell anything, which is not necessarily a good idea.
But you can go through the list of insurance companies, and there are a lot of them who are just pretty ordinary, common, or garden investors.
Koppenheffer: OK. I guess the question wasn't so much that all insurance companies are getting great investors, but that a lot of these investors seem to end up latched onto an insurance company.
Greenwald: Well, it's a very stable investor base. That's the good news.
Look. It is conceivable, under a set of political circumstances in Europe, something terrible happening in Switzerland -- even though they don't sell anything there -- that Nestle could fall from, what, 62 Swiss francs today to 40 Swiss francs tomorrow. But the underlying business isn't going to be impaired.
You need investors who are not going to go nuts and sell you out at those ridiculously low valuations, and are going to be willing, or are stable enough, to provide you with the resources to make good decisions at that point.
I think insurance companies tend to have those characteristics because they're a stream of policy premiums that are pretty stable.
Actually, something really good is happening in insurance these days, which I think all the insurance companies have noticed. That is, in the old days when insurance companies made a lot of money because premiums were high and their operating ratios were good, they kept hold of the money. Their capital base went up, and their ability to write insurance went up.
They're insurance guys. If they can write insurance, they'll write insurance and they don't care much about the price. What you've seen, starting with Travelers, but in all the insurance companies, is they're returning the capital to the stockholders.
If that trend holds, you're going to get a lot more pricing discipline and you're going to get a lot better operating ratios than you've had historically, throughout the industry.
Koppenheffer: It seemed that it's a lot more difficult lately to make up for bad underwriting with good investing.
Greenwald: Right, and that's also supported.
Koppenheffer: That makes sense, though.
Greenwald: The good underwriting.
Koppenheffer: Warren Buffett often talks about educating his shareholders, so I guess when you're an insurer, and you have that float, and it's sticking around, then you don't really have to worry about that.
Greenwald: And that's a $70 billion float that's growing over time.
Greenwald: You look at that float on the balance sheet, it's a very stable float.
Koppenheffer: It's not a bad asset for Berkshire shareholders.
Greenwald: No. And you didn't lose two-thirds of your investors or two-thirds of that float in 2008.
Koppenheffer: Exactly. Exactly.