I love to buy stocks that are able to grow for years. If I can buy a stock and have it grow at a high rate for 20 years, then I know I'll end up with a lot of money. That sort of potential is why I'm a fan of Fairfax Financial (NYSE:FFH).

The past
Fairfax is an insurance company focusing on the property-and-casualty market. It holds a majority stake in several insurers, including publicly traded reinsurer Odyssey Re (NYSE:ORH).

I first discussed Fairfax back in 2004, when I thought it was cheap trading at $125, or 0.6 times its book value.

It turns out that was awful timing. Soon afterwards, Hurricane Ivan hit, making 2004 the costliest hurricane season ever at that point. Then the 2005 season made 2004 seem like a minor drizzle. Fairfax twice had to sell shares to shore up its balance sheet.

So, clearly, Fairfax was a terrible investment, right? Nope. Shares are now trading for $240, up 90% after two of the worst years for insurance ever. How can the shares possibly be up? Well, 2006 was a great year, and the company was awfully cheap back in 2004. The margin of safety was big enough that, even after the bad news, the investment was profitable.

The present
Fairfax is a much safer company now than it was then. Its problems arose from underwriting and reserving problems in a couple of acquisitions. Those issues now seem under control -- for the first time in years, the company didn't have to strengthen its reserves.

The balance sheet is much stronger too. Back in 2004, Fairfax had a net debt-to-equity ratio of 55%. Now, that ratio is down to 39%. Furthermore, the quality of the assets has improved. Reinsurance recoverables and tax assets have been converted into cash, and Fairfax is selling a major position in Hub International (NYSE:HBG).

Some uncertainty remains. An SEC investigation initiated in 2005 hasn't been resolved, and last summer, Fairfax launched a $6 billion lawsuit alleging stock manipulation. However, these are short-term issues. What really matters is the company's long-term performance.

In that respect, Fairfax has enormous potential.

The future
Insurers are paid up front, but claims are paid years later. During that time, the company can invest that money. If the underwriting is good, insurers are effectively borrowing large sums of money from their policyholders at cheap rates to invest.

And Fairfax has an amazing team of value investors. According to their latest annual report, their results are insanely great over various timeframes.

5 Years

10 Years

15 Years

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Some of Fairfax's recent successes include investments in ICICI Bank (NYSE:IBN), Zenith National (NYSE:ZNT), Merck (NYSE:MRK), and DirecTV (NYSE:DTV).

This approach of value investors leveraging the float from an insurance business to extraordinary profits isn't unique. Warren Buffett has had success with a similar model. What's more, Fairfax remains cheap. It's trading at a price to book multiple of 1.5, below the average P&C insurance multiple of 1.9. To me, that smells like a bargain.

The Foolish bottom line
Fairfax is a great example of why value investing works. Buying stocks with a margin of safety doesn't simply reduce the downside but also allows for superior profits even under adverse conditions. If you're looking to gain these benefits in your own portfolio, we can help. Our Inside Value newsletter analyzes two cheap stocks every month. You can see our top picks by clicking here for a free trial.

Fool contributor Richard Gibbons loves to click here whenever humanly possible. He owns shares of Fairfax Financial, though he does not own shares in any of the other companies discussed in this article. The Motley Fool has a disclosure policy.