Buffett is buying stocks...

 "Anything I bought at $80 I don't like as well at $100. But if you're asking me if stocks are cheaper than other forms of investment, in my view the answer is yes. We're buying stocks now. But not because we expect them to go up. We're buying them because we think we're getting good value for them."

Billionaire investor Warren Buffett made this statement in an appearance on CNBC this morning... He was on the financial news channel to discuss his annual letter to Berkshire Hathaway investors, which he released Friday.

Before getting into his quote above, we'll discuss a few key points from his annual letter... a must-read for serious investors around the world.

 Buffett notes Berkshire's core business is insurance – which Porter calls "the best business in the world."

The reason insurance is so profitable is simple... Insurance companies collect premium upfront and pay the money out (in claims) over time. As Buffett points out, in "extreme" cases, those payments "can stretch over decades." This money, which Berkshire invests, is called "float." And this year, the company's float reached a record $73 billion. Buffett believes float will expand even more this year.

 In addition to the size of its float, Buffett says Berkshire has another advantage over most insurers... For 10 years in a row, Buffett's insurance companies have underwritten insurance at a profit. (The premiums it has collected have been more than the money it pays out in claims.) This means that not only is Berkshire given the use of this float for free, it's actually being paid for the privilege. "That's like… taking out a loan and having the bank pay you interest," Buffett wrote.

 However, he predicted insurance companies will face headwinds going forward... Insurance companies invest heavily in bonds. And right now, bonds are paying record-low yields. As insurance companies' longtime bond holdings mature, they will be forced to reinvest those funds at much lower rates. And the value of these new bonds will be eroded as interest rates start rising. (We can't say when rates will rise, but we know eventually they must.)

Less profitable investment portfolios will lower earnings across the insurance sector. However, Buffett said the best insurance companies – those that focus on profitable underwriting and conservative investments – will continue to prosper.

 If this view of insurance companies sounds familiar… it's because they are the same factors – float and underwriting profits – that Porter and his team focused on when they recommended insurance stocks last October.

In the October issue of Stansberry's Investment Advisory, they noted the best property-and-casualty (P&C) insurance companies consistently produce underwriting profits and generate realized investment returns, while growing float, book value, and the investable asset base.

After performing a comprehensive review of 25 top U.S.-based P&C insurance companies… Porter recommended subscribers purchase shares of five of the highest-quality insurers that were then trading at huge discounts (50%-plus) to their float and book value.

Since then, those positions are up an average of 11.7%. (Another insurance firm recommended in Porter's March 2012 issue is up 19.8%.)

 And now… Buffett tells CNBC he's buying stocks. We agree, stocks are one of the few values in the market…

You want to be extremely careful about bonds today. The risk is great. Gold has been in a 12-year bull market. And though it's dropped lately, it's still gone up for 12 years in a row. (As we've said… we view holding gold bullion as insurance against central banks and devaluing currencies. If you don't own some today, you should. But you'll have to accept that it is going to be expensive.)

You can still find values in real estate. But the massive amount of money coming from investors in search of rental income is pushing the market out of "value" territory.

 So we're left with equities. In Extreme Value, editor Dan Ferris only recommends companies when their shares trade at a reasonable discount to their intrinsic value… Dan currently deems 13 Extreme Value portfolio positions within their buy range. These include some of the most dominant companies in the world – Microsoft, for instance.

Microsoft, the world's largest software company, trades at 15 times earnings. And it pays a 3.3% dividend. No, it's not cheap. But it's fair, especially considering the alternatives. And Microsoft's 3.3% annual dividend is nearly double what you can earn in 10-year Treasurys.

 Buffett said he's still buying Wells Fargo. The nationwide bank has long been Buffett's favorite bank. He's the largest shareholder with around 8% of the company. We last covered Buffett's thoughts on the bank in the July 17, 2012 Digest (when Buffett was speaking at the Allen & Co. media conference in Idaho):

 Buffett's position in Wells Fargo – the largest U.S. mortgage lender – is a proxy for the housing market. But Buffett also understands how banking benefits from today's monetary policy. Banks are able to borrow money for nothing and invest in higher-yielding assets (in most cases, mortgage paper that's guaranteed by the government). The Federal Reserve has given banks a license to print money.

 In his CNBC interview, Buffett said housing is improving... His brick, carpet, and wallboard businesses are all doing better – they're "not galloping," but they're moving forward.

 In addition, from the Berkshire annual letter, Clayton Homes, the country's leading producer and financer of manufactured homes, made 25,872 homes last year – up 13.5% from 2011. Clayton, which Berkshire Hathaway owns, accounted for 4.8% of all single-family residences built in the U.S. in 2012, making it the largest homebuilder in the country.

 And Buffett's real estate agents, which are under the HomeServices banner, were responsible for $42 billion of home sales, up 33% from 2011.

Also in 2012, HomeServices purchased 67% of the Prudential and Real Living franchise operations (which license 544 brokerage companies). And Berkshire has an agreement to purchase the remainder of those companies within five years.

Buffett says he expects to see earnings "rise significantly" as the housing market continues to strengthen.

 For the year, Berkshire Hathaway earned $24.1 billion. But Buffett was disappointed. Berkshire's book value (Buffett's favorite measure of value for his company) failed to outperform the S&P 500. That's the thing about Buffett's style of investing. During periods of massive outperformance (usually fueled by speculative booms), Buffett will underperform.

However, when the tide turns, as it did in 2001 (the tech bust) and 2008 (the financial crisis), his losses are much less severe. In 2011, Berkshire lost 6.2% of its book value. The S&P lost 11.9% (the Nasdaq was much worse). In 2008, Berkshire lost 9.6%... The S&P was down 37%.

During those downturns, he is ready with cash to pick from the carnage.

 Porter and I (Sean Goldsmith) spoke about Buffett's letter this morning, mainly about insurance and Buffett's thoughts on dividends versus share buybacks and reinvesting money in the company... Digest Premium subscribers will have access to Porter's thoughts on the topics later in the week.

 We're continuing our series of True Wealth System challenges this week…

As we explained in the Digest… we've spent several years – and hundreds of thousands of dollars – developing proprietary software that quantifies the investing strategies Steve Sjuggerud developed over his career.

The result is True Wealth Systems… Steve's high-end trading service. The tools we developed help Steve analyze a vast array of market data and yield buy/sell signals on asset classes like commodities, currencies, and stocks…

To demonstrate the power of applying these programs to Steve's strategies… we asked Steve to examine popular investment ideas… We published some of this work last week (and we compiled those pieces in the weekend edition of our daily e-letter Growth Stock Wire.)

Today, Steve and his analyst Brett Eversole turn their attention (and programs) on Warren Buffett and evaluate the legendary investor's stated strategy for buying back shares of his holding company, Berkshire Hathaway…

We've published the results at the end of today's Digest… Don't miss it. (And remember, if you have a question you'd like Steve to tackle, send it to feedback@stansberryresearch.com.)

 New 52-week highs (as of 3/1/13): ProShares Ultra Biotechnology Fund (BIB), Berkshire Hathaway (BRK), WisdomTree Japan SmallCap Dividend Fund (DFJ), WisdomTree Japan Hedged Equity Fund (DXJ), iShares Biotech Fund (IBB), ProShares Ultra Health Care Fund (RXL), Anheuser-Busch InBev (BUD), Pepsico (PEP), Automatic Data Processing (ADP), Dominion Resources (D), Hershey (HSY), Chubb (CB), Kohlberg Kravis Roberts (KKR), Becton-Dickinson (BDX), Chart Industries (GTLS), Range Resources (RRC), Government Properties Income Trust (GOV), and Fluidigm (FLDM).

 More readers tell their real estate success stories. And one is seeing signs of the top. Where do you weigh in? feedback@stansberryresearch.com.

 "Real Estate investing has been great for me for 26 years but the last few have been the best and easiest money. My last deal was a small starter home in a stable suburban neighborhood in Indianapolis. Paid $41,000 for the 3BR/2BA, moved a tenant in the day after closing at $845/mn. What I do with properties is I immediately put them up as a Rent to Buy also call lease options. In this case, I got $3,000 down from the tenant and our agreement is he will purchase the property (get a mortgage) in the next 3 years at $82,000. The option holder (tenant) takes care of all maintenance. Not taking care of maintenance is a big load off for me as I live in Belize for 5 months each winter.

"The property I bought prior to this one, I paid $30,800, put $6,000 into it, had a lease/option 'buyer' immediately, who paid $5,000 down and pays $830. Our agreed purchase price is $80,000.

"Do I get the houses back? Yes, when they are not able to follow through or just want something else they give them back and I just sell them again. Nine times out of 10 the houses come back in good repair with just the need of a good cleaning.

"I have been doing 2 or 3 of these each summer with very little effort; it has been a nice addition to my semi-retirement income." – Paid-up subscriber Pam

 "I bought a rental in 2010 when there was still blood in the streets and have done very well.

"However, after reading all of the comments from today's Digest, I am seriously considering selling. The all-positive comments about buying multiple rentals, (one gentleman mentions owning 35 and no longer owning his tow truck) has all the aroma of another bubble forming.

"I wish all those who are concentrating their wealth in real estate my sincere best wishes. I am surprised you offer no dissenting views on real estate, either from your own staff or from your readers. I obviously agreed with the thesis in 2010 that real estate was a good investment, especially when most everyone still thought I was crazy. I get nervous when everyone now sees it as a sure thing. Maybe I'll roll the proceeds into royalty miners. Everyone seems to hate miners and PM at the moment." – Paid-up subscriber John P.

Goldsmith comment: Retirement Millionaire editor David Eifrig and I were discussing this last night. We both agree that something is off with the real estate market. Prices are soaring. But rents aren't keeping up. Neither of us was able to put our finger on the problem.

However, we doubt we're at the top of the real estate market. There's still a lot of money headed toward the sector from banks, hedge funds, and individual investors. It will act as a sponge for the trillions of dollars central banks are printing. It's part of Steve Sjuggerud's "Bernanke Asset Bubble" thesis... We'll see real estate prices rise to insane heights before the top. And we're not there yet...

Regards,

Sean Goldsmith 
Miami Beach, Florida 
March 4, 2013

Follow Warren Buffett's Advice and Double Your Long-Term Gains on His Firm
By Steve Sjuggerud and Brett Eversole

Warren Buffett is always searching for a bargain. And right now, he sees one in his own stock price…

"The surest way to make money is to buy your own dollar bills for $0.80 or $0.90," the legendary investor said this morning on CNBC.

Berkshire Hathaway – Buffett's holding company – currently trades for 1.3 times book value (a rough measure of liquidation value). At that price, Buffett is interested in buying up his own dollars by buying back Berkshire shares…

"We feel the value of Berkshire is well over 120% of book. How much, nobody knows… Whether our stock is worth 138% or 135%, I don't know. I just know that it's worth more than 100%."

We were curious if Buffett's buyback strategy was a real money maker. So we put our True Wealth Systems computers on the case…

Finding historical Berkshire Hathaway data can be a real problem. If you search online, you'll likely come up blank. But our database is so extensive that we were able to put together more than 30 years of price and price-to-book value data on Berkshire.

We simply followed Buffett's idea of buying Berkshire when it trades for less than 1.2 times book value. Based on history, it's an incredibly profitable idea…

You see, since 1981, if you'd bought Berkshire and held for five years, your average annual gain would be 19% a year. (To calculate this, we used the annualized geometric mean for every five-year period… All that means is, if you bought the stock at any point over that 32-year period and held for five years, that was the average gain you could expect.)

But if you waited for Buffett's buy signal… you did much better. By simply buying when Berkshire is below 1.2 times book and holding for five years, your average annual gain increases to 34% a year. That's nearly twice the annual gain. And with compounding, it more than doubled your average five-year return…

The same holds true over shorter (three-year) and longer (10-year) holding periods…

Again, simply following Buffett's advice leads to much larger long-term gains in Berkshire's stock. It generally leads to a 50% increase to our annualized returns. That's huge… And the effects of compounding make those gains even larger over time.

The only problem: You don't get many shots to buy Berkshire at that level. In our study… the opportunity crops up only seven times in 32 years…

Today, Berkshire is slightly above the 1.2 book value threshold we used. But the stock has traded below that level recently, and it'll likely see similar prices sometime in the next few months.

The history is clear, and Buffett is right. Buying shares of Berkshire at a great value is a great long-term strategy. Take advantage of it!

Good investing,

Brett Eversole and Steve Sjuggerud

 I (Porter) recently went on vacation to Disney with my family, and I became interested in the business of Disney World.

On the surface, it looks like the kind of business that shouldn't work. Most large enterprises fail for two reasons: They either require too much capital over time and/or they require too many skilled people. And nothing is more difficult than maintaining a business that requires lots of skilled people. Disney employs 166,000 people (around 80,000 at Disney World). And if you've ever been to Disney, you know how incredibly skilled they are…

 For example, we were escorted around the park by an incredibly intelligent and dynamic VIP tour guide. Think about the skills involved in spending eight or 10 hours with a VIP client. You have to know everything that's going on in each of the five parks… You have to know exactly who to call for favors and reservations to get around lines and through gates, etc. Being able to handle all that on the fly, while communicating effectively with the customer all day long, every day, is grueling. And our guide made it look effortless.

 The idea that you could maintain a company of Disney's scale where everyone from the people picking up the trash on the ground to the VIP guide takes the same approach… knows the park… and understands the customer service implications of what he's doing...

It's just remarkable. I've stayed at the best hotels all around the world, and nobody else comes close to Disney World in terms of delivering genuinely warm, friendly service at all times.

 Consider the capital required for an operation the scale of Disney's. The company owns massive hotels and theme parks. It continuously invests huge amounts of capital in making movies and then branding and merchandising those films. The scale and reach of Disney is so big, it's hard to believe it actually works.

 I'm currently reading two biographies of Walt Disney. And I was surprised to learn that Walt Disney, the man, was a terrible businessman. He went bankrupt several times because it was so difficult to get the capital required to make the original movies, build his studios, and construct the first theme parks.

 I believe it's almost always a mistake to invest in companies that need huge and continuing amounts of capital to operate. In Walt Disney's case, the company has $40 billion in annual sales. And the cost to produce those sales is $33 billion. That's a very narrow margin. It's a tough business.

In addition to what it costs Disney just in terms of materials and people to generate those revenues every year, it also has to invest about $3.5 billion a year in capital expenditures. That's money it's spending to build new theme parks, construct new hotels, refurbish rides, and things of that nature. So even after it has made that money at a slim margin, it has to spend about half that cash just to maintain the business. And that is a very, very, very tough business. Almost every business like that around the world fails.

Tomorrow, I'll tell you why Disney has survived… And another business you can buy that has the same qualities.

– Porter Stansberry with Sean Goldsmith