The one business I'll teach my children... It's like painting by numbers... To invest safely and successfully in this space, you must know this... Two fundamental rules for investing in these stocks...

Editor's note: We've come a long way at Stansberry Research over the past two decades. But through everything, we've never forgotten how it all started...

As regular Digest readers know, when Porter Stansberry founded our company in 1999, he set out to provide subscribers with the information he would want if their roles were reversed. We're keeping that principle in mind as we celebrate our anniversary this week...

In 2014 and 2015, Porter wrote several essays about how to survive – and thrive – in the markets. Now, we're doing what we would want if we were in your shoes... We're sharing them again – with relevant updates – to make sure all our readers know how to build and protect their wealth.

In yesterday's Digest, Porter covered the three things every investor must know to succeed in stocks and shared a simple four-step guide that anyone can use to beat the market. Today, Porter explains why he hopes his kids will only ever invest in one type of business...

The One Business I'll Teach My Children

By Porter Stansberry

If you were going to limit all of your investments to only one sector of the economy – only one type of business or one kind of stock – what would you buy?

We've come to believe that, for outside and passive investors (common shareholders), only three sectors offer truly extraordinary rates of return and don't require taking any material risk.

Let me be clear about what I mean...

There are three sectors of the economy where companies can establish and maintain a truly lasting competitive advantage and where outside investors can identify attractive values.

As I teach my children about investing, I focus almost entirely on examples from these three sectors. And truly... I spend most of my time explaining only one business to my children.

If they come to understand this business thoroughly, I know that with a reasonable amount of saving discipline, they will be financially secure by the time they are 30 years old... and wealthy long before they reach 50.

Today, I want to show you why the investment returns in these businesses are so incredibly good over the long term. I want you to know how to think about these businesses... how they work... and a few simple keys to making great investments in these sectors.

I promise... this is all far easier than you're imagining right now. Let's start with this chart...

This chart shows four of the best-managed property and casualty ("P&C") insurance companies in the United States.

Company No. 1 is a major global company that insures virtually anything and is worth roughly $41 billion.

Company No. 2 started in the 1930s insuring jitney buses, and later, long-haul truckers. In 2019, it serves niche markets and underwrites specialty insurance products. The company is worth about $15 billion.

Company No. 3 got its start insuring contact lenses. In 2019, it focuses on things that other companies won't touch, like oil rigs and summer camps. It's a small public company worth a little more than $4 billion.

Company No. 4 was founded by a Harvard Business School graduate 50 years ago. It's still mostly a family business (even though it has public shareholders and is worth around $13 billion). It insures almost anything commercial, from yachts to elevators.

You might think that outside of being in the insurance industry, these companies have almost nothing in common. Some are small and insure essentially niche items. Others are huge, operate globally, and insure almost anything. Yet to us, these companies look nearly the same: They are among the best underwriters in the world.

That means these companies almost always demand more in insurance premiums than they will end up spending on insurance claims. As you will soon learn, nothing is more valuable in the financial world than having the skill and the discipline to underwrite insurance profitably.

Over the long term, all these companies have generated returns that are more than double the benchmark S&P 500 Index. They did so without taking any risk. And here's the best part... their success was both inevitable and repeatable. These are not "lucky guesses" or fad-driven product sales.

One of our overriding goals at Stansberry Research is to give you the knowledge we'd want to have if our roles were reversed.

Knowing what I know now about finance, I wouldn't have gotten into the investment-newsletter business. I would have gotten into insurance.

We can't teach you anything more valuable than understanding how to invest in good P&C insurance companies. And with the legwork we do for you, it's as easy as point and click.

If a company passes our tests and you can buy it at the right price... you can be nearly 100% sure that the investment will produce outstanding returns. It's like painting by numbers... Only it will make you rich.

Let me say it one more time... I believe if individuals limit themselves to only investing in P&C insurance companies, they would greatly increase their average annual returns. We don't believe that's true of any other sector of the market.

There's a simple reason for this. If you think about it for a minute, it should become intuitive... Here's why insurance is the world's best business: Insurance is the only business in the world that enjoys a positive cost of capital.

In every other business, companies must pay for capital. They borrow through loans. They raise equity (and 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. Often, it's the dominant consideration.

But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually get paid to accept it.

I want to make sure you understand this point. All the people who make their living providing financial services – banks, brokers, hedge-fund managers – pay for the capital they use to earn a living.

Banks borrow from depositors, investors who buy CDs, and other banks. They have to pay interest for that capital. Likewise, nearly every actor in the financial-services food chain must pay for the right to use capital. Everyone except insurance companies, that is.

Now, just follow me here for a second... Insurance companies take the premiums they've collected and invest that capital into a range of financial assets.

Assume, just for the sake of argument, that they earn 10% each year on their premiums. (That is, they make 10% on their underwriting.) And assume they invest only in the S&P 500... What do you think the average return on their assets will be each year? In this hypothetical example, their return would be 10% plus whatever the S&P 500 returned.

In reality, of course, few insurance companies can make such a large underwriting return. And few insurance companies invest a large percentage of their portfolios in stocks. Most stick to fixed income to make sure they can always pay claims. But the point remains valid... By compounding underwriting profits over time, year after year, into the financial markets, insurance companies can produce significant returns.

Here's the best part: Insurance companies don't really own most of the money they're investing. They invest the "float" they hold on behalf of their policyholders.

Float is the money insurance companies have received in premiums but haven't paid out yet. Underwritten appropriately, this is a risk-free way to leverage their investments and can result in astronomical returns on equity over time.

Just look at insurance company No. 1 in the earlier chart. Here it is again...

Company No. 1 has produced more than five times the S&P 500's long-term return. Can you think of any investor anywhere who has done anything like that? There isn't one. That kind of performance was only possible because, using a small equity base, the firm has profitably invested underwritten float into solid investments, year after year.

Do you like paying taxes? If you do... well, you won't like insurance stocks. They have huge tax advantages. Insurance is, far and away, the most tax-privileged industry in the world. Many of their investment products are totally protected from taxes.

And their earnings are sheltered, too. Insurance companies don't have to pay taxes on the cash flow they receive through premiums because, on paper, they haven't technically earned any of that money. It's not until all the possible claims on the capital have expired that the money is "earned."

So unlike most companies that have to pay taxes on revenue and profits before investing capital, insurance companies get to invest all the money first. This is a stupendous advantage. It's like being able to invest all the money in your paycheck – without any taxes coming out – and then paying your tax bill 10 years from now.

I realize that I can't make you (or anyone else) actually invest in insurance stocks. And I know that no matter what I say, you probably never will. It's a tough industry to understand, filled with financial concepts and tons of jargon. But the smartest guys in finance wind up in insurance, one way or another, for two reasons...

1. It pays the best.
2. It takes real genius to understand.

However, my goal is to make it so easy to understand and follow, that any reasonably diligent person can do so. I want to simply show you the one number you've got to know to invest safely and successfully...

The One Number You Need to Know to Invest Safely and Successfully

Normal measures of valuation don't apply to insurance companies.

Why not?

Because regular accounting considers the float an insurance company holds as a liability. And technically, of course, it is. Sooner or later, most (but not all) of that float will go out the door to cover claims.

But because more premiums are always coming in the door, float tends to grow over time, not shrink. So in this way, in real life, float can be an important asset – by far the most valuable thing an insurance company owns. But there's one important catch...

Float is only valuable if the company can produce an underwriting profit. If it can't, float can turn into an expensive liability.

That's why the ability to consistently underwrite at a profit is the key – the whole key – to understanding which insurance stocks to own.

Outside of underwriting discipline, almost nothing differentiates insurance companies. And they have no other way to gain a competitive advantage. Warren Buffett – who built his fortune at Berkshire Hathaway largely on the back of profitable insurance companies – explained this in his 1977 shareholder letter...

Insurance companies offer standardized policies, which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition.

Thus, the basis of competition between insurance companies is underwriting. That is... to be successful, insurance companies must develop the ability to accurately forecast and price risk. And they must maintain their underwriting discipline even during "soft" periods in the insurance market when premiums fall.

Our Stansberry's Investment Advisory research team tracks nearly every major P&C insurance company in the U.S. and in Bermuda (where many operate to avoid U.S. corporate taxes completely). We rank every firm by long-term underwriting discipline. We do the legwork for our subscribers. All they have to do is know what price to pay.

So if normal accounting doesn't apply for insurance stocks, how do you value them? Again, we went to the master, Buffett, to see what he was willing to pay for well-run insurance companies.

Back in 2012, we found data on three of Buffett's biggest insurance purchases. In 1998, he bought General Re for $21 billion, which added $15.2 billion to Berkshire's float and $8 billion in additional book value. So Buffett paid $0.94 for every $1 of float and book value.

Before that, in 1995, Buffett bought 49% of GEICO for $2.3 billion, which added $3 billion to Berkshire's float and $750 million in additional book value. So Buffett paid $0.61 for every dollar of float and book value.

And way back in 1967, Buffett paid $9 million for $17 million worth of National Indemnity float. That's $0.51 for every $1 of float. Looking at these numbers, we expect to pay something between $0.75 and $1 for every dollar of float and book value.

In short, there are two fundamental rules to investing in insurance stocks...

Rule No. 1: Make sure the company earns an underwriting profit almost every year, no exceptions.

Rule No. 2: Never pay more than 75% of book value plus float.

Most investors will never be able to make these investments because they don't understand why underwriting discipline is so critical. And they have no ability to accurately calculate float.

As I said, our Stansberry's Investment Advisory research team does all the hard work for you. Our Insurance Value Monitor looks for high-quality P&C insurers that are trading for about 50% of float-plus-book value – all of which consistently produce underwriting profits and generate realized investment returns, while growing float, book value, and the investable asset base.

Editor's note: For two decades, we've been on a crusade to level the playing field for individual investors. And now, we've put together something special to celebrate with you...

Porter recently sat down at our Baltimore headquarters with several folks who've helped transform Stansberry Research into a world-class investing resource for hundreds of thousands of subscribers worldwide.

True Wealth editor Dr. Steve Sjuggerud and Retirement Millionaire editor Dr. David "Doc" Eifrig were there. So were Extreme Value's Dan Ferris and Stansberry Venture Technology's Dave Lashmet, as well as Stansberry Portfolio Solutions portfolio manager Austin Root.

They shared their favorite memories and offered a "behind the scenes" look at our company. But more important, they made two huge announcements about our future that could forever change the way you use our research. Watch the full presentation right here.

New 52-week highs (as of 10/28/19): Celgene (CELG), Americold Realty Trust (COLD), New Oriental Education & Technology (EDU), SPDR Euro STOXX 50 Fund (FEZ), JPMorgan Chase (JPM), Microsoft (MSFT), O'Reilly Automotive (ORLY), ResMed (RMD), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), ProShares Ultra Financials Fund (UYG), and Vanguard S&P 500 Fund (VOO).

The feedback on our special 20th anniversary presentation continues to roll in. What's on your mind? Let us know at feedback@stansberryresearch.com. As always, we can't provide individual investing advice, but we read every word.

"I have to say that 'thank you' would never be enough... Thank you for being the 'Pirate.' Thank you for the 'End of America.' Thank you for my first subscription – your Stansberry's Investment Advisory – in 2011. Thank you for my first lifetime subscription. And most of all thank you for the Alliance membership.

"Your 20 years were well invested. You have given wealth to so very many people, myself and my family included." – Paid-up Stansberry Alliance member Jeff S.

"Your 20th anniversary discussion [was] very enjoyable. Very comfortable discussion. Thank you." – Paid-up subscriber Mark P.

"The world defines success as fortune and fame, but I think you guys got it right: 'I do my best to explain what I'd most want to know if our roles were reversed...' True success is in character – true to yourself and others, including our Creator. Keep up the good work." – Paid-up subscriber Mel P.

"I believe 10 years ago I said that if you could make it 10 more years I would buy the wine, or a bottle of wine, or something like that. I didn't say it as a bet, because I actually had no doubt you would make it. It's really a great accomplishment. I would certainly still hold up my promise, but just don't make it too hard on me. Just include an address." – Paid-up subscriber Bob G.

"A-HOY TEAM! Perhaps you have some members that have been with you continuously for the past 20 years, but you may not have many that began with your simple four-page PIRATE Profiteer investment publication some years earlier!

"Well, this writer has walked your 'gang plank' continually for the last 30 years and can safely admit to hundreds of thousands of dollars to the top side!" – Paid-up subscriber Len C.