Fri, May 23, 2014|Dan Ferris

Three 'Secret Buffetts' and what they're buying now...

Three 'Secret Buffetts' and what they're buying now... Ready for the recession... From burgers to insurance... Following a billionaire into Greece... Getting skinned with a butter knife...

Editor's note: In recognition of the Memorial Day holiday, the Stansberry & Associates offices will be closed Monday and we will not publish the Digest. We will resume our regular publishing schedule on Tuesday, May 27.

Three of the best investors in the world recently made major purchases...

In today's Digest, I'm going to introduce you to three investors you've probably never heard of before. They are, in a sense, "secret Warren Buffetts." Like Buffett, insurance is the backbone of these guys' operations. They funnel the cash from the insurance business into other investments. They understand risk.

And, like Buffett, all three men have an eye for value... They have generated incredible returns over their careers.

Study the investments these three men just made... Understand the principles behind them... And in one case, follow one of these gurus into one of the most hated markets in the world today. This will make you a lot of money in the markets.

So who are these guys, and what are they buying?

The first Secret Buffett is Tom Gayner, the Chief Investment Officer for insurance firm Markel.

We first wrote about Markel and Gayner in the October 2007 issue of Stansberry's Investment Advisory. In that issue, we called the company a "secret investment society." The company is modeled after Buffett's holding company, Berkshire Hathaway.

The company specializes in excess and surplus (E&S) lines and specialty insurance... It insures niche markets like summer camps, CrossFit gyms, fishing boats, and inflatable-rental-equipment businesses.

And it rarely loses money underwriting those risks.

Like Berkshire, Markel also invests its money in whole businesses – like a dredging company, a homebuilder, and an equipment manufacturer for bakeries, to name a few. And Gayner oversees a $3.2 billion equity investment portfolio.

And like Berkshire Hathaway, Markel has compounded its investors' wealth at an astounding rate – growing book value 15% a year for the past 20 years.

Markel's penchant for conservative investments and risk avoidance started with the company's founder, Sam Markel. He passed those values down to his grandchildren, who run the firm today. Here's what they have to say about the company's investment style...

Most people simply cannot take the psychological pain of underperforming for very long. The inherent uncertainty in investing and thinking about the unknowable future causes people to embrace the practices of what others are doing currently. Human nature seeks comfort in crowds rather than the relative isolation of remaining independent in thoughts and actions.

Our investment discipline also tends to create excellent tax efficiency over time. The items we focus on, such as basic profitability and good reinvestment attributes, are typically long-term attributes of a company. As such, we tend to buy and hold our equity investments for significantly longer periods of time than most institutional money managers. In fact, our ideal investment is one that we can own forever...

Gayner's investment principles closely mirror those of Buffett. In fact, Berkshire Hathaway is Gayner's second-largest position. Here's what Gayner told investment website Gurufocus about what he looks for in an investment...

When you find good companies that you like at a reasonable price and you have a quality management team that continues to compound the value over time, that's when you really do well as an investor.

You may be wondering what Gayner is buying today.

The most important move Gayner made in the first quarter was nearly tripling his position in consumer-products giant Unilever. Gayner owns 607,000 shares valued at more than $26.1 million, or about 0.8% of his total portfolio.

Unilever owns brands like Degree deodorant, Ben & Jerry's ice cream, Vaseline petroleum jelly, Dove soap, and Q-tips cotton swabs. It's a conservative play that fits perfectly with the trends we've been covering in Stansberry's Investment Advisory – investing in businesses that will thrive as more and more people face economic hardship.

As we wrote in the December issue...

In times of uncertainty, investors hang onto companies that sell the stuff people really need: utilities, food, and medicine. And they buy the things people can't stop using, like sodas and nicotine. On the other hand, construction-related industries and companies with a lot of interest-rate exposure struggled during the taper periods.

The second Secret Buffett is a young man out of Texas named Sardar Biglari. He owns a company called Biglari Holdings. And he allegedly got into investing after reading a book about Buffett.

Biglari made his first big investment in 2005 at the age of 27. He put $1 million into restaurant chain Western Sizzlin. He thought shares were cheap and a reorganization of the business could result in higher cash flows.

Biglari gained two board seats... And within two years, his investment had doubled.

In 2007, Biglari did it again with Steak 'n Shake... He started buying shares of the company... A year later, he gained control.

He also doubled his money with restaurant chain Cracker Barrel... making investors nearly $300 million.

Why are we talking about a young man making money buying restaurants?

Well, Biglari – a self-proclaimed Buffett disciple – just bought his first insurance company.

In March, Biglari Holdings acquired First Guard Insurance Company – a trucking-industry insurer. The Buffett comparisons abound...

The third and final Secret Buffett we'll discuss today is following us into one of the most hated markets in the world. And we couldn't be happier about it.

Canadian billionaire Prem Watsa is the head of insurance company Fairfax Financial. Some have gone so far as to dub him "the Warren Buffett of Canada." If you would have invested $1,000 with Watsa when he took control of Fairfax in 1985, it would be worth $1 million today. From 1985 to 2013, Watsa returned more than 20% a year to shareholders.

Stansberry International editor Brett Aitken discussed Watsa's investment prowess in his latest issue...

In April 2007, before the Dow Jones Industrial Index hit its highs, he appeared at the Ben Graham Centre for Value Investing at Western's Ivey School of Business to make his most public – and controversial – call about the state of the U.S. market...

"A one-in-50- or a one-in-100-year storm [is] coming..." he told the audience. "When the music stops, it stops very quickly."

And Watsa backed up his warning with capital. He had purchased a huge credit default swap (CDS) position in previous years. CDSes are investment vehicles that profit when the businesses they're written against defaults (or suffer a similar "credit event"). Watsa's target: Banks and bond insurers exposed to the lending and mortgage boom.

As Brett explained, by the end of 2006, Watsa was down more than 75% on his position. But he "swallowed hard" and added more exposure in 2007. In total, he bought $341 million in CDSes...

When the global financial crisis hit, Bear Stearns, Lehman Brothers, and AIG all failed. And within the year, Watsa's CDS position had ballooned to $2.1 billion... a more than 500% increase.

Watsa has found it difficult to hide from the press after this stunning contrarian call, though he still tried. When The Globe and Mail named him the CEO of the Year in 2008, Watsa was the first who attempted to reject the honor. (The Globe said "tough luck.")

In the meantime, he has been making headlines as he spends his war chest on out-of-favor purchases. He stepped in with a $64 million capital infusion to near-bankrupt MEGA Brands, best known for its Lego-like construction blocks. MEGA was recently acquired by toy giant Mattel for C$484 million.

He offered to take beleaguered mobile-phone company BlackBerry private, and then raised $1.25 billion in debentures for the company, appointing turnaround specialist John Chen as chairman. And he helped keep the Bank of Ireland out of state hands at the height of the euro debt crisis... when the periphery euro area countries, Portugal, Ireland, Italy, Greece and Spain (known as the PIIGS) looked like they could collapse the euro.

Watsa smelled blood, Brett said. And he found it. He bought when pessimism was at a high. In 2011, Watsa purchased a large stake in the Bank of Ireland. He paid just €0.10 per share...

That is about as close to the bottom as any investor could ever expect. To give you an idea of how cheap that was... just four years earlier in 2007, shares exchanged hands at over €11 per share. Since Watsa bought, shares have climbed to trade over €0.35 – more than triple what he paid. Watsa says he's in for the long term, although he did offload some shares this year as he repositioned his portfolio. Reuters reported that he sold part of his holdings at €0.33 per share... or 230% gains.

Watsa just made another investment in a troubled European country... And Brett thinks it could trounce Watsa's previous returns.

He's investing in Greece. And Stansberry International subscribers beat Watsa to the punch...

We first started getting bullish on Greece in July 2013. The country had been destroyed in the European crisis... Its financials were in shambles. Real estate and stock prices tumbled. One-year Greek debt was yielding more than 1,000% in 2012. Things couldn't get any worse... So we got interested.

In the July 9 Digest Premium, Porter proposed an interesting way to play the European markets... Going long Greece and going short France. As he explained...

I like this trade because everybody already knows that Greece is broke. As a result, everything bad has already happened in Greece. It's priced in. Interest rates have already soared (one-year interest rates hit 1,000% last year, no typo). Stocks have already crashed. It looks like Greece is at a blood-in-the-streets bottom, but we can't be certain.

Things can always get worse.

France, on the other hand, is still expensive. It's trading like a free-market country, when it's actually a socialist paradise. And socialist paradises always end the same way, in bankruptcy.

So, I like the idea of hedging a collapsing Europe by buying the economy that's already collapsed and shorting the economy that hasn't yet.

Brett recommended a selection of Greek banks in the April issue. The Greek economy was improving – GDP and tourism were up, sentiment was improving, and debt was down.

The stock market was up around 140% from its 2012 lows... But it was still off 75% from the 2007 highs. Compare that with the S&P 500, which is more than 20% above the 2007 peak... Greece is still dirt-cheap.

And in the May issue – out earlier this week – Brett is investing alongside Watsa. We can't give away too many details, but Watsa is loading up on this stock. We think he'll continue to buy more. Brett just recommended this company to Stansberry International subscribers.

This company is a powerhouse... But it's down 65% from the peak. It's silly cheap today, trading for less than four times cash flow and 0.4 times sales.

And there's a major catalyst involving the Greek government that could send this company's shares soaring...

Unfortunately, you can't buy a subscription to Stansberry International yet. We've only made it available internally and to a select few subscribers.

However, next week, we're giving you an opportunity to preview Stansberry International. You won't want to miss it... We'll alert you when we make it available.

New 52-week highs (as of 5/22/14): Apple (AAPL), American Homes 4 Rent (AMH), Callon Petroleum (CPE), Carrizo Oil & Gas (CRZO), CVS Caremark (CVS), Dorchester Minerals (DMLP), AllianzGI Equity & Convertible Income Fund (NIE), ProShares S&P 500 BuyWrite Fund (PBP), Sabine Royalty Trust (SBR), Market Vectors India Small-Cap Fund (SCIF), Sprott Physical Platinum & Palladium Fund (SPPP), Targa Resources (TRGP), Travelers (TRV), U.S. Commodity Index Fund (USCI), and Alleghany (Y).

In today's mailbag, a warning from a subscriber on the inside... Send your notes to feedback@stansberryresearch.com.

"Well guys I will let you in on this but if you put my full name on this I will skin you with a butter knife. Back in the 80's I was a member of an elite seal team that was doing ops for them and I will tell you this. You think the NSA is bad well you haven't seen nothing yet again we will see them go full blast and I and you will see the streets loaded with smack and coke. This government agency controls most of this crap and owe yes they have no shame in their game. We all have idea they are there to protect us from terrorist but kiss my ass if you think that THE CIA IS THE BIGGEST MISTAKE AND KEEPS ON AND ON. If we could invest in the agency you would get a 10,000% return 'cause they always screw up and look good doing it and profit from all of it.

"We used to have serious issues between them and the team I was in because of our mission but this is now going to really get out of control you watch and see. I will probably get a phone call from my former retired admiral for opening my mouth but it's time for Americans to realize that you are ready for the truth so if you don't listen to these guys Porter and his staff get ready for the blood on the street and this is no joke it will be bad and I don't know what most will do but to am putting my money in what they say and it works but I'm skeptical on how long it will last. People wake the F up and don't be stupid or watch what happens this will be WW3." For fear of getting skinned with a butter knife – Anonymous

Regards,

Sean Goldsmith

May 23, 2014

Our most controversial show yet...

In today's Digest Premium, podcast host James Altucher explains why parents are crazy for sending their kids to college, but why most still do...

To subscribe to Digest Premium and access today's analysis, click here.

Our most controversial show yet...

Editor's note: Today's Digest Premium is an edited excerpt from the most recent episode of the James Altucher Show podcast, which aired for the first time this week.

James is against sending kids to college. He argues it loads them with huge debts, then sends them into the world with little hope of landing a high-paying job. Instead, James recommends kids "choose themselves."

We highly recommend you listen to the full show, which you can do here.

Probably 60%-70% of [people listening] will just automatically say, "You are crazy. I went to college and I'm doing fine. So of course, my kid's gonna go to college."

Or they might say, "I didn't go to college," so there's this big cultural myth that if you're the first person in your family to go to college, that's some great achievement. Again, it's all part of this American religion that college is great. And the government will never say anything against this because it backs $1 trillion in student loans, so it's making money. The government is laughing all the way to the bank and at the expense of our 18-year-old children.

For most parents, you just can't convince them because they have too much of a cognitive bias against it. I would say 10% of parents more or less agree with me...

And then maybe there are like 25%-30% who are on the fence. They don't know, and they're scared. They're scared because they realize they don't want to spend this kind of money. It's pretty scary – for either themselves or for their kids – to get into this kind of debt and spend this kind of money. And they're also scared for their kids on the other side of the fence: They don't want their kids to be losers. They think because of the American religion, kids who don't go to college are called "losers" or "failures" or they don't get good jobs later. They don't want to ruin their kids' lives in the last decision they have to make for their kids.

To those parents, I would say: Your kids are going to be OK. They're going to have a five-year head start on all of their peers. And they're not going to be in debt. And they're going to have just as much opportunity going forward in this amazing future we live in as any other kid.

I'm not as pessimistic on America as many people are. I'm optimistic because of technologies like the Internet. There are so many opportunities open to kids today that weren't open to me, you, or most kids' parents because you can get an education for free now. You can build businesses for almost no money. You can try so many different careers now without wasting such an important part of your life and wasting all that money and all that opportunity cost.

It's important to realize things are different now. Tuitions have gone up more than inflation for almost 40 years in a row. That's a different world than when you and I went to college. And it's important to respect all these differences because they add up to one decision, which is don't automatically send your kid to college. At least consider the alternatives for your sake and for your kids' sake.

To listen to the full episode for free, click here.

– James Altucher

Our most controversial show yet...

In today's Digest Premium, podcast host James Altucher explains why parents are crazy for sending their kids to college, but why most still do...

To continue reading, scroll down or click here.