Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
father first taught me this lesson, because interest rates have been
dropping over the past decade. This has caused insurance companies
to get into the position where new investment cash is being invested
at rates below the embedded rate on the portfolio. By contrast, from
the 1950s through the 1980s, the opposite was true.”
Back then, investment income was an ever-expanding growth engine.
Interest rates were going up, so new cash and dividends were
being invested at higher and higher rates. Falling interest rates during
the 1990s have been a drag for some insurers, although the strong
ones have easily been able to live through it. “American International
Group and General Re would have grown faster had they been able
to invest their cash at higher rates,” Davis contends. “But it sort of
balances itself out, because when interest rates go down, reserves
usually go up. That’s because reserves are mainly invested in bonds,
which obviously appreciate as rates fall. Reserves may also become
more redundant as inflation drops, which is evidenced by the lower
rates. What I’m saying is that if you really get to the heart of the insurance
business, you’ll find there’s a reason it has existed in many
countries for so long and been such a compounding machine. I was
in Germany several years ago, making a speech at a sales conference.
I talked about the virtues of owning quality insurance companies. I
mentioned I had owned AIG in the fund for almost 30 years. A man
came up to me afterwards and said, ‘You know, Mr. Davis, what you
said rang true to me, because we have an old saying in Germany that
insurance companies are for holding, never for selling.’ He went on
to say, ‘My family has owned Munich Re and Swiss Re throughout
the past 100 years, through two world wars, depressions, and devaluations.
They haven’t always performed, but they’re still around and
growing.’ The reason is the assets of insurance companies don’t become
obsolete. I guarantee you that every hard asset on Intel’s books
today will be obsolete 20 years from now. The two are very different
businesses, but a lot of people don’t understand that. They always
live in the here and now, but the world is constantly changing.”
KNOWING WHAT PRICE TO PAY
Elizabeth Bramwell searches for fast-growing companies, but she
won’t pay just any price for them. “I look at individual valuations
relative to the overall stock market, namely the S&P 500, and other
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