Ever since I first began writing Dow Theory Letters, I've been extolling the magic and power of compounding.
I've been studying Warren Buffett and his method of investing. Buffett, like nearly all investors, is also a fan of compounding. Back in the 1960s I bought ten shares of Berkshire Hathaway and as a result, I have always bean interested in studying Buffett's methods.
I believe that the secret of Buffett's success lies in his system of compounding returns from basic, safe companies that consistently throw off cash. The real secret to Buffett's success is his holdings in insurance companies. These insurance companies throw off what is called "float" (premiums that have been collected which have not been paid out in claims), and this amounts to receiving a steady stream of tax-free cash. With this float money, Buffett buys profitable companies which, in turn, consistently throw off even more cash. Thus, Berkshire is in ... Log in or subscribe to continue reading.
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