OK, Bash Buffett -- but Buy His Stock

And for the record, I touted Buffett's bet against the U.S. dollar as one of the reasons to own the stock, calling it a hedge fund for the masses. Berkshire Hathaway has lost enough money on that bet for me to wish that Buffett either hadn't made it or that he'd gotten the timing right.

Berkshire as Cash Machine

But one of the advantages of holding a stock for a while -- and I've owned Berkshire Hathaway in my personal portfolio since June 2003 -- is that you come to appreciate qualities that escaped you on first acquaintance. In this case, owning Berkshire Hathaway has given me a deep appreciation for exactly what an amazing cash-flow machine an insurance company can be.

Insurance companies take in money in premiums from customers long before they have to pay it out in claims. They invest this float in stocks, bonds, real estate, pieces of other companies or whole companies and reap the returns until this money has to be paid out to customers who file claims. Thus an insurance company has two ways to make money:

First, there's underwriting profit if the company succeeds in writing policies at a high enough premium that, when claims on those policies are paid out, there's something left over. (The industry uses something called the combined ratio as a measure of this underwriting profit. A combined ratio of 90%, for example, means that the company has paid out in claims just 90% of what it collected in premiums. It has earned 10 cents in profit on every dollar of premium collected.)

Second, there's investment income. The company invests the float in some mixture of assets, looking for the highest return commensurate with the need to avoid losses that would endanger the company's ability to pay out claims. The insurance company also wants to build up its financial strength, as assessed by agencies, such as A.M. Best, that rate insurance companies. Many customers buy insurance on the basis of a company's financial strength.