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"I came from China, I know how terrible fascism is, and unfortunately I am seeing the same thing happens here, more and more"

The U.S. government has killed an estimated 11,000,000 people since the end of the 2nd world war. Often contractor companies do the violence, or arrange more violence so that they can make more money and so the managers can get promotions. It's killing for profit.

Why the Vietnam war? The CIA and Vietnam. "... from June, 1954 to June, 1963, that is, until two years after Dulles left office (August, 1961) the CIA was absolutely and exclusively dominant in creating and carrying out the policies which led eventually to the Vietnam War."

"To the CIA too must go the credit for the creation of the secret police forces of Diemâ(TM)s brother Ngo Dinh Nhu which prevented dissent within Vietnam until it was too late to change things."

The intention of the U.S. financial community to profit from corrupt practices was well known long before the crash in 2008. In the Berkshire Hathaway 2002 Annual Report (PDF), Warren Buffett said this on page 14: "I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive 'earnings' (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham."

The Iraq war made huge amounts of money for the Bush family and Dick Cheney: Cheney's Halliburton Made $39.5 Billion on Iraq War. That destruction will continue for decades: The End of Iraq: How American Incompetence Created a War Without End.

They would also adjust good drivers down. You realize that insurance is an extremely low margin and competitive business, right?

Warren Buffett does a pretty good job describing how the insurance business works (in plain English) in one of his annual letters to his shareholders (page 8). It is indeed a competitive business and as a whole is operated as a negative margin business. The concept of the float allows this to happen. It also allows an insurance company to treat their best customers to a larger than normal negative margin on their business via policy discounts because those best customers allow the insurance company to hold that float for a longer than normal period of time.

Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system."

Ah, yes. That would be the same Warren Buffet who traded over $37 billion of those very same derivatives (p.19) just prior to the 2008 crisis, in addition to selling even more esoteric tax-free bond insurance contracts.

No one can say the fraud was unknown, or that the present severe economic problems are due to a faulty mathematical formula.

I agree with you that the formula is not to blame. I don't think one should (implicitly or explicitly) assume there was much in the way of fraud -- that way lies conspiracy kookiness. Derivatives simply helped exacerbate a real estate bubble. Do you recall the endless conversations with all sort of ordinary people about the brilliance of their real estate investments? I sure do.

In the Berkshire Hathaway 2002 Annual Report (PDF file), Warren Buffett said this on page 13:

"Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system."

From page 14:

"I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham."

On page 15:

"In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." [my emphasis]

Warren Buffett, the world's most famous investor, published that in 2003. It was widely reported. No one can say the fraud was unknown, or that the present severe economic problems are due to a faulty mathematical formula.

Where did you hear about this 20% percent retained earnings rule (20% of what?)? I've never heard of it. I would venture a guess that if that was a real GAAP or FASB or IASB or IRS guideline that most if not all publicly traded companies would run afoul of it. It sounds like you are conflating something related to accounting for subsidiaries with an IRS tax rule.

FYI:
Berkshire Hathaway is a publicly traded company. I have no clue why you'd think that it is not. It's stock symbols are BRK.A and BRK.B (class A and B shares, respectively). Here is a link to its SEC 10-K for 2011:
http://www.berkshirehathaway.com/2011ar/201110-K.pdf

This is exactly what Buffett was talking about in his 2005 letter to Berkshire Hathaway shareholders. If you don't want to read the whole thing, there is an excerpt of the relevant portion here.

In this letter, Buffett explains how a CEO can make tons of money while driving a company into stagnation or even destruction. Here we are six years later and it seems like nothing has changed.

Warren Buffet would be p*ssed off. You should check his website... he probably still has an old stock ticker.

Advertising works? Geico has some of the best commercials (the gecko, the cavemen, the pile of money), but I've never, ever, ever, ever, ever considered buying their goods/services. I know a bunch of their customers and I know enough bad stuff about them that all the funny commercials in the world can't fix.

Bad experiences of folks you know notwithstanding, the numbers say Geico's advertising is working great.

8-10% might be a bit of an aggressive assumption for conservative investments. For the DOW to match last centuries growth in this century, it would have to close at 2,000,000 at the beginning of 2100(page 19, the whole thing is worth a read):

http://www.berkshirehathaway.com/letters/2007ltr.pdf

To hit 10% a year, the DOW would close at 24,000,000. One way to look at it is to ask, are things going to improve more this century than they improved last century, or less(the upside is that if they improve more, money will get less and less important, so it will be hard to miss out on).

The whole Malthusian folly comes into play, current projections can't really foresee radical future changes, but I don't think it is self evident that the progress made in the last 100 years will be repeated(especially in terms of things like resource extraction and farming, which saw enormous gains in productivity).

You should consider opening a Roth IRA Roth IRA. You can invest $4000/yr this way. You could open your account with a discount brokerage, so that you could choose any selection of public stocks/mutual funds/ETFs. The nice thing about the Roth IRA is that your initial investment is taxed at your current rate (which presumably is at an all-time low). Once you graduate, your income and tax rate will likely increase as you gain skill and experience. As you approach your maximum income you will be better off investing in a 401(k), but in the meantime you should fill your Roth first. As for investing, I suggest Buffet's letters, The Intelligent Investor, and Toward Rational Exuberance: The Evolution of the Modern Stock Market. Good luck.

You misunderstood -- I said to get a $60k/year job, and pretend that you have a $30k / year job. I earn $60k / year, and if I invested every other paycheck, I would be putting away over $22k / year. I'm 30 years old. If I were to from here on out pretend that I only made $30k / year, and invest the difference at 12%, I'd have over <pinky>Ten Million Dollars</pinky> in assets by the time I was 65.

I save at a much lower rate than that, but I also get to drive a nicer car, live in a bigger house, go out to lunch with my coworkers daily, and so on. This is a choice I have made, and I recognize that it is a choice I have made. I don't resent other, wealthier people who have made different choices.

On the other hand, while $30k / year isn't a lavish lifestyle, it's not exactly where-is-my-next-meal-coming-from either.

As for Berkshire's returns, I used the data in their most recent shareholder letter, in which Buffet claims a 305,134% total return from 1965 to 2005, or 21.5% / year.* That's the growth in Berkshire's per-share book value, not necessarily its stock price.

This is the true path to wealth that any American can follow: Spend less than you earn. Invest the difference. Do it for a long time.

* That's right kids! If you're young, every dollar you spend today could instead be $3000+ waiting for you at retirement!

I've been a Warren Buffet fan for a long time. (Though have never been able to replicate his investing success). Here's one guy that's got life figured out. As of a few years ago, at least, he was still living in his home in Omaha, Nebraska for which he paid less than $40,000 decades ago. To get a sense of his spartan style - check out how plain http://www.berkshirehathaway.com/ is and consider that one stock in his company makes google look like child's play.

First, at least one of you [BillG or MelG] must remain alive and active in the policy-setting and administration of BMG.

And, finally, the value of my annual gift must be fully additive to the spending of at least 5% of the Foundation's net assets...BMG's annual giving must be at least equal to the value of my previous year's gift plus 5% of BMG's net assets.

>> Most companies "manipulate" their stock price
So true.

And there's always Berkshire Hathaway http://finance.yahoo.com/q?s=BRK-A

Never split, 88K per share. Stop by the home page http://www.berkshirehathaway.com/ and read the Owner's Manual for some great investing advice, not just for Berkshire shares.

Splitting stock has zero effect on the value of a company, and is mostly used as a marketing ploy. An 8% drop is still an 8% drop, whether the price is $100 or $10. It has nothing to do with keeping small investors out, if you can only afford to invest $1,000 in google, it makes no difference whatsoever if this is invested in 1 $1,000 share, or 100 $10 shares, the fraction you own of the company is exactly the same.

I know most companies split their stock when it gets expensive enough. Why not Google?

Several possible reasons: a) Because it makes no sense. b) because if the stock drops too much, they would have to a reverse split to keep it above the threashold for being listed, which looks very bad.

There is another company that has doesn't do stock splits, you may have heard of them: Berkshire Hathaway which is currently trading at about $90,000 per A share. Warren Buffet explains why they don't split thier stock in the 1983 letter to sharholders.

Apart from how deeply interesting I find the system you're describing, I was eerily surprised to find out that W. Buffet works at Kiewit Plaza, in Omaha, alongside Kiewit Engineering:

http://www.kiewit.com/engineering/
http://www.berkshirehathaway.com/

I'm sure there has to be a story behind that little piece of twilightzone-esque coincidence.

Corporations never pay taxes, they are just a collector. Taxes for any company are a Right Hand side of the ledger entry.

Berkshire Hathaway paid $1.75 billion in federal taxes last year or 2.5% of ALL taxes paid by corporations. Read about it here. Or, as Buffett writes in his Annual Report:

In 1985, Berkshire paid $132 million in federal income taxes, and all corporations paid $61 billion. The comparable amounts in 1995 were $286 million and $157 billion respectively. And, as mentioned, we will pay about $3.3 billion for 2003, a year when all corporations paid $132 billion. We hope our taxes continue to rise in the future - it will mean we are prospering - but we also hope that the rest of Corporate America antes up along with us.

There actually are some honest companies out there. If we can get rid of the corrupt CEO's and cut down on executive salaries, then we would be moving in the right direction. While I am liberal, I miss the days of the fiscal conservative... at least I can understand where they're coming from.

This is why it's idiotic to take a company public.

What other fun, interesting websites cater to the 56k crowd?

When someone tells me that successful corporate sites have to be flash-heavy and 56k intolerant, especially business types, I like to show them the Berkshire Hathaway site.

The reactions vary, but it's never, "Well, Warren Buffet is an idiot."

Then there's always BERKSHIRE HATHAWAY INC, selling at a cool 88K at last check....

I just spent $10 million educating you!

The legendary investor Warren Buffett once said, "I'm not so impressed with managers who learn from their mistakes. I'm more impressed with managers who don't make mistakes."

Considering the relative performance of Buffett's company, Berkshire Hathaway and IBM, Buffett's approach may be more to the point.

Any why should a corporation pay any taxes.

"Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum
equaling 2½% of the total income tax paid by all U.S. corporations in fiscal 2003. (In contrast, Berkshire's
market valuation is about 1% of the value of all American corporations.) Our payment will almost certainly
place us among our country's top ten taxpayers. Indeed, if only 540 taxpayers paid the amount
Berkshire will pay, no other individual or corporation would have to pay anything to Uncle Sam. That's
right: 290 million Americans and all other businesses would not have to pay a dime in income, social
security, excise or estate taxes to the federal government. (Here's the math: Federal tax receipts, including
social security receipts, in fiscal 2003 totaled $1.782 trillion and 540 "Berkshires," each paying $3.3
billion, would deliver the same $1.782 trillion.)
Our federal tax return for 2002 (2003 is not finalized), when we paid $1.75 billion, covered a mere
8,905 pages. As is required, we dutifully filed two copies of this return, creating a pile of paper seven feet
tall."

... "Corporate income taxes in fiscal 2003 accounted for 7.4% of all federal tax receipts, down from a
post-war peak of 32% in 1952. With one exception (1983), last year's percentage is the lowest recorded
since data was first published in 1934.
Even so, tax breaks for corporations (and their investors, particularly large ones) were a major part
of the Administration's 2002 and 2003 initiatives. If class warfare is being waged in America, my class is
clearly winning. Today, many large corporations - run by CEOs whose fiddle-playing talents make your
Chairman look like he is all thumbs - pay nothing close to the stated federal tax rate of 35%."

-especially growth companies.

If the company management is competent, re-investing the profits back into the company to improve growth or profitability is a better use of the money, as it will increase shareholder value more than the simple payment of dividends => you'll make more money in the long run. If they're not competent, then payment of dividends just takes more money out of the company when it needs it to survive.

Read Warren Buffett's letters (1977-2003)
in the Berkshire Hathaway Annual Reports, or at least "Buffettology", by his son's ex-wife, Mary Buffett. Also read his BH Owner's Manual. This material constitutes an excellent education in long term investing.

Buffett generally disagrees with dividend payouts. According to Buffettology he believes that by paying dividends, the company is telling investors that there are better places to invest their money than in this company. If the management does not believe in their own competence, then neither should investors.

ALL stockholders are speculators. It's just a matter of time. Buffett is one of the pre-eminent buy-and-hold advocates. Much of his fortune was made by keeping stocks in Coca-Cola, Disney and others bought low in the 1960's. His strategy has, of course, made him the second richest man in America (not sure about this year), and the only billionaire in the US who made his money entirely in the stock market (as of several years ago - still true?) Buffettology has a summary of his success, starting out with $5000 of his own money and $5000 each from several other friends (20 of them?) in the late 1950's IIRC. That's like $100,000 each now, I suppose.

Shares in BH are now $89,900 each. The five year chart shows a dip to $40,000/share in 2000. (BH never splits.)

According to Buffettology, his strategy is to identify companies that will 'own' the market 10 or 15 years in the future - they have a 'franchise' (like Coca-Cola - the brand is forever, regardless of economic downturns), or are a tollbridge (he doesn't do high tech, but Cisco is certainly a candidate, as nearly every packet on the internet goes over a Cisco router at some point). Good, long term management is a requirement as well. He figures out the probable value of the company based on projected revenues 10+ years hence. Then, using bond interest rates over the 10 years, he backs back out the net present value of the company today. He buys the stock (actually nowadays he just buys the company) when the actual price is below the NPV price.

Up till now anyway, he hasn't bought tech stocks because he "doesn't understand tech" - a wise position, even if one is deep in the tech business. Berkshire Hathaway had a big drop (see chart, linked above) during the dotcom boom, as the great unwashed nattered on about the "new economy" and laughed at his "obsolete methods". Had I any cash then, I would have bought BH. His approach has been vindicated, needless to say.

The difficulty is figuring out MS' (or any tech stock's) value in 10 years, which seems just about impossible. Certainly they are a tollbridge - anyone who makes software or hardware for

-especially growth companies.

If the company management is competent, re-investing the profits back into the company to improve growth or profitability is a better use of the money, as it will increase shareholder value more than the simple payment of dividends => you'll make more money in the long run. If they're not competent, then payment of dividends just takes more money out of the company when it needs it to survive.

Read Warren Buffett's letters (1977-2003)
in the Berkshire Hathaway Annual Reports, or at least "Buffettology", by his son's ex-wife, Mary Buffett. Also read his BH Owner's Manual. This material constitutes an excellent education in long term investing.

Buffett generally disagrees with dividend payouts. According to Buffettology he believes that by paying dividends, the company is telling investors that there are better places to invest their money than in this company. If the management does not believe in their own competence, then neither should investors.

ALL stockholders are speculators. It's just a matter of time. Buffett is one of the pre-eminent buy-and-hold advocates. Much of his fortune was made by keeping stocks in Coca-Cola, Disney and others bought low in the 1960's. His strategy has, of course, made him the second richest man in America (not sure about this year), and the only billionaire in the US who made his money entirely in the stock market (as of several years ago - still true?) Buffettology has a summary of his success, starting out with $5000 of his own money and $5000 each from several other friends (20 of them?) in the late 1950's IIRC. That's like $100,000 each now, I suppose.

Shares in BH are now $89,900 each. The five year chart shows a dip to $40,000/share in 2000. (BH never splits.)

According to Buffettology, his strategy is to identify companies that will 'own' the market 10 or 15 years in the future - they have a 'franchise' (like Coca-Cola - the brand is forever, regardless of economic downturns), or are a tollbridge (he doesn't do high tech, but Cisco is certainly a candidate, as nearly every packet on the internet goes over a Cisco router at some point). Good, long term management is a requirement as well. He figures out the probable value of the company based on projected revenues 10+ years hence. Then, using bond interest rates over the 10 years, he backs back out the net present value of the company today. He buys the stock (actually nowadays he just buys the company) when the actual price is below the NPV price.

Up till now anyway, he hasn't bought tech stocks because he "doesn't understand tech" - a wise position, even if one is deep in the tech business. Berkshire Hathaway had a big drop (see chart, linked above) during the dotcom boom, as the great unwashed nattered on about the "new economy" and laughed at his "obsolete methods". Had I any cash then, I would have bought BH. His approach has been vindicated, needless to say.

The difficulty is figuring out MS' (or any tech stock's) value in 10 years, which seems just about impossible. Certainly they are a tollbridge - anyone who makes software or hardware for

-especially growth companies.

If the company management is competent, re-investing the profits back into the company to improve growth or profitability is a better use of the money, as it will increase shareholder value more than the simple payment of dividends => you'll make more money in the long run. If they're not competent, then payment of dividends just takes more money out of the company when it needs it to survive.

Read Warren Buffett's letters (1977-2003)
in the Berkshire Hathaway Annual Reports, or at least "Buffettology", by his son's ex-wife, Mary Buffett. Also read his BH Owner's Manual. This material constitutes an excellent education in long term investing.

Buffett generally disagrees with dividend payouts. According to Buffettology he believes that by paying dividends, the company is telling investors that there are better places to invest their money than in this company. If the management does not believe in their own competence, then neither should investors.

ALL stockholders are speculators. It's just a matter of time. Buffett is one of the pre-eminent buy-and-hold advocates. Much of his fortune was made by keeping stocks in Coca-Cola, Disney and others bought low in the 1960's. His strategy has, of course, made him the second richest man in America (not sure about this year), and the only billionaire in the US who made his money entirely in the stock market (as of several years ago - still true?) Buffettology has a summary of his success, starting out with $5000 of his own money and $5000 each from several other friends (20 of them?) in the late 1950's IIRC. That's like $100,000 each now, I suppose.

Shares in BH are now $89,900 each. The five year chart shows a dip to $40,000/share in 2000. (BH never splits.)

According to Buffettology, his strategy is to identify companies that will 'own' the market 10 or 15 years in the future - they have a 'franchise' (like Coca-Cola - the brand is forever, regardless of economic downturns), or are a tollbridge (he doesn't do high tech, but Cisco is certainly a candidate, as nearly every packet on the internet goes over a Cisco router at some point). Good, long term management is a requirement as well. He figures out the probable value of the company based on projected revenues 10+ years hence. Then, using bond interest rates over the 10 years, he backs back out the net present value of the company today. He buys the stock (actually nowadays he just buys the company) when the actual price is below the NPV price.

Up till now anyway, he hasn't bought tech stocks because he "doesn't understand tech" - a wise position, even if one is deep in the tech business. Berkshire Hathaway had a big drop (see chart, linked above) during the dotcom boom, as the great unwashed nattered on about the "new economy" and laughed at his "obsolete methods". Had I any cash then, I would have bought BH. His approach has been vindicated, needless to say.

The difficulty is figuring out MS' (or any tech stock's) value in 10 years, which seems just about impossible. Certainly they are a tollbridge - anyone who makes software or hardware for

-especially growth companies.

If the company management is competent, re-investing the profits back into the company to improve growth or profitability is a better use of the money, as it will increase shareholder value more than the simple payment of dividends => you'll make more money in the long run. If they're not competent, then payment of dividends just takes more money out of the company when it needs it to survive.

Read Warren Buffett's letters (1977-2003)
in the Berkshire Hathaway Annual Reports, or at least "Buffettology", by his son's ex-wife, Mary Buffett. Also read his BH Owner's Manual. This material constitutes an excellent education in long term investing.

Buffett generally disagrees with dividend payouts. According to Buffettology he believes that by paying dividends, the company is telling investors that there are better places to invest their money than in this company. If the management does not believe in their own competence, then neither should investors.

ALL stockholders are speculators. It's just a matter of time. Buffett is one of the pre-eminent buy-and-hold advocates. Much of his fortune was made by keeping stocks in Coca-Cola, Disney and others bought low in the 1960's. His strategy has, of course, made him the second richest man in America (not sure about this year), and the only billionaire in the US who made his money entirely in the stock market (as of several years ago - still true?) Buffettology has a summary of his success, starting out with $5000 of his own money and $5000 each from several other friends (20 of them?) in the late 1950's IIRC. That's like $100,000 each now, I suppose.

Shares in BH are now $89,900 each. The five year chart shows a dip to $40,000/share in 2000. (BH never splits.)

According to Buffettology, his strategy is to identify companies that will 'own' the market 10 or 15 years in the future - they have a 'franchise' (like Coca-Cola - the brand is forever, regardless of economic downturns), or are a tollbridge (he doesn't do high tech, but Cisco is certainly a candidate, as nearly every packet on the internet goes over a Cisco router at some point). Good, long term management is a requirement as well. He figures out the probable value of the company based on projected revenues 10+ years hence. Then, using bond interest rates over the 10 years, he backs back out the net present value of the company today. He buys the stock (actually nowadays he just buys the company) when the actual price is below the NPV price.

Up till now anyway, he hasn't bought tech stocks because he "doesn't understand tech" - a wise position, even if one is deep in the tech business. Berkshire Hathaway had a big drop (see chart, linked above) during the dotcom boom, as the great unwashed nattered on about the "new economy" and laughed at his "obsolete methods". Had I any cash then, I would have bought BH. His approach has been vindicated, needless to say.

The difficulty is figuring out MS' (or any tech stock's) value in 10 years, which seems just about impossible. Certainly they are a tollbridge - anyone who makes software or hardware for

I guess my question is, "what is the benefit of expensing options over the current way of doing things?"

A great read on the subject is Warren Buffet's 1992 letter to shareholders. It's a ways down - the section is called "Two New Accounting Rules and a Plea for One More" and it's in the second part of that section. Anyway, to answer your question:

1) Options have value, otherwise they wouldn't be given as compensation.

2) Value which is given for a service should be expensed.

Now, the trouble comes with the valuation. There are several methods of option valuation, each of which has their shortfalls:

1) Market price of options: basically you look at the going rate for the kind of options you are giving, and you expense that. However, this has several problems:

* the leverage of potential options on current stock shares are not included in the books right now, so a loss from options expensing will decrease book value, although that value was never on the books to begin with
* you need to unexpense unused options, which leads to unnecessary volatility when options expire

2) The Black-Scholes option-pricing model. Basically, this says that if you give an option, you are forgoing cash that you could have received immediately from the sale of that stock. Therefore, the cost of the option is basically interest on a loan of the value of the stock - it's basically the same way you might expense an interest-free loan.

One of the problems with this model is again that you are charging expenses that aren't on the books - you would not have given yourself an expense had you done nothing with the stock.

3) Warren Buffet's method - I can't remember what this is at the moment.

One other issue with stock options is that it dilutes the value of stock. Let's say, for instance, that you have issued 1,000 shares of stock, and you keep 1,000 shares in your treasury. That year, you make a profit of $1,000. You then distribute it to the shareholders, who get $1 each. However, let's say that you grant all of the remaining 1,000 shares from your treasury in the form of options, and all of the options are exercised by the recipients. That means that all 2,000 shares are in circulation. So, if you make the same profit of $1,000, each shareholder only gets fifty cents. However, these numbers are reflected in the dilution of stock.

"Tax breaks that only benefit the rich?"

Ask Warren Buffet.

CNN

His 2003 letter.

Can you name one CEO that's not an arrogant SOB?

Perhaps Warren Buffet? I have read many of his letters to stockholders, and he seems like a pretty straight shooter.

Here is the latest , unfortunately in PDF format. I'll cut out a few quotes, though.

If we fail, we will have no excuses. Charlie and I operate in an ideal environment. To begin with, we are supported by an incredible group of men and women who run our operating units.

Overall, we are certain Berkshire s performance in the future will fall far short of what it has been in the past. Nonetheless, Charlie and I remain hopeful that we can deliver results that are modestly above average. That s what we re being paid for.

Granted, this fellow is incredibly wealthy, and perhaps he deliberately slants his writings with a false tone of modesty to avoid showing off his ego. Or maybe a cigar is just a cigar and he really is a regular guy inside...

Acutally, most insurance companies pay out more in claims than they take in in premiums.

The data is publically available via the A. M. Best Company. I'd give you a primer on the whole thing, but Warren Buffett has done a much better job than I could.

His explanation is about 1/3 of the way down the page, or just search for 'Source: A.M. Best Co.'.

How success full are these companies? One of the most successful men in investing, Warren Buffett owner of berkshirehathaway, seems to think at least some of these companies are worth owning. He has owned shares in Fannie Mae, Gillette, Philip Morris, and Well Fargo. He also has or does own stock in Coke and American Express. Which didn't make the list.

Generally, a big enough insurance company, or odd enough one (Lloyd's of London claims they'll at least make an offer of a policy for anything), will take a look at something like this, talk to people, come up with their best guess at the risk, figure a cost, and offer something. Insurance companies insure hard-to-guess about stuff all the time, like that model's legs. It might be a high cost, but...the expected cost over all experiments is zero, right? (Insurance companies don't make money off the premium, they make it off investing the money they take as payment for the policy before they have to pay out, what they call "float" Good normal-person info about this at this site).

Many insurance companies take in less money than they pay out. The amount by which they pay out over the amount that they take in in any given year is known as their combined ratio -- that amount - 100% is their cost of float. Anyway, the idea is that they can take in large amounts of money and hold it for a while, paying out equally large amounts of money some time later. This allows them a period of time in which to invest the money that comes through.

Obviously if they can keep their combined ratio at 100% they could make money by investing the "float" (funds paid in premiums but not yet paid out) in very safe low-risk bonds. Many insurers do just that. A company headed by a genius could do somewhat better. Of course, there are some strict limits as to how much they can invest where to make sure that they retain enough liquidity to service upcoming claims.

For a fantastic overview, take a look at the company who now holds General Reinsurance and GEICO as wholly owned subsiduaries -- Berkshire Hathaway. They are chaired by possibly the world's finest investment minds in Warren Buffett (one of the 10 richest men in the world -- self made through investments) and Charlie Munger (likewise but not top 10).

If you read the Chairman's Letters (start at the beginning) you can get a pretty good grounding in what insurance companies do and how they make (or lose) their money.

-Richard

I think Warren Buffett said it best in his annual report:

The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them.

And people bought into this. So fools and their money were, in the classic style, parted.

What about the home page of Berkshire Hathaway? The company was founded by Warren Buffett, who preceded Bill Gates as the nation's richest person. Their stock trades at over $50,000 per share, and they still can't hire anyone who knows HTML.