Earthquake Insurance

By Ramesh Akkineni
from Whitney Tilson’s 2006 Wesco Annual Meeting Notes
It has some elements of rationality. It’s worked very well, but it’s created a lot of leverage in the system. If there was a real convulsion of some kind, all of these things would encounter trouble. But short of a convulsion, everything would be okay. It’s sort of like earthquake insurance. Most years when you write earthquake insurance, you pocket the premiums and look very intelligent. If you do that with someone else’s capital under a profit-sharing formula, it would really be intelligent.
All of this stuff that people are investing in – it’s like the man who promises you an extra yield on a bond, provided there’s no major earthquake (earthquake in some general sense). The investment world is just chock full of this stuff and it’s worked very well so far. Everyone’s made a lot of money.

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