Tom Gayner Discusses His Evolution as an Investor
Tom Gayner (Trades, Portfolio) is co-CEO at Markel Corporation, a holding company for insurance, reinsurance, and investment operations around the world. The company has often been compared to Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) in the way it operates. Markel is an insurance company that uses a value investing philosophy and invests its float in other businesses. You can see in the graph below how Markel has outperformed Berkshire over the last five years.
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The intrinsic value of MKL
In the video below, Gayner gave a talk at Google (GOOGL) last June where he discusses his investing evolution. He describes how he first started as an investor with a CPA background. His accounting skills gave him the foundation for value investing because accounting is the language of business. In order to determine a company's intrinsic value, investors need to be able to follow financial statements. Accounting also gave him a quantitative mindset.
Gayner admitted that he was overly focused on quantitative metrics in his early years. Over time, he became aware that there's a difference between spotting a value company and finding the creation of value. He tells the story about Ben Graham's investment in GEICO as an example. GEICO contributed more to Graham's investment returns than all of his other holdings combined despite not having characteristics typically associated with Graham stocks. GEICO had more of a growth component. It was a business that earned high returns on capital and was able to reinvest that capital and compound value.
I found one discussion to be especially interesting. Gayner has changed his stock discovery habits. In the past, he would look at the list of stocks which were trading at 52-week lows everyday and not pay attention to the stocks making new highs. He reasoned that this was where the bargains were. Instead, he gradually realized the importance of qualitative factors. He tries to find companies that earn high returns on capital and have the ability to expand. Now, he looks at the list of 52-week high stocks before the 52-week low list. He has found that this technique helps him find higher quality companies. In another very helpful discussion, Gayner talks about his four criteria for picking a stock:
Profitable business with good returns on capital that doesn't use too much leverage.
Management.
What are reinvestment dynamics of the business?
Price.
My notes are below with the minute mark for the topics covered.
Minute | Topic | Comment |
00:00 | Introduction | |
4:00 | Accounting is the language of investing | Need accounting to understand the quantitative aspect of investing |
He started with a bias towards quantitative analysis | ||
The volume of Ben Graham's net net opportunities has dramatically declined | ||
7:00 | You can use metrics to spot value but it doesn't tell you enough | |
8:20 | He evolved from spotting value to spotting the creation of value | His objective is to understand a business' prospects over time and to find ones that create long term value |
9:15 | Four criteria for investment ideas | 1) Profitable business with good returns on capital that doesn't use too much leverage |
Likes demonstrated record of profitability | ||
11:30 | Looks for businesses where value is being created for the customer | |
Reasons why businesses aren't profitable | Not enough demand for their product or service | |
Business executes poorly | ||
Too much leverage can ruin a good business in bad times | ||
A leveraged company may have to sell good assets at the worst times | ||
His observation is that high quality people don't use a lot of debt | ||
15:45 | 2) Management | |
Looking for integrity and ability | ||
People with integrity and low ability don't successfully grow companies | ||
People with ability and low integrity do well for themselves but not as much for shareholders | ||
18:00 | 3) What are reinvestment dynamics of the business? | |
How much can the business grow and how scalable is it? | ||
Perfect business is one that earns high returns on its business and can keep re-investing | ||
Second best business is one that earns high returns on capital and has honest, capable management that can make wise decisions like returning money to shareholders or making appropriate acquisitions | ||
4) Price and valuation | ||
This is where many people start because there are a lot of books on the subject | ||
He observes people making a couple of common mistakes | ||
24:00 | Paying too much. Investors can recover from this error | |
Bigger error is missed opportunities | ||
26:00 | Over time he began thinking more about the reinvestment dynamics of businesses | How will business change over time? Will fundamentals improve or deteriorate? |
When you do find superior businesses, don't be a "penny pincher" as you buy | ||
Q&A Session | ||
26:40 | How do you assess management? | Find managers who are honest, capable, and good at allocating capital |
How do investors without access to CEO's assess management? | He spends a lot of time reading about management and using same resources as retail investors | |
He reads proxy statements, annual reports, magazine articles | ||
30:00 | Tells the story of his mentor | "Secret to success in investing is lasting the first 30 years" |
The point is that investors will observe patterns and cycles over time | ||
"Everything you see in the world of finance, you will see again" | ||
31:00 | He thinks the Great Financial Crisis of 2008 is a once in a generation event | |
You don't need personal relationship with management to get a sense of their tendencies | ||
32:00 | What do you think about investing in quickly evolving companies vs. stable companies like Coke? | It's harder to evaluate the business prospects of startup companies |
Ben Graham says growth is extremely important but difficult to calculate | ||
Graham made more money in GEICO than in every other investment combined | ||
GEICO was the growth company that got the reinvestment dynamic right | ||
36:00 | How did you transition to Markel? | Started as an accountant because that's what his father did |
Went on to a big accounting firm that he found to be too structured | ||
1986 Markel wanted to use its insurance float to invest | ||
When he joined Markel, he was given $2M to manage | ||
48:00 | Are you worried about missing private companies like Uber? | There are other companies in the public markets like FedEx which had approximately the same valuation as Uber at the time. |
51:30 | How do you assess or recognize the "missed opportunities"? | He tells the story of how he initially didn't invest in Berkshire Hathaway. It went up dramatically and his friend convinced him that it was still a great buy. He learned from his first mistake. |
When he started investing, he would look at stocks trading at a 52 week low | ||
Now, he looks at 52 week high list first to understand emerging trends | ||
The companies making new highs are more likely to be higher quality companies | ||
54:30 | What do you think of Google? | He owns a little Google and regrets missing the opportunity to buy more |
He's not skilled in assessing Google management's intentions for the future | ||
57:15 | Are you worried that Markel will become too big like Berkshire Hathaway? | That would be a good problem to have because it would indicate Markel's success |
This article first appeared on GuruFocus.
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The intrinsic value of MKL
