On Friday, March 2, 2012, Tom Gayner, the President and Chief Financial Officer of Markel, met with a group of University of Maryland undergraduate finance majors at his company’s offices in Glen Allen, Virginia. (Markel is a property and casualty insurance company. On average, 80% of Markel’s premiums cover insurance claims, 15% cover administrative costs, and 5% are profits. Insurance companies invest “the float”, which are the premiums they collect prior to their claims being paid.) Tom responded to student questions throughout our 1 1/2 hour meeting.
Tom mentioned that since his father was a CPA, and frequent conversations at home focused on businesses, Tom developed an early interest in this area. His first job was as an accountant. He shortly thereafter changed positions and became a portfolio manager at Markel.
Tom stated that there are four characteristics that he seeks when investing in common stocks :
(1) Companies with a proven track record of profitability over 5 – 10 years. These companies should have a high return on capital and low leverage. He drew an analogy between debt and aspirins. Small quantities can be helpful, but too much can be fatal. He does not follow Silicon Valley stocks.
(2) Companies with talented management teams with integrity. Management teams receiving excessive compensation raise issues of integrity.
(3) Companies with reinvestment opportunities. They should generate much of the capital that they require.
(4) Companies selling at a reasonable price per share.
In response to other student questions, Mr. Gayner stated the following:
— He spends most of his day reading newspapers and magazines. He sometimes calls investor relations departments at various companies to ask questions. It is important to have a network of smart friends who as allies will help each other with investment decisions.
–After getting a job, it is very important to be trustworthy. Clients (or your employer) would then give you money to invest. Tom is a continuous learner. He likes to read how successful coaches (sports) and generals make their decisions.
–Sometimes Tom has invested in a stock that he thinks should be selling for twice its current price. However, it may take as long as five years for him to be proven right. One must keep clients and supervisors aboard during this period, especially, if the initial investment declines to 1/2 of its initial price. If a mistake has been made, it is important to admit it. Tom quoted Winston Churchill: “When I make a mistake, I change my mind. What do you do?”
–All businesses are hard. General Motors went bankrupt. There is more international competition now than ever before. Caterpillar derives the bulk of its business outside of the U.S. Honda receives a majority of its revenues inside the U.S. The S&P 500 derives over 50% of its revenues outside of the U.S. Markel receives 40% of its revenues outside of the U.S.
–In Berkshire Hathaway’s (Markel’s largest investment) 1990 annual report, Warren Buffett’s letter to shareholders mentioned that Berkshire was “topping out”. Its stock price then was $5,750 per share. (Today, those shares sell for approximately $120,000.)
–Tom relies on behavioral finance and does not look at beta to estimate the cost of capital. In an example, his current estimate of 10% for the cost of capital of a firm reflected his estimate of the risk faced by the firm and low interest rates.
–Markel’s largest 20 stocks represents 80% of the value of its portfolio and are the stocks that Tom has the most confidence in. The remaining 20% of Markel’s portfolio are relatively small positions that Mr. Gayner follows closely in order to learn more about them.
–He admires Bill Gates who once a year relocates to a remotely located cabin for a “think week”. Gates is completely cutoff from all communication during this week.