Tom Gayner (Markel): How do you build Markel?
- Tom Gayner joined Markel in 1990, when the stock was about eight or nine dollars (2023).
- Markel stock compounded at about 15% for 37 years, to thirteen hundred and something (2023).
- Markel’s market cap grew from 35 to 40 million dollars to 17 to 18 billion dollars (2023).
- Berkshire Hathaway was Markel’s largest equity position at about 11% of the portfolio (2023).
- Markel ran a public equity portfolio of about 8 billion dollars and fixed income of 27 billion dollars (2023).
Markel (MKL)
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What does music teach Tom Gayner about investing?
TL;DR: He picks three: Paul Simon’s five-and-a-half-hour audiobook Miracle and Wonder, Bono’s book Surrender and the Rolling Stones (2023).
Tilman Versch [00:00:38] The audience of Good Investing Talks, it’s great to have Tom Gayner back. We just released the video with him with an invite for the Markel Omaha Brunch. We also took the opportunity to do the follow-up meeting with him after we did our first video, I think, two years ago. It’s great to have you back, Tom.
Paul Simon, Bono’s book and the Rolling Stones
Tilman Versch [00:01:00] Tom, one interesting thing that we started our last video is songs. And I ask you before, we are recording here to bring a song that describes, like, the last two years in the market. Like, my guess would be because it was a rough time, maybe Bee Gees’ “Staying Alive”, but I might be totally wrong.
And the first one is the Paul Simon autobiography/biography, Miracle and Wonder, which has Paul Simon and Malcolm Gladwell. It’s an audiobook only, and when you listen to it, you’ll see why it needed to be an audiobook. So it’s an absolutely spectacular history of music, history of the way the world has developed, what music means, how sounds work, its effect on our emotions and our politics, on the way we feel and think and process things. And the title in and of itself, Miracle and Wonder, there’s so much of life that is indeed both a miracle and a wonder.
So I cannot recommend that strongly enough. It’s about five and a half hours and from time to time, I find myself either on a train ride or a car ride and I’m by myself and it’s just a wonderful extended listening time. And at this point, that five-and-a-half-hour audiobook, I’ve listened to it three times already and I’m sure there’s a fourth in my future when I have a car trip or two coming up. So I recommend that very strongly.
The second thing, and this also ties to the investment world and the idea of perhaps recency bias, I just read Bono’s book, Surrender. And it’s the 40 songs and 40 chapters about each of those songs, and the historical setting of how those songs came to be. And I think that’s a good book and worth reading as well. And the one takeaway that I would have from there is apparently Bono was a great fan of David Bowie.
And he talks about a conversation that he had with Bowie at one point. And Bowie said, “There are really only two languages in the world. One is love and the other is fear.” And I think about that and I think of the universal applicability of that statement. And in any given setting or situation you find yourself in, I think you’re involved in either a love-based conversation or relationship or a fear-based conversation and relationship. And it’s not zero to 100, some are 70-30 or 60-40 or 52-48. But I just think framing things in that polar opposite way was an interesting construct that struck me from reading the Bono book.
And then the third single song I would mention, and again, a classic rock band that stands the test of time and speaks a little bit to perhaps the sideways motion of Markel stock for the last couple of years and some of the things that are going on, is the Stones’ “You Can’t Always Get What You Want”. But if you try, try, try, you get what you need.
So that soundtrack plays in my head sometimes, because it’s important to keep try, try, trying as is suggested in the song. And if you do, you do get what you need and I do feel pretty optimistic about both, that we are getting what we need, and the future is pretty good as well. So those are the three musical thoughts I had when you mentioned that you might want to talk about that sort of thing a little bit today.
Tilman Versch [00:05:10] Yeah. It was more like looking back in the last two years, but you answered it in a wider way, which I find also super interesting, because it also shows what I find what I learned from music, and I recently discovered Rammstein, which is not the typical band for investors because they have this dark touch…
Tilman here. As you can see from longer hair, the comment with Rammstein was made a while ago, and this was way before the allegations event against the band came out. At the moment, I’m quite shocked by what was told in these allegations, and I have changed my view on the band, but we still have to wait what the legal system decides on this. Thank you.
…discovered Rammstein, which is not the typical band for investors because they have this dark touch. but they have this unlikelihood of success. They are German-speaking band from Eastern Berlin, they made success and they filled the Madison Square Garden. And yeah, this thing of touring, there’s also documentary on it. It’s super fascinating, you can also learn a lot about business from…
Willie Nelson’s concerts show the seasons of a life on the road
Tilman Versch [00:06:57] Yeah, and one comparison might be also the idea of touring, that you have to play in many different smaller cities to build a reputation with a band. You tour through a country like the U.S., you go to smaller towns and play your music there before you conquer the big cities and become, like, superstars international. That’s also a bit comparable to the investing world. I think you also started touring with Markel in 1990. And since then…
Well, this past summer, he was playing in Charlottesville and I happened to see him, and I think he was 89 years old. He was playing with one of his sons and it was an absolutely magic evening. There was a very different spirit and electric feeling in the air. And you could tell that as compared to that concert 15 years earlier when he was in his 70s, here he was in his 80s, and you just had this sensation that he knew that this was not going to go on forever.
And he felt the love of the crowd, and the joy and the happiness they had from the fact that he was there, and he offered that back in return. And it was one of the most magical concerts I’ve ever seen, but it speaks to some of those nuances and complexities and process of what it means to be out there on the road. And the different venues you’re playing, the different times that you’re doing in your life, different seasons, different stages and the understanding and the meaning that you can draw from each one.
How does Tom Gayner tell the Markel story?
TL;DR: The four lenses and three engines are the old catalogue. Markel stock went from about eight or nine dollars to over 1,300, about 15% for 37 years (2023).
The old catalogue is the foundation for new moves
Tilman Versch [00:09:13] But if you think about concert, there’s also certain storytelling involved in it. So you have this catalogue, you have to play your favourite songs, everybody’s expecting you, but you have to also add new things. It’s also like, maybe this comes a bit down to Markel. I think when I read your press releases, or your recent talks, there’s also this talking about the three engines you have that you’re repeating and repeating again and again. But there’s also some kind of new things you add to this. How do you create this kind of storytelling?
And for instance, if I look back over the course of the first quarter, you know, which just ended, and I think about some of the investment actions that we took during the first quarter, some of those are different actions than what we’ve taken in the past in terms of some new names, and some new companies, and some new situations.
But if I think about why those came about, or why they sprung to the front of mind, it’s because it was the firm foundation and the base and the pillars, and the way in which the filtering process worked that certain things jump out at you. So, both aspects are very important, both having the fundamental pillars and the fundamental disciplines, and four lenses as we call it, or the three engines there that help filter and screen what seems like it would be a good fit or not for Markel.
And at the same time, going to work every day with a fresh set of eyes and a fresh sensation of the fact that the world has spun. We’ve gone completely around the axis, we’ve travelled 26,000 miles between the time we got to work today compared to where we were yesterday. And something might have changed. So how do you stay sensitive to that? How do you stay aware of it without being overwhelmed by it, but also comforted that we’re going to travel 26,000 miles tomorrow as well?
And we successfully executed it yesterday and the day before that, and the day before that and will successfully execute it again tomorrow. But there’s some different tactical things that might need to be done in the process of doing that. So, that’s sort of the joy of living and the joy of life and the fun it is to go to work, to talk to people, to read things, to experience things, to listen to new music, or old songs again to think about what you should do right now.
Focus on the truth and let go of the outcome
Tilman Versch [00:12:17] Your conference halls are like capital market conferences, conference calls, and like also the event in Omaha we’ve just chatted about, like how do you make sure that the participants get what they want to come back to the song but also that you implement new communication things? For instance, if you go to the three engines, you have this, I think the ventures is the newest engine you have?
How did you go on your communication to implement this? That the capital market gets to notice when you started talking about and how long does it take that this also can become a hit? So you have to do the fundamental performance, but you also have to do the communication on what it brings as in success to the company.
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I’ve lived long enough to know that that’s an imprecise imperfect process at best. So what I really have to do is get back to my own sense of what do I believe the truth to be? What is the important thing to communicate? Try to be as good at that as possible, and then I have to let go of the outcome.
So, to open up another realm, there’s an absolutely wonderful book called Thinking in Bets by Annie Duke. And I think any serious student of investing should read that book. And what it’s about is not necessarily about investigating, it’s about playing poker and about both the underlying math that’s involved at a poker hand and probabilities and statistics. And I’m not a PhD statistician or a probability theory guy, but I know a little and I did indeed study them as required courses and topics in college for which I’m very grateful. So I know a bit about that and the point she makes in that book is you have to be concerned with your own process and the quality and fidelity that you bring to that process.
You cannot judge how good you are at what you’re doing by the outcome, she calls that resulting where, you know, if you have a good result, you sort of just assume that your process was good. Well, it’s likely that if you have a good result, that your process is good and the likelihood that you have a good process when you have consistently good results over long periods of time goes up, but it’s never 100%.
And to some degree, it’s frustrating as a human being when you’re trying to connect and communicate with someone that they don’t… To say, you don’t understand me or not hearing what I say, that’s a mark of frustration and that happens, but that’s real. That’s just human being stuff. You can’t fundamentally change what you are doing in response to the notion that it’s not going to land with somebody all the time.
I’m reading a new book right now, there have been hundreds, if not thousands, of books about Abraham Lincoln, but I’m reading one right now by Jon Meacham. And I’m just reminded of the Lincoln quote about, “You can fool all the people some of the time and you can fool some of the people all the time.
But you cannot fool all of the people all of the time.” So there’s an inherent transmission decay between communication and understanding. So what do you do to try to bridge that gap, or minimize the decay, or minimize the ‘latency’, as the word is used in today’s world? Well, try to make your message as simple and as clear and as concise as possible, and say it over and over again. Don’t be embarrassed to go back to the same fundamental principles and fundamental vision and understanding as you had before and say it again and again and again.
He has lost count of how often he explained the engines
Tilman Versch [00:16:47] So a rough bet, how often have you talked about the three engines or the four lenses in your life already?
Tilman Versch [00:16:56] More than a few thousand times maybe.
From eight or nine dollars to over 1,300 a share
Tilman Versch [00:17:08] The question behind this is like if you have a success or build something new, it’s also how to understand. But then you have the fundamental success you can measure, but there’s also the way you have to communicate success. And you have the successful growth of Markel, like your stock price was when you joined somewhere in the tens, maybe. What was the stock price when you…?
Tilman Versch [00:17:32] Yeah, and now, what is the stock price?
How much of a CEO’s job is communication?
TL;DR: With 20-some thousand employees, he sees communication as part of everything he does and workshops his message like a touring comedian (2023).
20-some thousand employees need a CEO who communicates
Tilman Versch [00:17:57] But still like, on the way up, you also have to communicate that you can have a reproducible process. And you also had to go out to communicate about success, I’m asking this question because I’m, like, sometimes fascinated by the investing industry. You have good investors with good returns but nobody knows about them and they don’t go out to promote or market it or just tell people about it. Like, how much of your time is spent on telling your story?
So for the people of this company to have a good conception of what it is we’re trying to do, and how we think about what a good thing is and what a not so good a thing is, it’s important for me as the CEO to be comfortable in being in front of them and writing the annual report, in communicating our disciplines and our values which have overlapped and commonality to how we invest the money to make sure that we got 20,000 plus oars all pulling in the same direction. So it would be a mistake and it would not work in the context of being the CEO of a company with 20-some thousand people to operate in a closed or isolated chamber, and not be actively communicating, both through the spoken word, the written word and physical presence.
Communication is part of everything he does
Tilman Versch [00:20:03] And how much, like if you have a rough estimate, of your day is communication at this point?
So, my time might be 150% of the 24 hours in a day because no matter what I’m doing, typically, that applies to other things as well. So, communication in and of itself is not something that happens in isolation. It’s part of thinking, a lot of communication is listening and a lot of communication is nonverbal. So, all of those things go into the process of how it is my own thoughts and actions are formed.
Invert and workshop the message over time
Tilman Versch [00:21:51] We mentioned the 10 and 1,400, and you already mentioned, like your growth over growth, you have new roles, different companies, you have more money to manage, it adds complexity. But you also have this idea of telling it simple, telling it precise, telling it that maybe people get an idea in their head if you tell this story. So how do you make this art of boiling things down to digestible, thinkable things, when it’s super complex the kind of framework you’re operating?
I’ve been involved in individual conversations of being involved in townhall meetings and reflecting upon what worked and what didn’t work. And the stuff that didn’t work, let’s do less of that, and the stuff that worked, let’s do more of that. And I’ve been doing that my whole life, so I don’t know how to answer your question well, other than sort of frame the process a little bit by which I’ve landed where I’ve landed now.
Tilman Versch [00:23:43] So it’s touring and A/B testing.
But the reason he did that is because when he’s on the road in the tertiary market, like Richmond, Virginia, he’s figuring things out. He’s working that kind of stuff out. So by the time you see him in a Madison Square Garden or on a Netflix Special, he has worked at his craft almost like a diamond cutter, cutting away the bits of the diamond that take away from the true beauty that’s inherent in the diamond itself, to get to that very polished gemstone of a performance that you see when you’re looking at the Netflix special or the New York City performance.
So yeah, to your point, all of these exercises, all of the interactions, to some degree, are chances for me to practice cutting those gemstones to be better at presenting the things that are really good.
What did Tom Gayner learn as a salesman?
TL;DR: Four years as a salesman at Davenport taught him empathy. He runs about 8 billion dollars in equities and 27 billion dollars in fixed income (2023).
A great salesman is marked by empathy
Tilman Versch [00:25:10] You have this very interesting position at Markel. On the one side, you are a listed entity, on the other side, you’re investing at your position especially in other listed entities. So you’re, so to say, buy side and sell side in one thing. And I think if I’m not totally wrong, please correct me, you’ve worked in sales and selling before you joined Markel. What has helped you what you learned in this phase, it was, I think, two years if I’m not wrong, and that helped you communicating with the stock market? And what is a thing that you had to let go from this experience?
So what the best salesman could do, it’s not that they can talk and they can sell you something that you wouldn’t otherwise need or want. It’s that they take the time and effort and they tried to find out what it is that you need and what it is that you want, and what it is that would make your life better, and they do their best to grab into their kit bag or tool bag or awareness to come up with products or services or solutions to your problem.
And the best salesman in the world oftentimes can be very introverted, very quiet, listen way more than they talk, which is not the stereotype that comes up from salesman. But through that process and through that act, they demonstrate empathy and they build long-standing relationships of trust and of being a problem-solver for people. And as such, they get repeat business from the people whose problems they’ve solved and they get referral business from the friends and colleagues of people whose problems they’ve solved.
So I love being a salesman, and I think that’s really the definition of what a really good salesman should be. From the context of the buy side in the investment world, where you’re looking at the people who actually make the decisions of what to buy and hold on to, yeah, we have a public equity portfolio of eight billion dollars or so at this point, we have a fixed income portfolio of 27 billion dollars of what we’re buying.
So yes, I’m responsible for running those portfolios and buying things. And again, a lot of that comes through interaction and thoughtful relationships with intelligent people and looking at companies, looking at our own business and seeing what’s going on out there in the world, being involved in other businesses through some boards, things of that nature, which are wonderful insights into the economy and who’s doing what, and who’s better at things and who’s worse at things. It’s just a constant sifting and sorting process that changes a little bit some days, changes a lot some days, and it’s a fun process and a joyful process just to be part of that.
The stock lagged while the business kept improving
Tilman Versch [00:28:50] What kind of problem solving definition do we have at the moment for Markel shareholders? What kind of problems or top three problems are you trying to solve?
And that 5-year bucket looks pretty good, so despite whatever challenges of missteps and external factors that we faced and through some real head winds at us and whatever mistakes and missteps we made internally and we’ve made some, I think the evidence is pretty clear at this point that the ship is sailing in the right direction. And in general, I don’t think the perception of that matches the economic reality of what seems to be happening. So, that’s a little bit frustrating, but I’ve been in the investment business for close to 40 years now and I have never seen a company that had consistently good fundamentals where it was becoming more and more profitable over time, that the stock market didn’t figure that out eventually.
So, as Ben Graham said, in the short term, the market is a voting machine. In the long term, it’s a weighing machine. So, when I look at the last couple of years of Markel stock, I think the market has been a bit more of a voting machine, but I’m very confident that in the long run, it will return to its function to being a weighing machine. And when it does, the frustration that Markel shareholders might feel at the moment might be assuaged.
How does Markel find long-term shareholders?
TL;DR: Since 1990 he has gone to Omaha, starting with coffee and bagels for six people. The market cap grew from 35 to 40 million dollars to 17 to 18 billion (2023).
An outsider’s view of sell-side and buy-side incentives
Tilman Versch [00:30:57] You have this interesting, I call it, it’s not correct but I make it a dichotomy here, between buy and sell side and you’re somehow on both. And you also have some friends where you exchange ideas on the portfolio. For instance, Saurabh Madaan brought Amazon to you. So through this position you have in between both worlds, what do you might be able to see different than the typical hedge fund friends you have?
So if you get paid that way and transactions need to take place, well, then it’s going to be kind of in your interest somehow or another to filter into your being, it seeps into your consciousness that you tend not to be content with things remaining static because you can’t get paid if that’s the case. So for me to be aware of the sell side and aware of the dynamics and forces that act upon them, but not be part of it, sort of enables me probably to have an outsider’s point of view about information that will come from the sell side and the way they would see and think about things.
Similarly, from the buy side, those tend to be mutual funds, hedge funds, endowments, pensions, things of that nature where the assets are. And so when a decision is made, typically, that person has some responsibility for the asset itself and how well things go. Well, there’s another layer on the buy side that’s very important, is that at some point, there are people on the buy side who would be principals, and it really is their money and their capital, and they would think about it as true owners of that. And there’s some people who are agents. So you might work for a long-only hedge fund, or a long-term mutual fund, or a pension fund, or an endowment, and you might think of that as very, very long-term capital.
But you yourself are perhaps an employee who’s only been there two years or three years and you have supervisors, bosses, managers that are judging you. And the time frame and the data they have about you are much shorter term, and they in turn probably have bosses or clients or customers who are judging them.
So even though the time frame of a pension fund for some large entity should be generational, the people who are actually making the decisions oftentimes have much shorter time frames than what the principal of the account really should. So to have some awareness of who it is you’re dealing with and what their agenda might be and what the forces and pressures on them personally might be, that can create principle agency differences that come from the buy side. So, again, to have a bit of an outsider’s view of seeing and observing that, I think, is helpful.
And then the last thing I would do to link that all together, I think the great thing that has happened in Markel and it’s part of the reason to engage in communication like this and to be so thoughtful and so determined to cultivate a good group of shareholders, is what I’m trying to do, is minimize the differences that exist between what is in the best interest of Markel and the Markel Corporation over time and the shareholders of Markel. I want the shareholders of this company to want the same thing as the company itself, which means being very successful for an indefinite period of time. We talk about the two time horizons. We talk about being around here forever and right now.
So, to find a tribe of forever-oriented owners of the business whose time horizons, whether they be from the sell side, even with the pressures that sell-side people have, or from the buy side and pressures that sometimes people from the buy side would have, and sift and sort and cultivate and nurture an investor group who really does have as much as possible that long-term time horizon, well, that’s worth doing and it’s necessary for us to be able to run the business with a truly long-term time horizon as well.
He goes to Omaha and follows his ear
Tilman Versch [00:35:58] How do you invest into finding this group? What are your strategies? Like, forming a group like this, they don’t fall out of the blue sky. It’s hard work and also some monetary investment sometimes. How do you invest to find these people?
1990, so that was 33 years ago now, and he’d already been doing it for 20 or 30 years by the time you got to 1990, so I just was aware of it and decided to start going to Omaha and meeting people and forming those relationships one at a time. The financial expense of doing that is not very much, that’s not a marketing campaign that needs to buy Super Bowl commercials or have a top-shelf advertising agency involved.
And again, tie that back to that Miracle and Wonder book that Paul Simon that I was talking about, and the Graceland album is sort of a sub idea that gets followed through the whole book. And one of the fascinating things about Paul Simon is that he grew up in Queens, New York, at a time when Queens would have had, probably still does, a lot of communities and people from different parts of the world who had different musical heritages and traditions and sounds and cultures that went around with it.
And what Paul Simon was able to do was really walk around his neighbourhood and go to school with people in his neighbourhood who had these different cultures and these different musical genres all there, and he just followed his ear. That’s exactly the way he would describe what he did, he followed his ear.
So to some degree, what I’m doing in the way we find this is I follow my ear. So I go to Omaha, I meet six people. I know all six of those people and they introduce me to their friends over time and it’s just been a 37-year effort of meeting people, listening to people, learning from them, reading things they recommend to me, watching movies they recommend, and you just build this cumulative database of relationships that help you stay current, help you learn things, help you filter things and it’s fun.
Brunch costs are small next to a 17 to 18 billion market cap
Tilman Versch [00:38:34] But you also decided to invest into building these relationships with the event you host. Like, I’ve heard one podcast with William Green where you said you didn’t pay for the guacamole extra when you went to the Mexican place and, like, you’re really a cheap guy. And now you’re hosting a free lunch or brunch for 2,000 or 1,200 people. How you became willing to do this?
Tilman Versch [00:39:51] No guacamole.
And I think we’re building the tradition here of that same notion of the worldwide convention, where you have investors who are looking for management teams that run their business in a truly long-term way. And there’s not thousands and thousands of companies and investments that really are run this way. So I think what we do is different, it’s differentiated, it’s not common, and people who are looking for something distinctive and not like everything else, when they find that community, they like it and they come again and again and again. So, even for a frugal guy like myself who avoided spending the extra money for the guacamole in my early years, we can afford the guacamole now and it’s money well spent.
Tilman Versch [00:41:17] Great. Then I know what’s on the menu for the annual meeting in Richmond, maybe.
How does Markel keep the right pace?
TL;DR: Two time horizons, forever and right now. He asks Markel Ventures managers what they would do if it were their only business, and 90 times out of 100 the answer makes sense (2023).
Two time horizons: forever and right now
Tilman Versch [00:41:28] Yeah. To come from this eight to 1,400, it’s a bit of a marathon, you have to run. Like, with marathon runner, you have to be in the right pace because, like, also coming back to Warren Buffett and Charlie Munger, they deliver and deliver and I think they found their pace and the way they are, they feel the right heartbeat. Maybe there’s also an explanation that they are that old. How do you think about building such a system that you’re on the right pace at Markel that you can consistently deliver and, like, not over tune and not under tune?
So, by definition, the sell side is going to have a cadence which is oriented towards activity because that’s how they get paid. And the buy side, while the underlying principal may be at a very measured and long-term base, some of the people within it may have more of an agent’s mentality than a principal mentality and they cause their pace to be quicker than it otherwise would naturally be.
So for instance, one of the ways in which we try to get the pace right is, again, talking about those dual time horizons that we talked about around here, the forever and right now. Well, I think it’s important to talk about both, not just one of the exclusion of the other because if you talk about forever without referencing right now, it’s easy to become complacent and comfortable and not act with the sense of urgency that is required sometimes.
If you talk about the right now all the time without the context of forever, you can get too short-term in your focus and you can push, push, push, push in ways that if you were a good farmer, a good farmer knows you have to rotate your crops, that sometimes you need to let land lie fallow for a season or two in order for the soil to regenerate itself. And a good farmer is to say, he doesn’t farm for himself, he farms for his children and his grandchildren. There’s just an inherent sense of stewardship that goes along with the ability to understand those dual time horizons and the tensions that exist between the two of them.
One of the other ways that again this would come about is that, for instance, it’s pretty common that somewhere along the line when we have bought a Markel Ventures company and these people are relatively new to Markel, a situation will come up where they have some tough decision to make and they’ll come to me and sort of ask what I want to do and 99 times out of 100, what I say is, “Well, let me ask you this. If this was your business and it was the only business you and your family were ever going to have, what would you do?”
And then I stop talking. I sit back and I wait for them to answer that question and it’s been my experience that 90 times out of 100, when the question is framed that way, these reasonable, thoughtful, intelligent, honest people, they answer it in a way that makes sense to me. And so I say, “Well, I think you should do that,” and they do and that has worked out very well.
So it’s just this constant reminder, it’s a liturgy. It is the notion of sort of having these touchdowns, these principles, the four lenses of investment, the three engines of Markel that we say over and over and over and over again. And what all of those serve to do is to provide context for any individual decision or any individual action that you need to take at any one point of time. You don’t have to take your actions in isolation, either intellectually, behaviourally, or collegially with your colleagues because you can sort of close your eyes and imagine if the person who sits in the office next to me was faced with this decision, what would they do?
And it’s comforting and, you know, as individuals again, psychological stuff, being alone is an uncomfortable thing. And you can drive somebody nuts by isolating them. Solitary confinement has been ruled cruel and unusual punishment, well, because of the isolation.
So the fact that we would have such well-defined principles and ideas that undergird the organization, that gives people psychological comfort that they know that if their colleague was faced with this decision, they were probably doing something similar to what I’m doing. And if I had to make a decision on behalf of my colleague, I can sort of be comfortable having a sort of a modified power of attorney or proxy to do that because these ideas have become the system of Markel.
How concentrated is Markel’s portfolio?
TL;DR: Berkshire is about 11% of the portfolio, Apple maybe three or four percent, and the top 20 names are more than two-thirds (2023).
The top 20 names are more than two-thirds of the portfolio
Tilman Versch [00:47:03] Maybe the end question also about the system of Markel and also in comparison to Berkshire Hathaway, which is a bit of a role model. But if you compare the public equity portfolio of Berkshire and yours, we’re coming back to the topic of concentration we covered also in our last interview.
And if you look at Berkshire’s portfolio, I have the feeling it’s more concentrated, if you think about the big bets, Apple, for instance, which takes a super large stake of the portfolio. But for you, it’s like less concentration plays a role there. Why is that so? And why aren’t you, like, into going big for Apple for instance?
I know myself well enough, and I think it’s important to have humility enough to recognize that to take as concentrated a position on things as what Buffett and Berkshire do is probably not appropriate or wise for Markel, both given my limitations and our own relative size of balance sheet and size of our insurance business relative to our equity capital, all kinds of reasons. That said, in the world of institutional equity investing, I would say we are pretty concentrated. Our largest position is indeed Berkshire, which is 11 percent or so of the portfolio.
Apple, just to recognize the name you’re talking about, is one of our top ten holdings and it would represent, I’m guessing, three or four percent or something like that, but don’t hold me to that particular number.
If you take the top 20 names that we have, you’re more than two-thirds of the entire portfolio. So while there are a lot of names, there’s actually a reasonable concentration at the upper end and concentrating on your best ideas, which I think is in keeping with the lesson that Buffett would have taught and it’s being executed in the way that I myself can do it. For instance, if you think about it in baseball terms,
Buffett’s a slugger, I mean, he’s a home run hitter and has jacked some balls out of the ballpark. I might be the number six or seven hitter in the lineup but not the number four hitter. So my job is to get the ball in play, get a single, get a base hit, get it hit by a pitch, draw a walk and get on base and keep the game intact and keep our team at the bat. And if we do that, the compound effects of that are very good.
And again, if you look at the long-term compounding record of Markel, it’s been pretty good so far. And despite a little bit of a lull in that action between innings stretch in the last couple of years, I think the process by which that record has been created is intact. I know that the values by which it has been created are intact, and that’s why I feel pretty good about the next inning, two innings, three innings, next game, next season.
What does Tom Gayner think about Markel’s valuation?
TL;DR: He lets buybacks speak, the most ever in the last one and a half to two years. The stock rose 175x in his 33 years without a catalyst (2023).
Record share buybacks speak louder than words
Tilman Versch [00:50:46] Maybe for the closing, a quick question on the devaluation of your stock, like from what I heard in this conversation, you think Markel is undervalued, is that so?
So I tend not to speak about whether Markel would be over or undervalued. I have laid out in the last couple of years’ annual report the way in which I would go about the discipline of trying to think about what Markel is worth. And I talk about, you know, the investments per share, and the fact that I do think those accrete and stick and provide 100 cent on the dollar value to the shareholders, given the structure of Markel and given the float where that money comes from.
I talk about Markel Ventures and the non-insurance underwriting parts of the business and what a reasonable multiple of that would be. And we talk about that over time so it’s calculated in a consistent way because I don’t think GAAP accounting does a particularly good job of capturing that number. I wrote about it in this year’s annual report, when you take a financial business and a non-financial business and you mix it together, I talked about that, it was like mixing chocolate milk and motor oil. Those are both liquids, they can be measured in fluid ounces, but I wouldn’t combine the both of them and I wouldn’t drink the combination, nor would I put it in my car’s engine.
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So GAAP accounting is limited in its ability to capture valuation of a business like ours. I think you do have to break it into segments when you’re doing that valuation. And when you do, and you do so consistently, there is a number and I compare that number to the trading price, and if you then get to the sensation of, “Okay, well, actions speak louder than words,” in the last year and a half two years, we have repurchased more Markel stock than we ever have before. So that is a manifestation of my personal belief of what Markel stock is worth and what it’s selling for, and I’ll just continue to let actions speak louder than words.
175x in 33 years without a catalyst
Tilman Versch [00:53:07] You also have this situation, buy side and sell side, like, you’re in between these worlds. What has helped you, this experience of maybe continuous undervaluation of the stock, to really understand also, like interesting thesis on catalysts that the value gap will close and what you see in other companies that there’s a valuation gap where you think the fair value, how long it takes, what drives this, what has this generally taught you?
And if you look at the pace at which we have repurchased our own stock in the course of the last year and a half or so, well, in 35 or 40 years, we’ll be down to one share and I suspect we won’t get that far. But if we do, I’ll be the last shareholder and I suspect that it would be selling for a lot more than what it is right now. At what point the rest of the world seems to agree with that notion, I don’t know. There’s nothing I can do to force that.
All we can do is run the business with as much rationality and professionalism and care and sense of durability and sustainability and doing things the right way and taking care of our customers, and taking care of our people. And if we keep doing that, well, in the 33 years that I’ve been here, there’s never been a catalyst. There’s never been any moment where you would say, “Oh, this is what’s going to make Markel stock move from x to 2x to 4x.” But in the course of time that I’ve been here, it’s, you know, 175x. But there was never a catalyst. So it seems to me that a catalyst is not what we’re lacking or what we need for it to go from 175x to 200x or 250x or 400x. I think if we keep doing the sorts of things that we’ve been doing with the same values and the same processes and the same discipline and the same rationality, we’ll get there and that’s good enough for me.
Tilman Versch [00:55:26] Try, try, try.
A non-traditional conversation fits Markel
Tilman Versch [00:55:35] Maybe both someday. For the end, I always give the chance to add something we haven’t discussed. So, is there anything you want to add to the interview?
Tilman Versch [00:55:54] Yeah. Thank you. Then, we’ll see you in Omaha and wish you a great day.
Tilman Versch [00:56:01] Bye-bye to the audience. Bye-bye!
