I've been doing some research this week on insurance as there are a number of stocks in this industry on my watchlist. Yesterday I went through the Value Line list of life insurers, many of which are selling well below book value. I'll be taking a look at a few of these in more detail soon.
Of course, insurance is a business that Warren Buffett has used as a foundation at Berkshire to build his investment fortune. But there is a far less known investor that runs a similar company that any value investor would benefit tremendously from studying his thoughts and ideas. Markel Corp (MKL) is a company that is run by Tom Gayner, a superinvestor that uses value investing strategies combined with insurance float to build wealth for himself and his shareholders.
Gayner has led Markel to an incredible 20 year performance, compounding MKL's book value at a remarkably high 16% per year, far better than the S&P 500. This is what happens to a stock's price when the business is growing it's book value at these kinds of consistent high rates:
The book value has increased from $20 in 1992 to $403 today. The stock price has risen in corresponding fashion from $31 in 1992 to over $500 today. Patient long term shareholder's have reaped incredible rewards by investing with Gayner who used MKL as the conduit.
Readers know we love simplicity here at BHI. In the video below, which was taken in 2007, Gayner outlines his 4 point plan for investing in stocks, which is logical, simple, and conceptually easy to understand (not to mention profitable):
- High Returns on Capital: Gayner wants above average businesses that produce high returns on capital and require little additional capital
- Management with Integrity and Talent (both are equally important)
- Compounders: Gayner looks for businesses with attractive reinvestment opportunities. He wants high returns on capital, and he also wants the economics of the business to be such that the company can compound earnings and cash flow and grow intrinsic value over time (compounding machine).
- Valuation: He doesn't want to pay too much, although he mentions that he is willing to pay a fair price for these compounders, as they will grow shareholder value steadily over time.
Gayner has successfully created his own compounding machine at Markel. I strongly recommend reading his shareholder letters, which are excellent resources on both value investing and the insurance business.