Another Admirer of Warrern Buffett Tom Gayner, Chief Investment Officer of Markel Corp., like Prem Watsa (who we reviewed yesterday), is another Warren Buffett's admirer and attends Berkshire Hathaway annual meeting on regular basis. Tom Gayner and Prem Watsa do what Warren Buffett does, namely managing the float money generated by a profitable insurance business, and over a long period of time, increase the book value of the insurance company behind it. With one exception, their portfolio is one or two zero truncated from that of Warren Buffett’s. At end of 1Q09, Markel Corp. total asset on balance sheet was Merely $9.3 billion, far less than that of Berkshire Hathaway’s $260 billion.
The smaller size does not hinder Markel’s performance. Thanks to the combination of insurance underwriting profit and the outstanding investment return, Markel’s book value per share grew at a compound annual growth rate of 17% during the past 20 years, from $9.22 in 1988 to $222.20 in 2008, according to the 2008 annual report of the company.
Sitting on the top of the investment portfolio, is Tom Gayner, who has been President of Markel Gayner Asset Management since 1990 and Executive Vice President and Chief Investment Officer of Markel since 2004. His long investment career has contributed to the 17% per year book value growth. The specific figures of Tom Gayner’s investment performance can be found in the company’s annual reports.
Investment Philosophy
In this interview with manualofideas.com, Tom Gayner illuminated on his investment philosophy:
I was reading the write-up of Wesco Financial (WSC) 2009 Annual Meeting Notes yesterday and came cross this from Charlie Munger:
The truth is judging trustworthiness of the management is just as hard for the professional money managers as it for individual investors. People who have acumen in money management are not necessarily good at judging people. As we will show later on, Tom Gayner's solution to this problem is very simple.
Even investing in company run by honest people does not guarantee good return. As the performance of Tom Gayner’s equity portfolio in 2008 shows (-34% vs. S&P 500’s -37.5%). But 2008 was not the norm! Let’s wish we will never see such a destructive year again.
1Q09 Trading Activities
Tom Gayner was very inactive in 1Q09. During the volatile quarter, he bought one new stock, SL Green Realty Corp. (SLG); added to two of his existing position: Leucadia National Corp. (LUK), Schlumberger Ltd. (SLB); and sold out on one position Friedman Billing Ramsey Group Inc. (FBR). Total turn-over of this trades are less than 0.25% of the total equity portfolio of about $1 billion, GuruFocus Data shows.
Such an inactivity is a major shift from last year, when they reported a realized investment loss of over $400 million. The lack of buying of stock invited questions from the investor during the 2009 annual shareholders meeting. People questioned him why the company held so much cash ($1.1 billion at the end of 2008). Gayner’s answer was:
The Chairman and CEO of Leucadia, by the way, is Ian Cumming, another Investment Guru whom GuruFocus tracks.
1Q09 Top 10 Holdings
As a result, the top holdings of Tom Gayner have not changed much from 2008. Here is the List:
Berkshire Hathaway (BRK-A) (BRK-B) takes up 16.79% of Tom Gayner’s equity portfolio; Prem Watsa’s Fairfax Financial Holding (FFH, Financial) takes up another 7.34%. Brookfield Asset Management is managed by another savvy Canadian asset manager J. Bruce Flatt. True to Gayner’s word, he invest money only in company run by people he trusts. Unfortunately, BRK, FFH, and BAM all had a tough time since last year. So at least for short term, his performance suffered. As a value investor, Tom Gayner does not care the price decline due to market force, rather he is more concerned with the company-specific factors that could cause permanent impairment to the investment. As a CIO of a insurance company, however, he needs to play it safe in order to “maintain a margin of safety that can absorb the inevitable downturns in future financial market.” ( 2008 Letter to Shareholders, Page 9)
Tom Gayner’s Comments on His Top Holdings
In the 2009 Annual Meeting, Tom Gayner commented on the following stocks on the list (read the complete Notes supplied by Inoculated Investor here):
Conculsion
In conclusion, as of 1Q09, Tom Gayner continues to trust his portfolio in the hands of people like Warren Buffett, Prem Watsa, J. Bruce Flatt, and Ian Cummning.
We should revisit him in the next quarter.
The smaller size does not hinder Markel’s performance. Thanks to the combination of insurance underwriting profit and the outstanding investment return, Markel’s book value per share grew at a compound annual growth rate of 17% during the past 20 years, from $9.22 in 1988 to $222.20 in 2008, according to the 2008 annual report of the company.
Sitting on the top of the investment portfolio, is Tom Gayner, who has been President of Markel Gayner Asset Management since 1990 and Executive Vice President and Chief Investment Officer of Markel since 2004. His long investment career has contributed to the 17% per year book value growth. The specific figures of Tom Gayner’s investment performance can be found in the company’s annual reports.
Investment Philosophy
In this interview with manualofideas.com, Tom Gayner illuminated on his investment philosophy:
MOI Question:Ă‚ You have stated that the businesses you seek should have (1) a demonstrated record of profitability and good returns on total capital, (2) high measures of talent and integrity in management, (3) favorable reinvestment dynamics over time, and (4) a purchase price that is fair or better. Perfection, however, is rarely attainable in the stock market. Have you had to compromise on these criteria, and if so, could you illuminate for us how you decide on acceptable versus unacceptable trade-offs?
Tom Gayner: While you say that perfection is rarely obtainable in the stock market, I would go so far as to say that it is never obtainable in the stock market. Perfection doesn’t exist in this world. All of my choices involve various degrees of compromise and tradeoffs. As an accountant, I can tell you that my wife and children are sick of hearing me use the phrase “opportunity cost”. Every decision is also another decision (at least) and every non-decision is also a series of other decisions.
The challenge is to get the balance roughly right between the choices that actually exist. All of the four points I lay out are north stars that guide me. I admit though, that I have never personally been to the North Pole.
The one area where I will not compromise is in the area of integrity. I may not make every judgment correctly when I’m trying to make sure I’m dealing with people of integrity but I will never knowingly entrust money to people when I am concerned about their integrity. Even if you get everything else right, the integrity factor can kill you. My father used to tell me that, “you can’t do a good deal with a bad person.” And he was right.
The other factors can be thought of as shades of gray and nuances. We look for as much of the good as we can find and weigh that against what we have to pay for it, our expectation of how durable the business will be, and what our other alternatives are. I don’t have a formula or algorithm to get that precisely right, I just spend all my time thinking, reading, and adapting as best as I can.
I was reading the write-up of Wesco Financial (WSC) 2009 Annual Meeting Notes yesterday and came cross this from Charlie Munger:
Question: How can an individual shareholder, who can’t meet management, judge trustworthiness?
Charlie Munger: There’s no one answer. If you go to Mass. General and say you want to learn to read bone-tumor slides well, they can’t teach you. “No one’s any good at it who hasn’t been doing it for eight years.”
The truth is judging trustworthiness of the management is just as hard for the professional money managers as it for individual investors. People who have acumen in money management are not necessarily good at judging people. As we will show later on, Tom Gayner's solution to this problem is very simple.
Even investing in company run by honest people does not guarantee good return. As the performance of Tom Gayner’s equity portfolio in 2008 shows (-34% vs. S&P 500’s -37.5%). But 2008 was not the norm! Let’s wish we will never see such a destructive year again.
1Q09 Trading Activities
Tom Gayner was very inactive in 1Q09. During the volatile quarter, he bought one new stock, SL Green Realty Corp. (SLG); added to two of his existing position: Leucadia National Corp. (LUK), Schlumberger Ltd. (SLB); and sold out on one position Friedman Billing Ramsey Group Inc. (FBR). Total turn-over of this trades are less than 0.25% of the total equity portfolio of about $1 billion, GuruFocus Data shows.
Such an inactivity is a major shift from last year, when they reported a realized investment loss of over $400 million. The lack of buying of stock invited questions from the investor during the 2009 annual shareholders meeting. People questioned him why the company held so much cash ($1.1 billion at the end of 2008). Gayner’s answer was:
They are concerned about inflation. Don’t know when it will come. Carrying more short term securities than before. Expecting an interest rate spike. Does not want to own long term bonds. “Last thing we want to own..”. Not earning much on their cash but they want to preserve the option that comes with holding cash
The Chairman and CEO of Leucadia, by the way, is Ian Cumming, another Investment Guru whom GuruFocus tracks.
1Q09 Top 10 Holdings
As a result, the top holdings of Tom Gayner have not changed much from 2008. Here is the List:
| Ticker | Company | Shares | Value ($1000) | 1Q09 Weighting |
|---|---|---|---|---|
| BRK-B | Berkshire Hathaway | 31,443 | 88,670 | 8.94% |
| BRK-A | Berkshire Hathaway | 898 | 77,856 | 7.85% |
| FFH | Fairfax Financial Holdings | 279,459 | 72,799 | 7.34% |
| KMX | CarMax Inc | 5,339,906 | 66,428 | 6.7% |
| DEO | DIAGEO plc | 1,258,456 | 56,316 | 5.68% |
| BAM | Brookfield Asset Management | 3,104,339 | 42,778 | 4.31% |
| WMT | WalMart Stores | 817,225 | 42,578 | 4.29% |
| GE | General Electric | 3,649,556 | 36,897 | 3.72% |
| UPS | United Parcel Service | 705,483 | 34,724 | 3.5% |
| FNF | Fidelity National Financial | 1,754,300 | 34,226 | 3.45% |
| RLI | RLI Corp. | 620,266 | 31,137 | 3.14% |
| JNJ | Johnson & Johnson | 538,295 | 28,314 | 2.85% |
Berkshire Hathaway (BRK-A) (BRK-B) takes up 16.79% of Tom Gayner’s equity portfolio; Prem Watsa’s Fairfax Financial Holding (FFH, Financial) takes up another 7.34%. Brookfield Asset Management is managed by another savvy Canadian asset manager J. Bruce Flatt. True to Gayner’s word, he invest money only in company run by people he trusts. Unfortunately, BRK, FFH, and BAM all had a tough time since last year. So at least for short term, his performance suffered. As a value investor, Tom Gayner does not care the price decline due to market force, rather he is more concerned with the company-specific factors that could cause permanent impairment to the investment. As a CIO of a insurance company, however, he needs to play it safe in order to “maintain a margin of safety that can absorb the inevitable downturns in future financial market.” ( 2008 Letter to Shareholders, Page 9)
Tom Gayner’s Comments on His Top Holdings
In the 2009 Annual Meeting, Tom Gayner commented on the following stocks on the list (read the complete Notes supplied by Inoculated Investor here):
BAM: Can you discuss the investment case for Brookfield Asset Mgmt ( BAM)?
Gayner: MKL has a long term relationship with BAM. CFO’s mother used to work at MKL. BAM has made some tremendous capital allocation decisions. Natural resources: timber, paper mills, hydroelectric dams. Have realized that the forest is a better investment than the mill. Try to buy minimal capital expenditure requiring assets that will go up in value over time. Thus they own better assets over time. Like and trust the people who run BAM. Believe it is priced attractively and expect to own it for the long run. Will protect against inflation due to the hard asset focus
GE: You talked about GE as a good long last year. What happened?
Gayner: This was a hidden leverage problem. Steve Markel was suspicious of GE and Gayner wishes he had listened to Markel. GE has been at the epicenter of the storm. They liked the idea that Welch was out and Immelt was not in the habit of smoothing out earnings. Knew that Welch manipulated earnings by looking at their insurance operations. Thought that Immelt has done a good job de-emphasizing that. It looked like a classic good value play. But the events of 2008 have made Immelt’s course much more difficult now. Think that the positives are still there. Right now there is a different between the company and the stock price. Price is guaranteed to be wrong. However, this is a bit of a bi-modal outcome. Either the stock goes to $0 or $60-$75. Would not have chosen this fight if they had known in advance. They will avoid these types of situations in the future
GE: Why not buy LEAPs on GE due to the bi-modal outcomes?
Gayner: At $8-$12 a share GE is a LEAP. A leap of faith more like. Right now meat and potato companies can be bought at prices we have not seen in years. You can build 70-80% of your portfolio with these solid companies. The rest of the portfolio you use to buy leaps like GE
DEO: What is the thesis on Diageo?
Gayner: It fits the 4 criteria they look for: Profitable business with a high return on capital, Return on total capital is their preferred metric; Run by honest, talented people (weigh those traits 50-50); Has positive re-investment dynamics; Earns a high ROC and can re-invest at that rate; If they can’t re-invest at that rate then they pay dividends and buy back shares; Priced fairly. Look for businesses in which 5-10 year shareholder returns mirror the returns provided by the business. All comes down to what you have to pay
Conculsion
In conclusion, as of 1Q09, Tom Gayner continues to trust his portfolio in the hands of people like Warren Buffett, Prem Watsa, J. Bruce Flatt, and Ian Cummning.
We should revisit him in the next quarter.
