GuruFocus interviewed Tom Gayner on Friday in Omaha. A former accountant, Gayner has been delivering market-beating returns managing $2 billion in float as the CIO of insurance company Markel Corp. (MKL, Financial), which he joined in 1990.
Holly LaFon: Do you want to talk a little about your top holding? What is it that you like about CarMax (KMX, Financial)?
Tom Gayner: we’ve owned CarMax for a long time now. It was developed within Circuit City at the time. It was sort of an incubated company within Circuit City where they had done a white paper and tried to think about what form of retailing consumers liked least, so, what could you do that would be better than other people? So, what Carmax did was look at the used car buying experience and try to figure out a way to make that better for consumers.
And the net of it is, it’s a fixed priced offering, so no haggle. And it reminded me in many ways – I don’t know if you’ve ever heard the story of R.H. Macy, Macy’s department store? Well, Mr. R.H. Macy himself was a Quaker merchant on Nantucket Island, where there was a community of Quaker merchants who outfitted whaling ships – this puts us back into the 1800s. And he thought Nantucket Island was a little bit of a sleepy place, so he was going to the bustling city of New York to try and catch bigger fish. So he set up his dry goods store, department store, in New York City.
Now Quakers, as a matter of religious belief, sell everything. And they have a long history of merchants selling things for fixed prices, because religiously, they think you’re just as good as you as you as you, so everyone should get the same price. And as a consequence of that, R.H. Macy was able to put ads in the newspaper, that said “set of dishes $2,” “set of sheets $3,” something like that. And that was an incredibly radical concept at the time because most merchants haggled over everything.
So, Macy’s is still going to today, it’s been a huge success, they’ve obviously got a fly wheel going. Well, in the used car business, CarMax is really doing that exact same thing where you know immediately what the transaction prices are both from what you’re trading in and what you’re buying. So that resonated with me – I thought that made a whole lot of sense. The word I was looking for was a tracking stock – it was a tracking stock after it was incubated. Well, it came out at $20.
At the time, AutoNation (AN), which was owned by Glen Isaiah (?) also tried to do a similar thing. And the two fo them became very competitive, both tried to grow very fast. And CarMax probably over-expanded a little bit. As a consequence, they stubbed their toes and ran into some operational difficulties. The stock went – and this was pre-split – from 20, probably got down to less than $2.
HL: So you bought more?
TG: I bought a lot more. I mean, I didn’t buy any at $20. I probably started buying it at $8 on the way down, or something like that. But we bought a ton of it, and bought it all the way down. Because I believed in the concept, I knew the people, I trusted them, I thought they were going to do fine. They slowed down their growth to fix their operational issues. And it’s been off to the races every since. So, at this point, when I bought it, I think they had six or eight locations or something like that. Now they have maybe 175 or so, roughly. And I think that that can be something that can be in almost any mid-to-medium-to-large-size city can support one or more CarMaxes.
HL: So still so much room to grow, and not even nearing market penetration even though you had it that long?
TG: That’s right.
HL: On Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) we’re really interested in the new managers. And everyone who has this as their top holding we want to know, what do you think about their investment philosophy and are you excited about the way they’re managing money and how do you think they’re going to influence the stock going forward?
TG: Sure. I mean, A, I am in agreement with the investment philosophy and the approach of Berkshire. In many ways it’s a role model for us, and how we built Markel (MKL) over the years. So that makes a lot of sense to me. I think Ted and Todd are both talented, thoughtful, intelligent investors, and they’ll do just fine. I also think that Berkshire is as much – or it’s an equal parts an insurance business, an investment business and a collection of operating businesses. And all of them matter a great deal. And all of them are very, very large. And as a consequence, the influence of any one individual today is a lot less than what it would have been 25 or 30 years ago. So I think the company is much more institutionalized today than what it was 30 or 40 years ago. And just like Exxon has been run successfully without John D. Rockefeller for 100 plus years now, I think that Berkshire has the ability to be a large, profitable, exemplar company, for another 100 years, even after Buffett, even after Ted, even after Todd, even after whoever has their hands at the wheel for the next 10 and 20 and 30 years. It’s an institution now, not just a one-man show.
HL: Somebody also mentioned the day that they bought Burlington Northern, the stock didn’t budge, and on most large companies if they did something that radical, it would be all over the news, the stock might do something crazy. But Berkshire is so large and their shareholders are so long-term in thought that it didn’t make waves.
TG: Well that’s correct, but that didn’t happen overnight. Buffett spent decades doing the right thing, cultivating the right sort of behaviors, cultivating that long-term mindset into the shareholder base, such that when an opportunity like that came along, he’s able to do that largely with the support of his shareholders.
By the way, I wouldn’t say that it was unanimous that people were comfortable with that. And it’s amused me – now we’ve been shareholders since 1990, a long time, the 23rd year coming out – and every year at the annual meeting and often times in the press and in stuff you read, you sort of hear these reports about how Berkshire’s lost it, or they can’t do what they did in the past anymore. People have been saying that ever since I’ve been coming out here, since 1991. And yet it continues to compound and grow and move forward. So, I’ll give him the benefit of the doubt that he and the brain trust of the company know what they’re doing, but it seems that they regularly get second guessed.
HL: Great. What do you think about market valuations right now, and are you having difficulty finding bargains right now, or are you so long-term that you aren’t really hunting?
TG: I tend to be a bottom-up person, finding ideas one at a time, rather than having any particular market prediction about things. I don’t know what the market’s going to do. They joke there’s two kinds of people, when it comes to knowing about what the market’s going to do: There’s those that don’t know, and there’s those that don’t know they don’t know. So, I’m in the first category – I don’t know.
I don’t think the valuations are ridiculous or that stretched or out of control or anything. There’s plenty of specific stocks and specific companies and securities that one at a time I think are pretty reasonable investments, and that’s really what we do is to find things one at a time rather than make big macro bets.
Now, from time to time, there are eras and environments where we would act more dramatically because we think things are screaming cheap or ridiculously expensive. I don’t think now is either one of those times. Things are not screaming cheap, neither are they ridiculously expensive. So we’re kind of steady as she goes.
HL: As a younger portfolio manager, a reader who is a CFA and has $8 million under management. He wants to know how to grow his assets under management and his business. Is that something you have advice about?
TG: There was a time in my life when I was in a similar position. And really the best way to enjoy growth is to do a very good job with what you have. And if you do that and put results on the books and treat the people you’re dealing with fairly, it will compound and one thing will lead to another and it will all work out. I don’t know of any dependable way to make that go faster than just the methodical process than doing a good job with what you have.
HL: How long do you spend making an initial purchase and how do you know when you have enough information to make a purchase?
TG: The answer of how long I spend before making a purchase is probably my lifetime. Because knowledge in the investment business is cumulative. You continuously, should be, learning and understanding more things today than you did yesterday. So you might stumble across something or an idea that seems like a sudden idea or that it just happened but really it’s the frame of reference that you’ve built up over your lifetime already that gives you the context to say, this is a good idea, or it’s not. Or, that even gives you enough curiosity and context to say, all right, this might be a good idea, but I’m worried about this factor or that factor or I would like to know a little bit more information about this thing or that thing. So it’s not a uniform blanket answer. It depends on the idea, and the sort of thing it is, and how much you know about it already. But it all builds as a lifetime endeavor.
HL: Since you’re an insurance investor – you kind of do what Prem Watsa and Warren Buffett do – so do you feel like you can just look at an insurance company or financial company and tell whether it’s run well or not, or whether it’s a good investment or not?
TG: Yes, that’s an area that we operate in all the time. It’s an oversimplification to say that I can look at the financial statements of an insurance company and know whether it’s well run or not. I place a lot of faith and stock in the management teams and the people who run things. The financial results are manifestations of what those people are doing, but I somehow or another I want to get to know them to help make that judgment as to whether I think it’s well run or not.
HL: Since you are so strong in that area, what is the number one, or top things that people should look for in an insurance company or a conglomerate?
TG: You have two different things. In the insurance world, reserve integrity is huge. In fact, there is someone who once that joked an insurance company is congealed integrity. Because when you’re creating an insurance company’s set of financial statements, and I am an accountant by training and background, there is an incredible amount of judgment and latitude that goes into putting an insurance company’s financial statement together. Because remember, you’re selling a product today and you don’t know what the ultimate cost of that product is going to be until some years into the future. So you’re going to have to make judgments about that.
So, in between a balance sheet of an insurance company and an income statement of an insurance company, that’s almost a wrestling match between the two. So, management teams in their behaviors and in their character one way or another are going to indicate which financial statement sort of wins that battle in their hearts and minds, and what I’m interested in are insurance companies that think the balance sheet is more important than the income statement, and they’re conservative, they sort of take their time about recognizing income and make sure that the balance sheet is always heavy enough that the reserves are always substantial enough that when you see that play out over time, in things like the lost triangle footnotes, where you get to see the initial estimate that somebody made and then you get to see how that plays out over a multiple-year period, which gives you some flavor as to how conservative or aggressive they were at the time. It’s an insight into the character of the people making the decisions.
But even that, even that has nuances to it, because for instance as in the case of Markel, we’ve made a number of acquisitions over the years. When we buy a company that has a different sort of reserving philosophy, a way of doing things than what we did, we inherit their lost triangles and their history, and that gets melded into our own. So in effect you really have to save the old annual reports and think about what the legacy company did before you just blend it all together to draw a conclusion.
HL: So you recommend that people also look at what the insurance company is buying and look at those balance sheets as well?
TG: Yes… but if they’re buying them they probably have a plan in mind. We have bought in some cases wonderful insurance companies that are good at what they do. Sometimes we buy companies that needed some help. So those historical financial statements would have reflected two very different paths and histories but the path going forward is what we’re trying to make better.
HL: Are there any sectors that you feel are undervalued right now?
TG: The financial system still bears a lot of scars from 2008. And it’s not just the financial system, it’s the people who were connected to the process. That hasn’t sort of normalized or found equilibrium yet. I wouldn’t make some blanket statement that financial stocks are undervalued. I’d say they’re complicated. And when you’re looking at complexity, some people are going to figure things out before other people and make returns from doing so. So that’s interesting.
And you live in Texas – the energy landscape is changing dramatically. And there’s immense implications for that that I think are bigger than people have figured out yet. Again, I don’t know what the outcome’s going to be. I wouldn’t just say “buy energy stocks” or “sell energy stocks.” All I know is the tectonic place are moving. So the world’s going to be different going forward than what it was in the past in that realm, in that area.
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Holly LaFon: Do you want to talk a little about your top holding? What is it that you like about CarMax (KMX, Financial)?
Tom Gayner: we’ve owned CarMax for a long time now. It was developed within Circuit City at the time. It was sort of an incubated company within Circuit City where they had done a white paper and tried to think about what form of retailing consumers liked least, so, what could you do that would be better than other people? So, what Carmax did was look at the used car buying experience and try to figure out a way to make that better for consumers.
And the net of it is, it’s a fixed priced offering, so no haggle. And it reminded me in many ways – I don’t know if you’ve ever heard the story of R.H. Macy, Macy’s department store? Well, Mr. R.H. Macy himself was a Quaker merchant on Nantucket Island, where there was a community of Quaker merchants who outfitted whaling ships – this puts us back into the 1800s. And he thought Nantucket Island was a little bit of a sleepy place, so he was going to the bustling city of New York to try and catch bigger fish. So he set up his dry goods store, department store, in New York City.
Now Quakers, as a matter of religious belief, sell everything. And they have a long history of merchants selling things for fixed prices, because religiously, they think you’re just as good as you as you as you, so everyone should get the same price. And as a consequence of that, R.H. Macy was able to put ads in the newspaper, that said “set of dishes $2,” “set of sheets $3,” something like that. And that was an incredibly radical concept at the time because most merchants haggled over everything.
So, Macy’s is still going to today, it’s been a huge success, they’ve obviously got a fly wheel going. Well, in the used car business, CarMax is really doing that exact same thing where you know immediately what the transaction prices are both from what you’re trading in and what you’re buying. So that resonated with me – I thought that made a whole lot of sense. The word I was looking for was a tracking stock – it was a tracking stock after it was incubated. Well, it came out at $20.
At the time, AutoNation (AN), which was owned by Glen Isaiah (?) also tried to do a similar thing. And the two fo them became very competitive, both tried to grow very fast. And CarMax probably over-expanded a little bit. As a consequence, they stubbed their toes and ran into some operational difficulties. The stock went – and this was pre-split – from 20, probably got down to less than $2.
HL: So you bought more?
TG: I bought a lot more. I mean, I didn’t buy any at $20. I probably started buying it at $8 on the way down, or something like that. But we bought a ton of it, and bought it all the way down. Because I believed in the concept, I knew the people, I trusted them, I thought they were going to do fine. They slowed down their growth to fix their operational issues. And it’s been off to the races every since. So, at this point, when I bought it, I think they had six or eight locations or something like that. Now they have maybe 175 or so, roughly. And I think that that can be something that can be in almost any mid-to-medium-to-large-size city can support one or more CarMaxes.
HL: So still so much room to grow, and not even nearing market penetration even though you had it that long?
TG: That’s right.
HL: On Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) we’re really interested in the new managers. And everyone who has this as their top holding we want to know, what do you think about their investment philosophy and are you excited about the way they’re managing money and how do you think they’re going to influence the stock going forward?
TG: Sure. I mean, A, I am in agreement with the investment philosophy and the approach of Berkshire. In many ways it’s a role model for us, and how we built Markel (MKL) over the years. So that makes a lot of sense to me. I think Ted and Todd are both talented, thoughtful, intelligent investors, and they’ll do just fine. I also think that Berkshire is as much – or it’s an equal parts an insurance business, an investment business and a collection of operating businesses. And all of them matter a great deal. And all of them are very, very large. And as a consequence, the influence of any one individual today is a lot less than what it would have been 25 or 30 years ago. So I think the company is much more institutionalized today than what it was 30 or 40 years ago. And just like Exxon has been run successfully without John D. Rockefeller for 100 plus years now, I think that Berkshire has the ability to be a large, profitable, exemplar company, for another 100 years, even after Buffett, even after Ted, even after Todd, even after whoever has their hands at the wheel for the next 10 and 20 and 30 years. It’s an institution now, not just a one-man show.
HL: Somebody also mentioned the day that they bought Burlington Northern, the stock didn’t budge, and on most large companies if they did something that radical, it would be all over the news, the stock might do something crazy. But Berkshire is so large and their shareholders are so long-term in thought that it didn’t make waves.
TG: Well that’s correct, but that didn’t happen overnight. Buffett spent decades doing the right thing, cultivating the right sort of behaviors, cultivating that long-term mindset into the shareholder base, such that when an opportunity like that came along, he’s able to do that largely with the support of his shareholders.
By the way, I wouldn’t say that it was unanimous that people were comfortable with that. And it’s amused me – now we’ve been shareholders since 1990, a long time, the 23rd year coming out – and every year at the annual meeting and often times in the press and in stuff you read, you sort of hear these reports about how Berkshire’s lost it, or they can’t do what they did in the past anymore. People have been saying that ever since I’ve been coming out here, since 1991. And yet it continues to compound and grow and move forward. So, I’ll give him the benefit of the doubt that he and the brain trust of the company know what they’re doing, but it seems that they regularly get second guessed.
HL: Great. What do you think about market valuations right now, and are you having difficulty finding bargains right now, or are you so long-term that you aren’t really hunting?
TG: I tend to be a bottom-up person, finding ideas one at a time, rather than having any particular market prediction about things. I don’t know what the market’s going to do. They joke there’s two kinds of people, when it comes to knowing about what the market’s going to do: There’s those that don’t know, and there’s those that don’t know they don’t know. So, I’m in the first category – I don’t know.
I don’t think the valuations are ridiculous or that stretched or out of control or anything. There’s plenty of specific stocks and specific companies and securities that one at a time I think are pretty reasonable investments, and that’s really what we do is to find things one at a time rather than make big macro bets.
Now, from time to time, there are eras and environments where we would act more dramatically because we think things are screaming cheap or ridiculously expensive. I don’t think now is either one of those times. Things are not screaming cheap, neither are they ridiculously expensive. So we’re kind of steady as she goes.
HL: As a younger portfolio manager, a reader who is a CFA and has $8 million under management. He wants to know how to grow his assets under management and his business. Is that something you have advice about?
TG: There was a time in my life when I was in a similar position. And really the best way to enjoy growth is to do a very good job with what you have. And if you do that and put results on the books and treat the people you’re dealing with fairly, it will compound and one thing will lead to another and it will all work out. I don’t know of any dependable way to make that go faster than just the methodical process than doing a good job with what you have.
HL: How long do you spend making an initial purchase and how do you know when you have enough information to make a purchase?
TG: The answer of how long I spend before making a purchase is probably my lifetime. Because knowledge in the investment business is cumulative. You continuously, should be, learning and understanding more things today than you did yesterday. So you might stumble across something or an idea that seems like a sudden idea or that it just happened but really it’s the frame of reference that you’ve built up over your lifetime already that gives you the context to say, this is a good idea, or it’s not. Or, that even gives you enough curiosity and context to say, all right, this might be a good idea, but I’m worried about this factor or that factor or I would like to know a little bit more information about this thing or that thing. So it’s not a uniform blanket answer. It depends on the idea, and the sort of thing it is, and how much you know about it already. But it all builds as a lifetime endeavor.
HL: Since you’re an insurance investor – you kind of do what Prem Watsa and Warren Buffett do – so do you feel like you can just look at an insurance company or financial company and tell whether it’s run well or not, or whether it’s a good investment or not?
TG: Yes, that’s an area that we operate in all the time. It’s an oversimplification to say that I can look at the financial statements of an insurance company and know whether it’s well run or not. I place a lot of faith and stock in the management teams and the people who run things. The financial results are manifestations of what those people are doing, but I somehow or another I want to get to know them to help make that judgment as to whether I think it’s well run or not.
HL: Since you are so strong in that area, what is the number one, or top things that people should look for in an insurance company or a conglomerate?
TG: You have two different things. In the insurance world, reserve integrity is huge. In fact, there is someone who once that joked an insurance company is congealed integrity. Because when you’re creating an insurance company’s set of financial statements, and I am an accountant by training and background, there is an incredible amount of judgment and latitude that goes into putting an insurance company’s financial statement together. Because remember, you’re selling a product today and you don’t know what the ultimate cost of that product is going to be until some years into the future. So you’re going to have to make judgments about that.
So, in between a balance sheet of an insurance company and an income statement of an insurance company, that’s almost a wrestling match between the two. So, management teams in their behaviors and in their character one way or another are going to indicate which financial statement sort of wins that battle in their hearts and minds, and what I’m interested in are insurance companies that think the balance sheet is more important than the income statement, and they’re conservative, they sort of take their time about recognizing income and make sure that the balance sheet is always heavy enough that the reserves are always substantial enough that when you see that play out over time, in things like the lost triangle footnotes, where you get to see the initial estimate that somebody made and then you get to see how that plays out over a multiple-year period, which gives you some flavor as to how conservative or aggressive they were at the time. It’s an insight into the character of the people making the decisions.
But even that, even that has nuances to it, because for instance as in the case of Markel, we’ve made a number of acquisitions over the years. When we buy a company that has a different sort of reserving philosophy, a way of doing things than what we did, we inherit their lost triangles and their history, and that gets melded into our own. So in effect you really have to save the old annual reports and think about what the legacy company did before you just blend it all together to draw a conclusion.
HL: So you recommend that people also look at what the insurance company is buying and look at those balance sheets as well?
TG: Yes… but if they’re buying them they probably have a plan in mind. We have bought in some cases wonderful insurance companies that are good at what they do. Sometimes we buy companies that needed some help. So those historical financial statements would have reflected two very different paths and histories but the path going forward is what we’re trying to make better.
HL: Are there any sectors that you feel are undervalued right now?
TG: The financial system still bears a lot of scars from 2008. And it’s not just the financial system, it’s the people who were connected to the process. That hasn’t sort of normalized or found equilibrium yet. I wouldn’t make some blanket statement that financial stocks are undervalued. I’d say they’re complicated. And when you’re looking at complexity, some people are going to figure things out before other people and make returns from doing so. So that’s interesting.
And you live in Texas – the energy landscape is changing dramatically. And there’s immense implications for that that I think are bigger than people have figured out yet. Again, I don’t know what the outcome’s going to be. I wouldn’t just say “buy energy stocks” or “sell energy stocks.” All I know is the tectonic place are moving. So the world’s going to be different going forward than what it was in the past in that realm, in that area.
See Tom's stock portfolio here. Also, don't forget to try a 7-day free trial of GuruFocus.
