Markel Corporation (MKL)

[Enterprising Investor]

Like Buffett, Another Folksy Investor Turns Patience Into Profit (5/22/15)

Earlier this month, a crowd filled an auditorium to attend a corporate annual meeting at which a folksy investor spoke about his company and the secrets of success. But they weren’t in Omaha to hear Warren Buffett talking about Berkshire Hathaway; this crowd came to the Altria Theater in Richmond, Va., for the annual meeting of Markel Corp.

One of the speakers, Thomas Gayner, co-president and chief investment officer of the financial-holding company, has an outstanding record as a portfolio manager. He works only for Markel and doesn’t take outside clients, but every investor can learn from him.

Over the past 15 years, Mr. Gayner’s stocks have returned an average of 11.3% annually, while the S&P 500 index of big U.S. stocks has returned 4.2%, counting dividends. Last year, when winning portfolio managers were scarcer than vegetarians at a pig roast, Mr. Gayner outperformed the S&P 500 by 4.9 percentage points. His portfolio fell 34% in the market rout of 2008, but that was better than the S&P 500’s 37% loss.

You never would know any of this from listening to Mr. Gayner. After a good year, most portfolio managers beat their chests even harder than they beat the market; Mr. Gayner’s 2014 report merely said, “our overall equity portfolio earned 18.6%,” without even mentioning that the S&P 500 was up 13.7%.

Several of Mr. Gayner’s peers describe him as a good investor who has become great by knowing he is just good. He is no Warren Buffett, and he is keenly aware of his limitations. “I tell investors, ’You’re smarter than I am, but I’m managing your money,’” Mr. Gayner says. “‘If you see me doing something I shouldn’t be, tell me.’”

But he also makes the most of his strengths.

Markel’s costs are so low that he can manage its $4.5 billion stock portfolio for less than 0.01% in annual expenses, about one-70th the cost of the average U.S. stock mutual fund.

Mr. Gayner, 53 years old, worked as an accountant, a stockbroker and an equity analyst before joining Markel in 1990. He looks for profitable businesses with low debt, good management, plenty of opportunities to reinvest future profits and reasonably cheap stock.

He says, “I think as hard as I can about what I would do if this was my own money and even if it was all the money I ever will have.” Adds Mr. Gayner: “Sometimes that means hanging on even longer than you might otherwise.”

According to Mr. Gayner, Markel’s insurance operations are so consistently profitable that cash has flowed into his portfolio every single month since he joined the company in 1990. Unlike most mutual-fund or hedge-fund managers, he has been able to add to his favorite holdings whenever he wishes; any individual investor who is a net saver, Mr. Gayner says, shares the same advantage.

Markel doesn’t hold “analyst days” or provide “guidance” on future earnings. So the company attracts investors who tend to hold the stock for years at a time, which, in turn, frees Mr. Gayner from the pressure to beat the market over the short run or to shadow the S&P 500.

So he can bet big. His 10 largest stockholdings total 45% of the portfolio; at the average U.S. stock fund, according to Morningstar, the 10 biggest positions account for just under 30%.

He lets his winners run. At Markel’s full 35% tax rate, “if I sell, I have to invest the proceeds, and I’m reinvesting 65-cent dollars,” Mr. Gayner points out. “That makes the hurdle for switching a lot higher.”

He has owned Berkshire Hathaway, now approximately 11% of Markel’s stock portfolio, for a quarter-century and CarMax (9% of the portfolio), Brookfield Asset Management (4%), Walt Disney Co.(4%) and Marriott International (3%) for at least 15 years apiece.

“If you stumble on something that really compounds in value for decades, it can make all the difference,” he says. “The things you were right about become more and more important as time goes by, while the things you were wrong about become less and less important.”

The economist Paul Samuelson once said that there is “only one place to make money in the mutual-fund business—as there is only one place for a temperate man in a saloon—behind the bar and not in front of it…so I invested in a [fund] management company.” Mr. Gayner also likes to invest in such companies. He owns, among others, BlackRock, Federated Investors, Oaktree Capital Group and T. Rowe Price Group.

Many of Mr. Gayner’s roughly 90 other positions are tiny, including Rush Enterprises, an operator of truck dealerships, in which Markel holds less than a $300,000 position. “I think about something more if I own a little of it than if I own none of it,” he says. “I’m scattering seeds, seeing which become seedlings.”

Instead of trying to mimic the inimitable brilliance of Mr. Buffett, maybe more investors should emulate the common sense and patience of Mr. Gayner.

http://blogs.wsj.com/moneybeat/2015/05/22/like-buffett-another-folksy-investor-turns-patience-into-profit/