An Interview with Markel's Tom Gayner (7/25/14)
Tom Gayner is the President and Chief Investment Officer of Markel, a specialty insurer located 102 miles south of Motley Fool HQ. Mr. Gayner kindly invited me and three other Fools to have lunch with him this past Tuesday.
Markel is regularly mentioned in speculative discussions around which company could be the "next Berkshire Hathaway." As Chief Investment Officer, Gayner manages the company's equity portfolio which has generated returns of 12.4% per year over the past decade – handily beating the S&P 500. In addition to that sterling performance, Gayner is one of the most quotable investors out there. The video below is our full conversation. A full transcript follows the video.
Matt Koppenheffer: I'm here today with the CIO and President of Markel, Tom Gayner. Tom, thank you so much for joining us. This is a really exciting opportunity to get to chat with you.
Tom Gayner: My pleasure, thanks for coming.
Koppenheffer: Let me start out with a nice easy question, here. I know that you are a voracious reader. What are some books that you've recently read?
Gayner: Funny you should ask; last week I happened to be on vacation and it was a great treat because essentially I got to sit and read a book a day, and that's a great luxury, to have that much time.
One of the books that I read through the course of that week was a book called Once in Golconda, by John Brooks. I don't know if you saw it, but recently Buffett and Bill Gates were talking about a John Brooks book called Business Adventures, and just by coincidence I'd read Once in Golconda earlier in that week.
It's the story of the 1920s and 1930s, written from the perspective of Richard Whitney, who was the President of the New York Stock Exchange at that time. It's a fun book. It's extraordinarily well-written. There's thousands of books to talk about, but that one is fresh in my mind, being very recent.
Koppenheffer: Sounds like a good beach read.
Gayner: It is that!
Koppenheffer: Switching gears, circle of competence. This is something that we hear Warren Buffett talk about so much. What would you consider that your circle of competence is, in terms of investing?
Gayner: "Sugar, money, and dirt" are the three catchwords that I use to describe my circle of competence over the years.
One is the sense that, in sugar, you're talking about food, candy, chocolate, alcohol, things of that nature. Those are things that human beings, in general, like very much; understandable businesses, businesses that produce cash flows that you can make sense of. You can think about what they did the last five years, and what they're likely to do the next five years. That makes a lot of sense to me.
Money -- financial intermediation, banks, brokerage firms, insurance companies, financial advisory businesses, investment management -- things that deal in the inventory of money naturally resonate and make sense to me. I feel very comfortable operating in those worlds.
Dirt are real estate or businesses that you can touch and feel, and have tangible assets to them, and again the cash flows from those businesses tend to be relatively predictable, compared to many others, and reasonable people can make reasonable judgments about those kinds of businesses.
That would tend to define the circle of competence as I would define it right now.
It's also important to never be satisfied with anything, including your circle of competence. One of the things you should always be doing with your circles of competence is see if you can push it a little bit more, because the world changes. It keeps spinning, and things don't stay the same, so you always need to be working and learning and studying to make sure that your circles of competence are relevant.
Koppenheffer: It's nice to have some of those like sugar, where ... I'm pretty confident the chocolate bar is going to do well.
Gayner: It was popular yesterday, it was popular last year, it was popular 100 years ago, it'll be popular 100 years from now as well, probably.
Now, some people watching this may hear Tom Gayner talking about sugar, money, and dirt, and say, "That should be my circle of competence, because Tom Gayner is a fantastic investor." Is that the right takeaway from that?
Gayner: No, I think that oversimplifies things, and I think anybody who's watching this really should figure out what their circles of competence are.
Different people have different skills and abilities. If they happen to be particularly knowledgeable about medical things, or technological things, or entertainment, or sports -- anything that's their skill and their ability -- those should be defined by them, rather than thinking, "Somebody else does that, so I should do that too."
For instance, I like to play golf so I was sitting there watching the British Open and Rory McIlroy wins that wire-to-wire. I think about myself when I go play golf, and I think, "There's Rory, and he's got a golf shirt. I've got a golf shirt. He's got a golf glove, and I've got a golf glove. He's got a golf club. I've got a golf club. I see him swing like that, and I think I swing like that" -- but it turns out I don't!
His circle of competence is very different than mine. Even if I try to pretend and put on the uniform and the attributes of what his circle of competence is, my results are not going to be as good as his because we're just two different people, and have two different sets of gifts.
Koppenheffer: Got you.
Now in your investing, management -- evaluating management -- is a big part of the process. From a retail investor's perspective, obviously Tom Gayner pays a visit or calls somebody and it's a different reception than John Smith calling them up.
For that retail investor, what's a good way to get a sense for management; their trustworthiness, their capabilities?
Gayner: For instance in the course of the last week or two, I don't remember where I read it, but there was an article that profiled Bill Marriott. I believe he's roughly 82 years of age, and it was his life story and how he started out working in the root beer stand, but then morphed into the hotel business. It was talking about what Marriott is doing now, with some of the newer designs.
Well, we're Marriott investors. I've never spent any time with Bill Marriott. I don't think I've even had the chance to shake his hand, although I'd very much like to do so. But we've owned that stock probably for the better part of 20 years.
I'm a Marriott customer. I can see and understand what they do, as a customer, as well as reading their financial statements and the annual report. So, even though I don't know him, I can see and taste and touch and feel the product and the service.
I can read the financial statements. I can read profiles about him, and I can get as good a sense as possible without actually having a personal relationship with him, that enables me to make some judgment about the company that would not be wildly different than what any retail investor would have the opportunity to do.
Koppenheffer: I would say that another -- you just mentioned how long Marriott has been in the portfolio -- a key aspect of the investing at Markel is the long-term ownership. It can be such a huge advantage, to own stocks for that long.
How do you deal with ... we'll say the "dedication." I could also maybe say the potential boredom; some people might think of it as boring! What is it that allows you to own a stock for 10 years, for 20 years, and just say, "I'm going to own this. I'm not going to worry about everybody else buying and selling and turning things over"?
Gayner: Well, there's a variety of factors that would go into that. First off, I never buy something and say, "I'm done." Although we've owned Marriott for well over a decade, and probably two decades, that doesn't necessarily mean we will own Marriott tomorrow.
Things could change, and in fact one of the things I like about Marriott as an example was Bill Marriott, in this interview, was talking about the way in which the hotel business is changing; Airbnb, the sharing economy, all those sorts of things which are opening up new competitors that you would have never thought of 20 years ago, but that exist now.
The Marriott Corporation, not just Bill Marriott but other people within that company, are aware of those shifting changes, so part of my job as an investor is to monitor and stay on top of what Marriott themselves are doing, in response to the fact that the world is changing.
It's not boring because there are developments to be kept track of, and things to stay on top of, and things to make sure that your thinking is appropriate for today, just as it was 10 years ago or 20 years ago. And, most importantly, what will be the case 10 years or 20 years from now.
But there are businesses that tend to remain more relevant or less relevant, as time goes by. To the extent that you can find those that remain relevant, and that have good businesses, and that their customer bases can expand over time, and you can own them for a long time, that tends to be a very exciting thing to me. Some may find it boring. I think it's wonderful.
One other point I would say about that is, we're very lucky to be alive now, in the sense that the amount of progress that is, and I think will continue to happen all around the world, is faster and more dramatic right now than it has ever been before.
You take a company like Marriott as an example. How many hotel rooms will they be adding to their portfolio in the U.S. versus the rest of the world over the next 10 or 20 years? Well, just as if you were to go into a Wayback Machine and think about 30 years ago, when Marriott was just starting out, roughly, in the U.S. -- there were a lot of potential hotel rooms in the U.S. that they could build that company on the basis of.
Well, now it's the rest of the world.
Koppenheffer: It's a pretty big place!
Gayner: It's a big place. I don't know of one that's bigger that we can operate in!
Things like that; it's some leading companies and things that you think of as very established, dominant brands. Well, that may be true, but the addressable market that they've worked with before is much smaller than what it can potentially be over the next 10 or 20 or 30 years. You have proven winners that you can invest with and back, as they go about the task of trying to be successful in other parts of the world.
Koppenheffer: In addition to Marriott, CarMax, Disney, Berkshire Hathaway among the long-term positions that have been in the portfolio a decade or more. In addition, I've heard you talk about the tax advantages of holding a stock. CarMax is an example that Markel has a rather large profit, sitting on.
This may be a little bit different for retail investors that have tax-advantaged accounts, but from a tax perspective I know you also have some thoughts on holding onto stocks, rather than selling them or turning them over.
Gayner: Sure. The math, for us -- we're a full corporate taxpayer, so 35% tax rate, roughly, is what we would incur any time we sold something and recognize a gain. If you've got a big gain in something, a dollar's worth of gain, in effect if you sold that to buy something else with it, you've only got $0.65 to invest in the second idea, after you've sold and recognized the dollar gain.
It's a lot more productive for us, and a better use of our time and limited areas under our circle of competence, to buy something that we think we're going to be able to hold this, not just for the next 10 points, but for the next 100 points or the next 500 points.
There are very compelling investment ideas where a stock may be $20 a share and somebody argues a dramatically correct and compelling case as to why this is going to be $30 -- and it works. It goes from $20 to $30, but it's not the kind of company that's going to continue to compound in value over a long period of time.
So the smart thing to do, if you're trading those kinds of securities is, if you're right and it goes from $20 to $30, you should sell it and recognize the gain. But then you have to figure out what you're going to do next.
My bias, and the way I spend my time, is to try to buy something at $20 that I think is going to go to $30 -- and then $40, and then $50, and then $90, and then $150, and $300 -- over long periods of time, because it's just a much more efficient way for me to spend my time.
Koppenheffer: Looking at the big picture here, we've had a very nice bull market run and valuations, by some people's calculations, are now looking a little bit loftier -- 18x, 19x P/E ratios kind of level.
What is your thought on the current state of the market, and what we might see over the next five years? I know speculating on the market is not really your bag, but I've got to go there just a little bit!
Gayner: Well, you asked me about that book, Once in Golconda, and one of the central characters in that book was J. P. Morgan -- the original J. P. Morgan that you think of -- and his son, who subsequently ran that bank. J. P. Morgan's famous quote, when asked about the market and what it was going to do, he says, "It will fluctuate."
Koppenheffer: That's a great answer.
Gayner: It's an accurate answer. It was true 100 years ago, it's true today.
Similarly, going back 100 years ago, if we talk about the Dow -- and the Dow roughly at 17,000 -- what was it 100 years ago? It was probably closer to 17.
Koppenheffer: And still fluctuating.
Gayner: I don't know what the number was, but it's up a lot in the course of the last 100 years. I've been in the investment business close to 30 years now. I hope to be in it for another 30 years. I think it'll be massively higher 30 years from now than it is today -- and that's really the kind of time frame that I think about.
I have no short-term predictions. It's not an extraordinarily cheap market, it's not an extraordinarily expensive market, but it's certainly one in which I think you can find productive investment ideas.
Koppenheffer: Pushing you outside of your circle of competence a little bit more ...
Gayner: I thought we were talking about that when we talked about golf!
Social networks. Social networks -- LinkedIn, Facebook, Twitter -- these are companies that we see, we're using all the time. They're on the lips of a lot of retail investors and everyday folks getting into the market. Do you have a view on the value of these, where they could be headed? What's your thought on the businesses?
Gayner: In general, we know the ones which have been spectacularly successful. There are others that have flitted into view, and are no longer with us, or certainly no longer held in the same esteem as what they might have been, potentially. I recognize completely that some of these are, and will continue to be, of immense value. But it's not my field of expertise to be able to opine on them.
One of the things that I do think about, and that I am responsible for within my circle of competence, is the things that we do own and how are their businesses affected by the growing power of a Google or a Facebook?
For instance, in the late 90s as an example, I tended not to own some of the dot-com companies that were very popular at the time, and I would be criticized for not being "current" with technology.
I always would say to people, "Actually, I own shares in the most successful technology company in the world."
People who knew me well would look at me quite quizzically and say, "What do you mean? You don't own any of that."
I said, "Yes, I do. I own Walmart." If you think about Walmart, it was their brilliant use of technology, as much as anything else, that enabled them to scale the size of that business. While you would not necessarily have "Walmart" fall off your lips as an example of what's a great technology company, they were great users of technology.
Marriott, which we spoke of earlier -- the reservation system, the pervasiveness -- it started out with 800 phone numbers, and now marriott.com or the Expedias and Pricelines of which they would be a part of. It's my responsibility and within my circle of competence to decide and to stay on top of whether I think they are effectively adapting to the new environment they have to operate in.
Koppenheffer: I would say in the past few years, maybe the past 5 or 10 years, there's been an increased focus on behavioral investing; the ways that our brain can get in the way of good investing results. For you, what are some of the most difficult biases that you have to face, and how do you deal with them?
Gayner: Great question. I hadn't thought about it in exactly those phrases. Where it really makes sense to me, and where things clicked, was the Thinking, Fast and Slow book that Daniel Kahneman wrote.
I try to think about where I have thought quickly, and instantly reacted to something and made the decision -- whether you want to call it the reptilian brain, the Type 1 thinking, Type 2 -- all the language around those sorts of things. Where are you making simplifying assumptions, and where are you not?
I don't have a broad, generic category to answer your question with, but I do try to stay cognizant, personally, of where I might have jumped to a conclusion and where I should slow down ... and similarly, where sometimes jumping to a conclusion is very helpful, and those kinds of decisions are more likely to be correct than not.
Koppenheffer: Fortunately, I would imagine having stocks in your portfolio for 10 years plus helps avoid making split-second decisions.
Gayner: Well, let's put it this way. It helps split-second decisions to be more accurate than they used to be.
Charlie Munger talks about this quite a bit; accumulated wisdom, and having been in the business and studied companies, and studied business, and studied people, and studied history for years and years and years and years and years, you ought to be better at it the longer you've been doing it and the older you get.
Koppenheffer: Like the muscle memory of an athlete.
Koppenheffer: We put a call out to Motley Fool readers, to see if they had questions that they wanted us to bring to you, and I've got a couple of them that we could potentially close with, here.
The first one is from Christ W. His question was, "Does Markel Ventures look outside the U.S. for acquisitions, and if so does the process change when looking internationally?"
Gayner: We do. The first several Markel Ventures acquisitions that we did, tended to be pretty close to home -- some of which were right here in Richmond -- because it was a new activity for us, and we were stretching and expanding our circle of competence.
We thought it was quite important to make sure that we increased the odds of knowing what we were doing, which was helped by the fact that we knew people in this community as we did our first couple of acquisitions.
Since that time, and we're 10 years into the program now, we have indeed bought some non-U.S.-based businesses. They have tended to be businesses that the companies that we already operate, were already in. It wasn't that we got into a new business that was outside the U.S., and this was the first step in that world that we ever did.
The first company we bought in Markel Ventures was AMF Bakery equipment, so we have a decade's worth of experience in baking equipment, food supplies, and things of that nature, so some of the international deals we have done have been through AMF and in the food world -- again, connected to that "Sugar" chain.
Koppenheffer: And circle of competence is big in that.
Gayner: Circle of competence, that's exactly right. We've also done some international deals in our Ellicott Dredging operation. Ellicott, while it's headquartered in Baltimore, Maryland, actually does the vast majority of their sales outside the U.S., and has for a long time, so the people who run that business are experienced and skilled, and proven winners at doing business all around the globe, so they really were leading the transaction to buy the things that we bought outside the U.S.
The second question I have here comes from Andy S. The question is, "You get five companies, excluding Markel, to hold forever. Which companies, and why?"
Gayner: I hesitate to answer that, only because that answer might change tomorrow. So, Andy S., you can look at our public filings and you can see what we own.
You've mentioned some of the names. They are subject to change, so before we memorialize something on a stone, let's defer to another question!
Koppenheffer: We'll stick to the 13Fs for that.
Koppenheffer: Tom, I really appreciate you joining us today. This has been a lot of fun.
Gayner: My great pleasure, thanks.
Matt Koppenheffer owns shares of Berkshire Hathaway, Markel, and Wal-Mart Stores. The Motley Fool recommends Berkshire Hathaway, CarMax, Google (A shares), Google (C shares), LinkedIn, Markel, Priceline Group, Twitter, and Walt Disney. The Motley Fool owns shares of Berkshire Hathaway, CarMax, Google (A shares), Google (C shares), LinkedIn, Markel, Priceline Group, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. http://www.fool.com/investing/general/2014/07/25/an-interview-with-markels-tom-gayner.aspx