In honor of our member and friend, Saurabh Madaan, joining Tom Gayner’s team at Markel Corporation, we revisit below our exclusive interview with Tom, who serves as chief investment officer and co-chief executive officer of Markel. In the timeless interview, conducted near the stock market bottom in March 2009, Tom provides some much-needed perspective and investment wisdom.
MOI Global: 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.
My father used to tell me that, ‘you can’t do a good deal with a bad person.’ And he was right.
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.
MOI: How does your approach to international investing differ from that to investing in U.S. equities?
Gayner: I don’t think international investing is as different as it used to be. I believe that the world in general is becoming a smaller place. Given the advances in technology and communication, everything is starting to correlate with everything else. I think that growth rates, economic development, and rates of return on investment are all tending to head in the same direction. Capital has a universal passport and it heads to wherever it needs to go to earn the best returns possible.
Companies, especially the larger global companies where we tend to make most of our investments are doing business all around the world. All of these things tend to make nationality and borders slightly less relevant than what was previously the case.
One question I usually ask people when they ask me about our global investment approach is to mention two companies to them. I say that both companies make engines and move things from one place to another. One of them is Caterpillar and one of them is Honda. Which one is the international company and which one is the domestic firm? Depending on my mood, I give the person either an A or F on that exam. While Caterpillar is headquartered in Peoria Illinois, it does more of its business outside the U.S. than inside. While Honda is headquartered in Japan, I believe the U.S. is still its largest market. Your brokerage statements or pie chart presentations will probably show CAT as a U.S. company and Honda as an International company. I think that is a superficial difference and not a good guide to know if you are investing internationally or not.
Both of those are global companies and doing business all around the world. In my mind it is a distinction without a difference to describe one as a U.S. company and the other as an international firm.
That same sort of look through to where the company does business applies to a lot of the companies we invest in. Even though Markel is a relatively small company in the grand scheme of things, over a third of our business comes from outside the U.S. these days. That is just business written outside the borders of the U.S. Digging deeper, I think you would find that a lot of our U.S. written business relates to companies doing meaningful foreign sales and a lot of our internationally written business relates to activities that circle back to the U.S. The world is increasingly interconnected and I just try to make sure we are investing in the best business possible at the appropriate price.
MOI: You emphasize the impact of the passage of time on your investments. With the trend toward compression of time horizons and a focus on short-term performance in the investment industry, we are seeing many investors—even those who consider themselves value investors—emphasizing near-term stock price catalysts. Do you see a growing inefficiency in the pricing of “boring” investments that will deliver returns over time versus investments that are expected to pay off at a foreseeable point in time?
…the playing field for longer-term investing is getting less crowded. Fewer people are able to think about the long term and I believe that creates an opportunity…
Gayner: Yes. To expand on that one word answer, I think there is a real time arbitrage opening up right now. An old saying is that in a bull market, your time horizons grow longer and longer. In a bear market, they grow shorter and shorter. The bear market experience of the last few years compresses time horizons for a lot of people. Even if they want to remain focused on the long term, there are inevitable career risks in not putting results on the books today when people are so anxious about every aspect of their lives.
I think that means the playing field for longer-term investing is getting less crowded. Fewer people are able to think about the long term and I believe that creates an opportunity to buy wonderful, long duration investments, at better prices than has been the case in the last decade or so.
MOI: What is the one mistake that keeps investors from reaching their goals?
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In addition to the above interview, the MOI Global community is grateful to have benefited from Tom Gayner’s wisdom on other occasions as well. For example, Tom discussed the drivers of long-term compounding at Latticework New York 2017 and insurance and the Markel business model at Best Ideas 2013.