Hello everyone and welcome to At Barron's. I'm Andy Serwer and welcome to our guest Tom Gayner, CEO of Markel Group. Tom, great to see you. Thanks for joining us.
Andy, thanks so much for having me. Good to be here.
I know this is a question you often get, but please explain to us what Markel Group is exactly.
Well, Markel Group is an insurance-based holding company. Been around since 1930, so we're coming up on a hundred years. We started out in Northern Virginia insuring jitney transportation devices and taxi cabs of its day. And kept in sort of specialty forms of insurance for a long time. We've been investors in public equity securities for a very long time, started about 20 years ago. We moved from buying publicly traded securities to buying wholly owned businesses. So we have a collection of insurance and investment and non-insurance businesses that comprise the Markel Group.
All right. Well, a lot of people might say that sounds a little bit like Berkshire Hathaway. You get that a lot that you're a little Berkshire Hathaway. Is that the case, Tom? And how intentional is that?
Well, we've certainly studied the playbook and the example of what Buffett built at Berkshire for many, many years. In 1986 when Markel went public, I was actually an analyst who lucky enough was assigned to cover Markel in the IPO process and I had been familiar through the work of Carol Loomis and Fortune magazine with Buffett from that time. And I saw indeed a specialty insurance focused holding company business that was willing to invest money longer term and I said to myself right at that point that boy that's the formula by which Buffett built Berkshire. So here was an opportunity to see that recreated or that play run right here in Richmond, Virginia where I was living at the time. So that made all the sense in the world to me and given the example of how well they've done it, it seems a pretty good playbook to follow.
Tom, is it really desirable or even possible to emulate Warren Buffett and the late Charlie Munger and what they've done and did do and are still doing at least Buffett in terms of Berkshire Hathaway? How realistic is that?
Yeah. I think in terms of achieving what they've achieved, that is a different issue than emulating how they behave and the way they do things. So for instance, as a kid, I grew up at the era when John Wooden was the coach at UCLA and was winning national championship after national championship after national championship. And while I was never going to be good enough to play for UCLA, if I was lucky enough to be a basketball coach, I would read everything that Wooden ever wrote and I would study his videos and I would observe how he managed to coach that team. And am I going to win 12 national championships if my memory is correct of what he won at UCLA? The answer is probably no. But in terms of the techniques and how you build a team and how you go about things, I think he's an eminently worthy character to study. And oftentimes in the world of sports, you'll hear the phrase coaching tree, whether it's basketball or football, where a coach will be placed in the legacy of he coached under this coach, who coached under that coach. So the ideas involved in the coaching trees and learning from people who frankly are better at it than you'll ever be. I'd rather learn about something from somebody who's better than I'll ever be than from somebody who's not.
Yeah. So it's a continuous process for you. I know you go to the Berkshire Hathaway annual meeting, Tom. How many have you been to? And what do you do there when you're there?
Well, thank you. It's been 35 years in a row that I've never missed a meeting since, I guess the first one that I went to was in 1991. And at that point, what I said to Steve Markel, who was the vice chairman of the company at that point, and my boss who I worked for, I said, instead of trying to get people to come to Richmond, Virginia, let's go to Omaha and meet people because the people who are most likely to understand what we're trying to do are people who already own Berkshire. So, we went starting in 1991 and have never missed a year. And the people we've met, the friendships that have been created, the learnings that have happened through that time, the networks that have been built, it's just singular. There's no other place like it.
Yeah. And Markel has a great long-term record for investors. You went public in what, '86, 38 years ago, 15% CAGR since then. Medium-term kind of so-so and then recently you've bounced back over the past couple years. Explain that performance, those different phases of the moon, if you will, Tom.
Sure. The 15% is the correct number for since '86, but it's not all been in a straight line. Absolutely not. Different eras, different times, different settings in the financial markets, insurance markets, opportunities, acquisitions that we've done. We're long-term people around here. And we're willing to understand that you can't manufacture artificial smoothness. And in fact, again, a lesson you would learn from Buffett, I don't remember the exact numbers he talked about, but it's something along the lines. He'd rather have a lumpy 15 than a smooth 10 in terms of percentage returns. And we embrace that idea as well. So, the way we've always run this business is try to make good rational capital allocation decisions. Run it to the best of our ability and do it in a long-term fashion. And again getting back to the idea of athletics, so many people are involved in the process of sprints. And if you call quarters by quarters by quarters a series of sprints, well that is a very different race than running a marathon. Now a marathon will have splits and times within it than if you're a good marathoner. You should be kind of hitting some marks at the one mile mark, at the five mile mark, at the 10 mile mark, but those are not the final results. And we're marathoners, not sprinters.
As a bit of a long-distance runner myself, Tom, I can definitely relate to that analogy. So one thing that's curious to me is the valuations. Oh, first let me ask you, do you benchmark your returns versus Berkshire and not just the S&P?
No. Really we do the best we can. So, you know, benchmarking is something that everybody is going to do and you're going to observe and know what that data is, but, and I can't remember who said this, you should steer by the stars, not by the lights of each passing ship. So, I think there is a tendency and a temptation that sometimes we lose track of the stars and where the true north stars are because we feel we're in a competitive race against some of the other ships. And I think sometimes you can get off track with that and you can lose your focus. It's like driving by looking at the hood ornament of the car rather than the horizon.
You guys have a little bit of a Rodney Dangerfield problem in the market though because your trailing 12-month P/E is only 14. I should note that Berkshire's is only 12. What is it with you and Warren Buffett? You guys are, you know, hot shot CEOs, but you don't have an Nvidia P/E.
Yeah. Well, and we're not going to and one of the reasons for that is that the E and I will confess that I started my life out as a CPA. My professional training is that of an accountant. When you're trying to measure the E of Berkshire or ourselves or companies like us that would have some operational aspects to what goes into creating economic value as well as some investment returns and some things that are mark-to-market and some things that are not, the definition of what the E is is oftentimes something that well-meaning, talented, thoughtful analysts would have a different opinion about. Now, again, because we are long-term owners and we think about long-term ownership of the business, I think we as well as Buffett and Berkshire do a pretty good job of telling you what the E is certainly on a normalized basis. And let's say the E, let's double it, stand for economic earnings as opposed to GAAP earnings. When you get that, I think those ratios might be a bit different than what you suggest. And we would be pretty comfortable with the fact that the market over time gets it right with variability and volatility at any sort of shorter point-to-point kind of estimate. So for instance, he made the statement at the beginning, he pointed out that the share price has compounded at roughly 15% a year. Our calculation of what we would consider our intrinsic value to be and the way we would track it over the years has pretty much been that exact same number. So the market is efficient over time. It is efficient-ish in shorter time frames and in any given quarter or even any given year or two it can be pretty inefficient but over time the market gets it right.
I want to ask you about two lines of yours, Tom. I know you're a prolific writer again perhaps a little bit like the mentor in Omaha. One is 'simple can be harder than complex.' That's one of your taglines. Why is that the case? That sounds paradoxical if not contradictory.
Well, actually I think that opens up a very interesting topic and I do tend to spend a lot of time reading and one of the books I've read twice in the last couple of years is General Stanley McChrystal's book Team of Teams. And I think one of the central themes of that book is talking about the difference between complicated and complexity. So things that are complex. And I heard somebody talking about Einstein the other day or Einstein at some point was talking about his work as being the difference between studying a cloud and a clock. A clock can be very complex. There could be a lot of moving parts in there and in and of itself there can be some simplicity that is associated with that clock in that you can take it apart and you can see the cause and effects that are involved. Things that are complex have what are called wicked feedback loops where you can do the same thing and it'll have a different outcome the second time you do it than the first time or you do it the third time it again will have a different sort of outcome. So the ability to kind of keep in mind things that may get complex, may get complicated and what sorts of wisdom, common sense, rules of thumb, heuristics, whatever you want to call it to try to keep things as simple as possible so that the human mind can comprehend them but yet still acknowledge the fact that these are complex systems at play. I just find that kind of mental framing useful to make sure that you don't sort of fall in love with things that are complicated and distill things that are complicated into simple moving parts and think that you've solved the problem because you haven't. It's always nice to be able to maintain an understanding of the difference between things that are complicated and things that are complex because I think one of the temptations that one can have is that when you take apart things that are complicated, you might think you've just broken it down to its accurate simple parts but you have not really understood the system that's involved. But yet we're human beings. We need some rules of thumb, some heuristics, some common sense, some wisdom that gives us guideposts to let us know whether we're on the right track or not.
