6th European Value Investing Conference | Keynote Speaker | Tom Gayner

I'm really happy to be here because an introduction like that, I thought I was attending my own funeral. So really, really happy to still be alive.

And by the way, what are you doing for my funeral? I can book you right now.

Well, again thank you for the introduction and thank you for the time here and I think it picks up on the themes that you talk about George and rational thought and value investing and that is controlling your emotion using some discipline using some patience but the range of decisions that you can make if you're rational and if you're patient and if you're disciplined can be different in different settings and circumstances. So, for instance, just to pick up a name and a thought, Tiffany's the jeweler, and you think of the flagship location of Tiffany's in New York City and the Tiffany's locations around the world. If you go into the doors of Tiffany, I think you're not looking to buy a pair of pants or a bottle of wine or a car. There's a range of things that you would expect and you walked in the door to see what they have on offer at Tiffany. That's why you went in there. Well, similarly, if you're doing capital allocation and you were the head of Tiffany's, probably the range of decisions that you would make is somewhat constrained by the nature of the business itself. By contrast, Markel, however well known I would like to think we are from time to time, we're really not. We've been a very successful company, but in the realm of global business, we're still small and have a lot of range to go. And I think the name, starting with the name actually helps us in that there is no physical association, no visceral association for Markel. But how big is a Markel? What color is it? How tall is it? How wide is it? What does it look like? What is it made of? There's no form to pin in your mind of what that is. So consequently that kind of creates mental space for us to do just whatever makes sense. Now what happened was in the history of the company it was started in 1930. We're coming up on a hundred years and I know in this part of the world 100 years is a short period of time. In America that's a long time to persist and continue to exist for a century is a matter of something. We started in the technical business of insurance. But while we started in insurance, I would say really the insight that Sam Markel, the founder of the company, had was he was solving a customer problem and he happened to use the mechanism of insurance to do that. And that just started things with a mindset of just trying to figure out what problem does somebody have? What do they need that they don't have? And can we figure out a way to solve that problem for somebody and take care of them and earn a profit for doing so. And starting in insurance and starting sort of unusual forms of insurance that happened. We were an agent and a broker for a long period of time. Then we became an underwriter and then out of an underwriting, you know, every insurance company by definition is an investor because you get paid upfront and you pay your claims later. So you're holding a pool of money for a while as investors and all of you would know one of the fun things about being an investor is the 360 degree range of things you would look at. That's what's intellectually fun and stimulating about the business is it's new every day. So you're open-ended. So we started buying equity securities and publicly traded companies in many different industries. And then we started buying controlling interest in companies in many different industries. And then we started buying in our own stock. So that's the 360 degree range. There's no constraint either from technically what we can do or more importantly our mindset of what we're willing to consider and do that gives us the complete palette of choices for what we do with the incremental dollar coming in.

Well, sure. And if you're familiar with Markel or if you read our annual reports over the years, this is a catechism which you would find repeated over and over again and has been every year for the 35 years that I've been there. So there's really four things we look for as we make an investment. First is we want to invest in profitable businesses with good returns on capital. And to some degree that seems so obvious. Why would you say it? Well, because it defines a bit of the boundary. We're not venture capitalists. We don't know how to... I mean, I root for venture capitalists. They make society better. They foster technological innovation, which we all benefit from, but it's a different skill set to be able to do that than what we do. I have the unfortunate habit of being trained as an accountant and my father was an accountant, too. So, it's sort of in the genes. I can't help but look at financial statements when I'm looking at something. And I'm looking both at the numbers and also at the story, the narrative that you get from looking at financial statements. But I look at financial statements. Frankly, if you're a venture capitalist, financial statements are somewhat irrelevant. They do you no good because you're predicting something in the future that is either going to happen or not. So, I just don't have the skills to do that. But I want a business that's profitable, good returns on capital. And by the way, I would take it beyond just the financial dynamic when I say that when you look at a business that is earning good returns on capital, that means they are doing something for somebody else and they're being good enough at it that there's a margin of profit left for them. So, a profit margin in my opinion is actually a social stamp of approval that that business is doing something people want and need. Because if you're a business and you're not making a profit, either you're doing something that the world doesn't care about or you're not very good at it, and that's not a long-term recipe for success. So, we want to see that profitable business. And as a failed accountant, but an accountant nonetheless, I do look at the financial statements. Second, there's a qualitative sense. I want to invest in companies with management teams that have equal measures of talent and integrity because one without the other is worthless. You can... and there's examples galore and this ebbs and flows different sort of news cycles and economic cycles. You can have people who are extraordinarily talented and they are world-class wizards at whatever, but if there's an integrity hole, that's not going to work out well for me as their silent partner as an equity investor. And similar to even in running our business where we own the company. The management teams, so some of you were with us yesterday and Frederick Wolf who runs our German and European operations was with me on a panel. The idea that I would know how to control what happens here in Germany is ludicrous. Frederick runs Germany for us and he has talent and integrity and as such as trustworthy as the manager. So we spend actual time and I'll just use this word and sometimes people sort of worry about this or wonder about it and don't know how it works to underwrite the integrity level of the management teams we invest in as well as look for the financial performance would be markers of the talent. Third thing we think about is what are the reinvestment dynamics of a business and if they make good returns on capital well what do you do with the money? So compounding requires reinvestment. So we want to see a track record of being able to reinvest capital at good rates of return or good capital discipline. So if your business can organically accept and absorb the capital that you make and you can grow that way, well that's great. But that's pretty rare. So are you good at acquisitions? Are you able to deploy that capital into buying other things and earn good returns on it over time or do you pay dividends or repurchase shares? I just want to see capital discipline on display in some form or fashion. That reinvestment dynamic. And then the fourth and final discipline is price, fair price. And I know oftentimes as investment professionals and especially investment professionals early in their career focus on price because it's tangible and it provides a margin of safety which Ben Graham would have talked about quite a bit. But in the fullness of time, and you and I were chatting about this just a little bit beforehand, you can... if I find those first three attributes that I'm looking for of the business with good returns on capital, the management teams with talent and integrity and reinvestment runway, you can afford to pay a little bit more for that than you might think, especially if the duration of that continues for a long period of time. The reinvestment rates swamp the price you pay for it. And the specific story we were talking about and my data is a bit old and a bit fuzzy, but somehow or another, one of the legendary stories that people who are serious students of Buffett know is when American Express really wobbled and they had been the victim of a fraud called a salad oil swindle and the stock went down a bunch. Buffett made a very concentrated bet and that their business, the underlying business was sound with good returns on capital and it would be okay. And it was really one of the ways in which Warren Buffett became Warren Buffett was this huge swing he took at American Express that worked out and he still holds that stock. Well, a couple of years ago, I asked the thought question, all right, that story is well known. What if Warren Buffett had bought that huge chunk of American Express stock the day before the scandal as opposed to the day after? And the percentage difference in overall returns over 50, 60 years, meaningless. It dissolved away. The power of the business itself was so good and the compounding took place such that that fourth discipline of price which we talk about all the time and get worked up about. It's the least important of those four things. It's as heretical a statement as that is to make in front of a Ben Graham audience. I will make it just because well it's orary so let's be fun that way. Now the second derivative which is real and again this is where the qualitative aspects of human nature and decision-making and things like the work Daniel Kahneman does really fall into place is in reality the human emotions that were involved by Buffett buying it the day after the scandal as opposed to the day before. He can point to how cheap it is and how much it was last month versus what he's buying and articulate this philosophy of why he's doing this and his math and his argument whatnot. And you can either agree or disagree, but it's an easily understandable human argument and you can defend that position as he was as an investment manager. If you bought the day before, I'm trying to remember what the technical term for that is. I think it's a dumbass. I don't know how the English translates and I appreciate your facility in English but imagine yourself in that position. You're Warren Buffett. You correctly foresee the next 50, 60 years of powerful return on capital and powerful return on this company in American Express and you buy it and the next day you're panned by this story. How do you keep your clients? The honest answer is you don't. So the psychology and the human relations and the agent role that you play since you're managing money on behalf of other people that is an important dimension for how you actually survive and endure to get those multi-year compounding records. So the math is one thing but the emotions also need to be involved but those are the four lenses and the four ways in which any kind of idea that we look at and by the way that applies to public investing it applies to the wholly owned businesses that we own both insurance and non-insurance I think about them in the exact same way and it applies to people and management. So for people on the team that are part of the Markel organization, we have 22,000 of them and the compounding that comes from people who are good continuing to grow and do more and more. I think about individuals as a manager in each of those four dimensions. Are these people good at what they do? They're producing the results to the extent they're quantifiable. Are they honest? Do they have runway? Can they grow? Can they learn? Are they curious? Are they trying to figure out new things or not? And are they willing to work for us for what we're able to pay them? Those four dimensions are applicable across all of the dimensions.

Thank you. So in 1986 when Markel went public, you know obviously the company had started in 1930. It was the third generation of family at that point that was running it. And Alan Kersner was the chairman. He was married to a Markel. So he was not born with Markel blood but he's part of the family through marriage. And of the 12 cousins in the third generation, Alan Kersner and Tony Markel and Steve Markel were the three who in effect did a leverage buyout of the second generation and bought the stock from their parents and the three of them had run it for the better part of a decade at the point of the IPO. Well, Alan Kersner correctly foresaw many things and in fact in the Markel Style one of the CEOs of the Markel Ventures businesses that we bought says, you know, there's really two words in the Markel Style that really resonate with him. One is insurance and the other is winning. And the curious thing for those of you who are trying to fill out your bingo cards of looking at the Markel Style, insurance is not in there. So even in 1986 when Markel was a tiny company, Alan foresaw the day when it would become more than just insurance. So he allowed room and space for those 360 degrees of options to be available to us. So that word is not in there even though Markel was an insurance company at the time. Second, winning, that is the last word of the Markel Style. And so it does culminate in the idea of winning in a long-term sustainable way. But what Alan also knew in addition to the fact that this could grow and get bigger, especially if it was a values-driven organization was that you needed to write some stuff down. Not everything could be, despite my tendencies and I joke with my colleagues Tyler and Caroline there. I don't like to be pinned down on things and like to have some ambiguity and room for interpretation and being able to improvise as you go along, but some things do need to be written down. So Alan wrote down the Markel Style and it is the credo cultural statement which as my colleague Simon Wilson the CEO of the insurance business say is in the case of Markel lived not laminated. So sometimes you'll see mission statements or posters or things that are stuck up on a wall or that are around offices or whatnot, but nobody really pays attention to it. At Markel, the Markel Style is lived, not laminated and there it's in the annual report and it's in loose sites on people's desks and there are posters of it. But as a practical matter, one of the ways in which I would document the fact that it is lived is again we got 22,000 people and I'll let you in on a little secret. It doesn't always work with some of the people and you know you hire people. You do the best you can. You do your due diligence. There's thoughtfulness in terms of somebody joining the family, but it doesn't always work. And the first not red flag but pink flag I would say if you hear some people around the halls talking about somebody and they say you know not really sure that they're Markel Style the radar goes off for me. That is people telling me or saying something that there's just something that might not resonate or be there with a colleague. So that's never a joyful thing. It's always sad, but it's true. So we need to acknowledge that and accomplish it. But we also need people who actually read the Markel Style that think about it, that think about what it means to see it in action, to see it being reinforced and say I really like that. I want to be part of that team. I want to have that jersey on. I want to live my life being surrounded by people who think that's important and that there's really no room for cynicism or disbelief in those core values. We'll manifest them and practice them in different ways but when it gets to the core values we all need to be on the same page of that.

Well, there was a conversation I was involved in yesterday. I can't remember who it was, or maybe it was you, Rob, when we were chatting at the table last night about sort of things about what you've changed your mind about in the last couple of years. And so, yeah, over 40 years, there's some things I've changed my mind about. So one is the notion of especially as a younger person the idea of that fourth lens the price discipline and training as an accountant that's the easiest part of the business. It's the most quantitative and you can add up numbers and you can sort of make a case for why this is statistically cheap and almost like the Buffett Munger dynamic where I mean that was Buffett's history and it was the era and environment in which Ben Graham grew up and in the wake of the depression where you could just pick across the carcasses of these companies that were mainly left but they were trading for less than their net working capital that kind of stuff that is statistically cheap. It's cheap, but it does not attest to how good it is. The good comes from the reinvestment dynamic. So having more and more appreciation for lens number three and diminishing the factor of lens number four that has been the single biggest change and evolution and lifelong learning project of figuring out how things, how you can discern how good things are not necessarily how cheap they are.

Well, people ask me how it is that I became such a long-term investor. I said, 'Well, the truth is because I failed so miserably as a short-term investor. I mean, who wouldn't want to get rich quick? We all like that. I mean, as much as you might rail at people dominated by instant gratification or wanting things now, there's nothing inherently wrong with that. I just don't know how to do it. And it's not as if I haven't tried but I tried and failed. So I came to the belief that frankly one of my competitive advantages was having a different time horizon than others. My father used to tell me, you know, there's always somebody smarter than you. There's always somebody stronger than you. There's always somebody faster than you. There's always somebody better than you at any particular thing. So you need to find your place in life where despite that being true, you have something that you do better than other people. It's how you sort of differentiate yourself in life. And mine is patience. That is my superpower. Being able to get past the realms of competition that are ones where I'm going to lose. And my apologies for repeating this story for Tyler and Caroline because they've heard this before. But for instance, think about Usain Bolt, you know, for a long time the fastest man in the world and multiple Olympic gold medals as a sprinter. Now, as a sprinter, if there was going to be a 100 yard or as we would say in the US or 100 meter as I try to adapt here in Europe sprint, I mean, I know Usain Bolt is a little past his prime, shall we say, but if there was a race between me and Usain Bolt on 100 meters, bet everything you have on Usain Bolt, he's going to win that 110 times out of 100. Just fact. If you make it a 200 meter dash, I would still bet everything you have on Usain versus me. If you make it a mile, have I at least introduced a scintilla of doubt into your mind that I might be able to be competitive with Usain Bolt? He might be... Well, see some nod. Well, you're probably right. I would still bet a ton of money on Bolt. They couldn't hold back the body language like no I get it. But he might be so trained as a sprinter that he'd be gassed. I mean, I don't know. I've never raced a mile against Usain Bolt. It is my hope and prayer that I never have to, but no. How about a marathon? Maybe a scintilla of doubt. Now, how about a foot race? A foot race in US terms from Key West, Florida to Seattle, Washington. I think I have a chance because it's no longer about athleticism. It's about will. It's about endurance. It's about the ability to put one foot in front of the other no matter what. And that's my whole life. And I don't have any special skills at all, but I do have the ability to get up and put one foot in front of the other in a rational direction. So there's a great Monty Python skit for those of you who are Monty Python fans. It's where people are lining up at a race and it's called the 100 meter dash for people with no sense of direction. So the gun goes off and all those people at the line, you know, they scatter in every single direction. That is part of the disciplines of value investing is you're trying to provide people with the sense of direction. So these are the tools, these are the methods, these are the metrics, these are the paths that will likely lead you towards a productive destination and I can kind of get that I can see what north is on the compass and follow towards that and I am not the fastest but I am the most persistent and you just need to know who you are and try to be good at that.

All right. So concentration... Thank you for some murmurs of humor there. I'll try to speak to the concentration that you asked about as opposed to that particular concentration. I think you are correct in observing and diagnosing that what we do is misunderstood. So the fact of the matter is if I knew what would be the most productive investment over the next five or 10 years, I would do that and nothing else. And to the extent your knowledge increases and Charlie Munger talks about concentration is what you do when you're not stupid or not ignorant. I mean he's right about that. But part of the package of Tom Gayner is that you know I'm not going to suggest to you that I'm the smartest person in the room or anything. But so in order to protect against the overconfidence, I do diversify more than what people might do in an ideal world and I accept that. Number one. Number two, our portfolio is more concentrated than what people think it is.

So for instance, I would suggest that our top 20 holdings and Buffett talked about the concept of 20 punches and making 20 decisions and limiting yourself. I would say we directionally agree with much of that and the top 20 holdings would represent two-thirds, 70% of the value of the portfolio. I would argue that's reasonably concentrated. The other thing is the nuance that I would suggest is as an example, we own both Home Depot and Lowe's. It's just one specific example. Is that one position? Is it two positions? Is it 1.2 positions? Is it 1.7 positions? I don't have and I think it is a mistake to be too assertive about what the answer to that is. There's huge overlap between both those. And so when you're talking about Home Depot and Lowe's and why would you buy Home Depot instead of Lowe's or why would you buy Lowe's instead of Home Depot? I'm not going to engage in much of an argument with you about that. They're both good holdings. And so we have Visa and Mastercard as another example. We have a lot of things where they're duopolies, oligopolies, things of that nature. The railroad business, you know, there's what six major North American railroads going down to five. We own all of them. Is that six positions? I mean, and in Norfolk Southern, is that really an investment decision or is it an arbitrage since there's a deal announced? Well, it's a lot of these things. Again, going back to Tyler and Caroline, why are you trying to pin me down so much on this? I feel like a butterfly being put in a collection. We're just, you know, being pinned to the page a bit. So that is one point. We're a little more concentrated than what people think if you just look at the numbers. And number two, humility and modesty caused me to not want to overconcentrate too much. And then Daniel, this came about last night at dinner when we were sitting and chatting. I think if memory is serving and you know we'd had a couple drinks by that point, so you can correct me if I'm wrong, but I think you cited Apple back in 2005 or so. Were you the one who was talking about that? And you had a series...

Of 5, 10, 15 major investment houses with reports on Apple. And as you pointed out, none of them got it right in terms of what happened in the next 20 years for Apple. And so what I said, and this happens to be true, and if you're a Markel shareholder, you've benefited from this. I didn't know what was going to happen with Apple 20 years ago either, but I knew it was a thing and they were good at what they do. So I bought a little bit and guess what? A little bit became a lot. And I didn't try to predict what Apple was going to be, but I did try to listen to what the market was telling me. So observing it, seeing it, buying a little bit, a little sip, a little taste, and then sort of going to work every day and observing what was going to happen. I did not make a one-time decision on Apple, yes or no. I said, 'Hm, interesting. Buy a little, try a sample.' And as quarters and years rolled by, I added to the position as time went by and it became a major holding that has powered returns for Markel very well. And that is the sort of thing I do a lot, where I just try to have your head up, be open, be sensitive, observe, and don't think that you need to figure it out. You don't. The market will tell you. So that is another point. And then a particular wrinkle in time that we are in right now, with all the idea of historical change and technological swirl and a real differential thing that's happened. I think that the dispersion of possible outcomes is wide right now. So it's always wider than you think, but the cone of uncertainty is particularly large right now in a lot of ways. So as a consequence, I think it's a bit wiser to spread your bets a little bit more, to increase the surface area of things you are aware of. And my own personal circumstance is that if I own at least a little of something, I pay more attention to it than I would if I own nothing of it. To take it completely from intellectual to, 'Hey, let's bet a few bucks on this.' That causes me to be more aware of things, and because I think there's more things going on, there's more swirl, the cone of uncertainty is wider. The idea of having small positions in some things just to make yourself curious and learn is of value. So I would not hold myself to the stricture of saying, you know, 'I only own seven stocks.' I mean, and I know some people do that and that might be good at what they do. Okay, that's fine. You do you. But I'm not smart enough to do that.