SPEAKER: I'm not a surgeon. I don't think that's
what God wanted me to do, to make things better. But he did give me some sense
of judgment, temperament, patience, and
discipline that enables me to be good at helping
shepherd resources. Everybody has a role to
play, and this is mine. Friends, our guest for
today is Thomas Gayner, the Chief Investment
Officer at Markel Corp. He serves on the boards
of several organizations. And a recent Wall
Street Journal article quoted, "Every investor can
learn something from him. Instead of trying to mimic the
inimitable brilliance of Mr. Buffettt, maybe more investors
should emulate the common sense and patience of Mr. Gayner." Quoting from a recent chapter
in a book about him. " "Markels's success
has made Gayner rich, but he lives in a simple
townhouse and drives a Toyota Prius." I like getting 50 miles per
gallon because I'm cheap, he says. And if we did not
need oil, I think the world would be a better
and more peaceful place. By living modestly, he can also
give more money to charity. But I don't want to exaggerate. This is not a Mother
Teresa-like existence, he says. Friends, I'm personally
delighted to have him here. We share a common
hero in John Wooden and Tom's letters speak to
the spirit of Coach Wooden's definition of success. So without further ado,
ladies and gentlemen, please join me in
welcoming our special guest for today, Mr. Thomas Gayner. TOM GAYNER: Thank
you, [INAUDIBLE]. Well, thank you very
much for having me. I know it's sort of
a custom and a cliche to say that I'm really
honored to be here. And I am. That's true. I'm also a bit intimidated,
because I guess you're all smarter than I am. It must be a rule around
here that the dumbest guy has to wear a coat. So it is what it is and I'll
try to compete as best as I can, but I am very much honored to
be here and very impressed. What you do is known
on the world scale, and Markel is a tiny little
company compared to you. We have a nice record over
a long period of time, but I recognize the group that
I'm here in front of today, so I'm very honored and
privileged to be here. [INAUDIBLE] called me. He attended one
of the gatherings we do out in Omaha, where we
meet with most of our investors in Markel. And he called and asked if I
would come and give this talk. And of course, I said yes. So I agreed to give a talk,
but what I really like to do is talk with
people, not at them. So I'm going to share a few
comments and some discussion about investing,
but then very much, I hope that you'll start
to ask some questions and then we can have an
interactive discussion. Because I don't know
what's on your mind, so the only way that I really
can do that, and address the issues and things
you want to talk about, are to hear them
directly from you. When [INAUDIBLE]
and I were talking about what we should
call this talk, would be "The Evolution
of a Value Investor." And I thought that
was a good way to try to describe
things, because as I look around the group today, I
think in addition to the fact that you're all
smarter than I am, you're all younger than I am. And so you have some
evolving and learning and some passing through
time to do on your own, that I've done as
well, and perhaps I can accelerate your learning
curve a bit in that process. And speak a little bit about
my own story of how I evolved and the things that have
changed over time for me as an investor. So the way it begins--
my technical training is that of an accountant. I'm a CPA, professionally. My father was an accountant and
that was what my degree was in. And I always tell people
when they're sort of trying to figure out what it
is they want to do, among the things that would be
a reasonable choice for what you're studying,
would be accounting. And people ask me,
"why accounting?" And I said, well, if you're
going to go to Germany, and you wanted to be a
successful person in Germany, what would be the very first
thing that you should do? And my answer is, you
should learn German, because that is the
language that people are going to communicate
in, and work in, in Germany. So if you want to go
to Germany, and you want to be a
success of any sort, I think it would be very hard
to do that without having a working knowledge of German. Well similarly, in
business-- and by business, let's translate that further
to investing-- the language of business is accounting. So to understand what's going
on-- you don't need to be CPA, but I think it's very important
to have a rudimentary knowledge of what accounting
is, and how it works, and what words and
numbers mean when they're in the context of financial
statements in business and the language of accounting. So that's how I started. And similar to, I
think, many people as they begin to go
down the path of trying to become an investor, I had a
very strong quantitative bias in selecting investments. And one of the ways I would
describe that, and one of the tendencies
that we all have, especially when we're starting
out, for a variety of reasons, is to have quantitative metrics
that you really can rely on. And one of the reasons
that that would be case, is when you're starting
out and you haven't done this a whole
lot, you'd really like to have some confidence
supplied by something external that you're on the right path. And if you can do some
well-established, well-trod paths of disciplines of
things that have worked-- boy, that seems like a pretty
good basis to make a decision and to think about what's
going to happen in the future. And there is absolutely nothing
in the world wrong with that. I encourage that. That's really the
best way to start, but I think that is
only a partial step along the journey of becoming
an accomplished investor. That worked spectacularly
well for Ben Graham in the 1930s, who's the
grandfather of all investing and the professor who
really taught Warren Buffett the disciplines of investing. But that was a period of time
when we were just coming out of the Depression,
and there were a lot of securities
that were mathematically and quantitatively cheap. So it was a great technique,
a great discipline. It had not been
practiced, but that pond has gotten a little over-fished. So today, while it's important
to know the technical skills, to know the accounting,
to know things like the net working capital,
and to think about price earnings ratios a price
to book value ratios, and have the series of
quantitative metrics that would tell you
something is cheap, that's good as far as it goes. But it doesn't tell you enough. There are more things. And I call the notion of
doing that sort of work, which is the first step,
and you really should do it-- that's the
idea of spotting value. So it's a picture of
time stands still. When you're looking at a picture
of something that you think is worth this, and
it's selling for this. So there's a price a gap there. And you want to buy
it at this, and you think it will get to that. And that that's great if it
works, but that's a picture. What I have evolved
to, and the path that I've been on for a long
time-- and the reason I got on that path is because I found
that that notion of spotting value and thinking
that there's value gaps would close right after I
showed up to buy some stock, it didn't work. So it's not as if I found that
technique, and I learned that, and it worked, and
produced great wealth. It didn't. So you gotta take
the next step and try to figure something else out. So I moved from spotting
value to spotting the creation of value,
value creators as opposed to value spotters. So instead of a snapshot,
instead of a picture, how about a movie? What's this movie
going to look like? How's this reel going
to unfurl over time? So instead of saying that I
firmly believe that something is worth this, I'm now
asking myself, well, what will it be worth next year? And the year after that? And the year after that? And the decade after that? And to have some
sense of something that is increasing in value over
time at an appropriate rate. Well, that's what I'm
really hunting for and that's what I'm really
trying to find and spot. And I think this
has applications, not just for investing,
but for leadership, for management,
for relationships that you would have
on a social, as well as a professional basis. so it's
an integrated thought as to how my life is unfurling. So with that thought
in mind, I came up with a 4-Point view of what
it is that I'm specifically looking for, and how I
specifically think about things that I might invest in. So the first thing that
I look to invest in, is a profitable business
with good returns on capital, that doesn't use
too much leverage to do it. And again, each and
every one of those words came about because I
made a mistake somewhere along the line. Things did not work
and as a consequence, it was a hard,
searing lesson where I lost some of my own money. And as [INAUDIBLE] said in
his introduction, I'm cheap and I really hate losing money. So hard lessons are
learned of the kind that sink in and sear most deeply. So the profitable business
with good returns on capital. Now, you live in a
part of the world here where there are a lot
of dreams, a lot of venture capital things, where people
will describe things that are going to happen some day. And a lot of that does come
true, especially around here. This is a vibrant
community, and this place stands as a testament
to sometimes there's people who have an idea about
something that has never been done before, and
we're going to do it, and it'll be spectacular. And that does happen sometimes. And it's marvelous when it does,
but I don't have to do that. I'm not a venture capitalist. It's a legitimate
discipline, but that's not what I'm good at. In Virginia, we joke about
once you do something twice, it becomes a tradition, so
they have to keep doing it unless there's some
reason not to do it. So Virginia might
have a different sort of sense about history than
what might be the case here, and thinking about things
that were in the past as opposed to the future. So I like to see a demonstrated
record of profitability. Now the other reason that I
like to see that, in addition to just my own limits, and
not having the skills to see into the future as well as
some others do, is that, if you think about what a
business is designed to do, and it is to serve others. So the most successful
business you will ever find, is one that the customers are
glad they're doing business with you. Because that means their
lives are getting better. There is some value that is
being created for the customer, not for the business, but for
the customer, because of that company being in business. And the mark of the business
doing that well, is a profit. Because if you have a business
that is not making a profit, that means one of two
things is the case. A, the business is either doing
something that the world just doesn't really care about. People don't need it. People don't want it. For whatever reason, it's
not getting the recognition or demand in the
marketplace, such that the business is able
to do all the things that it needs to do, and still have
a margin of profit left over. So that's of no interest
to me, because in order to invest and
invest successfully, a business needs to be able to
have profits to pay dividends, to pay its employees, to grow
and invest over time, so I want to see a profit there. The second reason that
a business might not be profitable, is that
they're not very good at it. So I don't know
how much anybody's interested in
sports around here, but I'm the Washington
Redskins fan. And I hate to admit
that, because they're not very successful. But neither are the
Oakland Raiders, which are very close here. So those two teams are in
a decade-long competition for what the worst team
in the NFL is going to be. And I can't believe
that they do, which is kind of surprising,
but think about that as a business, that if you had
a business that's consistently at or near the
bottom of the things, you would not think that
that is very good business, and as a consequence, how could
that be a very good investment? If I really want to give some
of my hard-earned capital to that business,
and think that I'm going to get more
of it years later, I want that business
to be successful. So that's why look for
businesses that are profitable and earning good
returns on capital. And I add the part about
leverage, because again, from mistakes in the
2008-2009 financial crisis, I had some tough losses. And again, I think
you learn more from things that don't go well
then when things do go well. And I looked at some businesses
that I did not really appreciate how much leverage
was inherent in what they were doing. So if you have
financial leverage, you might have
very good business. You might be taking
care of your customers. You might be serving them well. They might be happy to
do business with you, but you might have to
refinance your debt and have capital
resupplied to you at a time when the markets just don't
want to give it to you. And if you're in that
situation, basically, that's like being a card
player and you've got some really good
cards in your hand, but somebody just comes and
rips the cards out of your hand, before you can finish
playing the hand. And I've seen that
happen firsthand. I've had gobs of flash
taken from, figuratively, not literally. I've still got my gobs
of flesh, but I've seen that, so as a
consequence, I've become very sensitive
about leverage and not having
too much leverage. There's also another
factor of leverage, and that is character. And I'll segue into the
my second lens in a bit. And I remember when
Markel first started down the path of buying
non-insurance businesses and expanding what we did, there
was one elderly gentleman who gave me a spectacularly
good piece of advice. And he said, if you're
looking to buy businesses, don't buy businesses where
they use a lot of debt. And I wondered why. And he said, well,
if you want to make sure you're dealing with
high-quality, high-integrity people, generally speaking,
high-quality, high-integrity people don't use a lot of debt. Or not so much that, but
if you're a bad person, if you were sort of a
little bit of a crook or had a little bit of
larceny in your heart, it's unlikely that you would
use 100% equity finance. Because when it's
equity financed, it means it's your own money. When it's debt, you're
running your business on other people's money. He says crooks don't
steal their own money. They steal other people's money. So when you see a business
that sort of relies on a bunch of debt to
operate and be successful, that adds a layer of concern or
diligence that you have to do, that you have to think
about that you don't have to if you look at the
business that just doesn't use very much debt. So it's a margin of safety. That's a word and a phrase that
Ben Graham used quite a bit in thinking about investing,
by looking at companies that don't use much debt. That just really
protects your downside and protects you from
bad things happening. The second lens that
I look at anything through is the management
and the management teams that are running the business. I'm not running these businesses
that either we invest in as shareholders and buy
stock in, or that we buy, that we're majority owners
of or 100% owners of. I mean, there are people who
are running these businesses, and those people will
make those businesses the success or failure
that they are doomed to be. And when I'm looking at people,
I'm looking for two attributes. One is I want
character, integrity. And ability. Two things: character
and the ability. Because one without
the other is worthless. If you have people who
have high integrity, they're good character people,
but they're not very talented-- well, they may be nice people. You may like them. They may be good
friends, good neighbors, good coaches of your
kid's soccer team, things of that nature. But in the context of business,
they can't get the job done. So as a consequence, that
doesn't do you any good, because the business
does have to be profitable to continue
to persist and grow and last over long
periods of time. So you got to see
that talent there. The character is nice,
but it is not sufficient in and of itself. If you have people who are
talented, who are whip-smart, who are very skilled at
what they do, but yet have a character or integrity
flaw of some sort-- well, they may do well,
but you as there outside, silent,
non-controlling partner are not. That will not end well. And again, I'll get
to your questions in just a few
minutes, I sure will. That's not just
about picking stocks, that's about relationships. So if you're picking a spouse,
or a partner in a venture-- anything like that. To see both of those
features in place in large enough
quantities, that you have confidence
that you're dealing with people of character
and integrity and talent. That's an important
thing to look for. In fact, I can't think of
anything that's more important. I'll go through four
bits, four lenses, and then we'll start opening
the floor for questions. The third thing that
I think about when investing in anything, is what
are the reinvestment dynamics of the business? And that's a somewhat
complicated way of saying things. [INAUDIBLE], as a
graduate of the University of Pennsylvania-- we were
chatting about this earlier. So Ben Franklin was
the founder of Penn, and sort of the revered
figure of the Penn Quakers. And Ben Franklin said
money makes more money, and the money money
makes, makes more money. So he intuitively understood
the power of compound interest. Einstein said it was the most
powerful force in the universe, compound interest. Einstein further went
on to say, that those who understand compound
interest earn it and those who do not understand it pay it. So what is the reinvestment
dynamic of the business? What's the compounding feature? And one of the ways you
could think about that, is think about the
restaurant business. In a spectacular five-star,
gourmet, lovely restaurant-- typically, those tend to
be owned by the people who are there every day. They're not chains of the
best restaurants in the world, from sort of a
gourmet perspective. Usually the owner is
the chef, or right there in the front of the house. And he's there all the time. So that business,
that restaurant, can be very successful. But typically,
that is not a model that is set up to be able to
replicate it again and again and again and again and again. It may provide a
very nice living for the owner and their
family, and employ their family, and great service
to the world, great food, great prices, all that sort of
stuff, but it's not replicable. So there are some
businesses that you'll see that are like that,
that are boutiques, in some form or fashion. It's a limiting factor to
really be able to apply capital and to see it grow. There are other
businesses, and in the news these days that people may
wonder whether their time has passed, and I won't
enter into that debate, but clearly this would be
an example of where somebody was able to figure out
a restaurant model that was able to be replicable, and
able to be done over and over and over again. But go back in time 50 years,
and at the start of McDonald's. And then another McDonald's and
another McDonald's and another McDonald's. One right after the other. That's a perfect example
of where that reinvestment dynamic kicks in. So what I'm looking at
something, I'm thinking how big can this be? How scalable is it? How replicable is it? Because in order for you to
really apply a bunch of capital to it, it has to be
something that you can keep reinvesting in. And if you think about
things in a spectrum, and I would encourage
you to always think about things in more than one
dimension and in a spectrum. Things, generally
speaking, are not binary. They're not yes or no. They're not white or black. They're shades of gray all
the way along the line. So a perfect
business is one that earns very good
returns on its capital, and can take that capital that
it makes and then reinvest that and keep compounding at the
same sort of a rate year after year after year. That's the North Star. That would be the
absolute perfection. The worst kind of
business is the one that doesn't earn very
good returns on capital, and yet seems to need
gobs of it all the time. And again, this
might be old data, because the world
seems to change, but I used to joke that
airlines fit that category. So there were all
these airlines, and they realize what
was coming and going. And people seem to want to
always get in the business, but they never really make
good returns on capital. These days they are. Whether they will continue to
do so or not, I don't know. But that's kind of the
spectrum of business, so I just try to get as close
to this end of the spectrum as possible. Now in the real world,
this does not really exist very often
or very frequently and oftentimes it's very
richly priced when you see it. But how close can you get to it? Because the second-best
business in the world, is one that earns a very
good returns on capital. It can't reinvest it, but
the management knows that. They're intellectually
honest that they have to do something
else with the money. And what are their choices? Well, they can
make acquisitions, they can pay dividends, they
can buy in their own stock. But they are thoughtful
and they know that. And Berkshire really
is the best example of a company that
had that in place, where you had the
genius at the top who knew that the original
business, which was a textile business--
whatever money that made, it was best to invest
that somewhere else. And that's what Buffett
has done for 50 years, is to reinvest the cash flows
of the various businesses the come feed into
Berkshire in other places, so that is the maestro-like
effect that he has had. So that's a legitimate way of
handling the notion that you can't reinvest in the
business that you have, but you can be thoughtful
about what you do that money when it comes in it. And then the fourth and final
lens its price, evaluation. And that's really
where a lot of people start in investing because
there are books you can read. There are spreadsheets
that you can do. There are well-trod
paths you can follow that talk about what's
a reasonable price earnings ratio, what's a reasonable
price to book ratio, or what's a reasonable
divident-- all these quantitative factors. And those are all good, but
as I said, they're not enough. They go in to the thinking. They go into the thought
process of whether this is a good investment
or not, but the mistake that I see-- there's
two types of mistakes you could make when you're
doing your evaluation work. One is that you pay
too much for something. So you make this judgment
about what something is worth, or you make an error
in those calculations, and you pay more than
something is worth. And that that's a
frustrating error, but you've laid out some
money and it doesn't really earn much return
or less of return or maybe even loses
money compared to what you paid out for it. That's not the
worst thing that's ever going to happen to you. That's an error that
you can recover from. The kind of errors
that are harder, and that really cost
you more, although it's a hidden cost and
it's an implicit cost, is that you've thought about
what something was worth, and you thought about what
you wanted to pay for, and this was something
that actually did compound, and you never bought
it, because it never met your test evaluation. But it's just kept on
compounding over time. That example, it's easy
not to talk about it. And I think if there's
one thing that I've been thinking about a lot
recently is as human beings, we tend to have very vivid
memories of things that we did and things that happened
to us, especially things that happened
to us recently. We tend to not
have vivid memories and not do well about
thinking about the things that didn't happen to
us or that we didn't do. And we can brush away those
experiences relatively easily, because we don't firsthand
experience with it. So we probably all have
stories about something, and the older you get,
the more stories you'll have like this, where you
thought about something or you thought something
might have been a good idea, or you thought that might
have been good business, or you thought that might
have been a good stock. In a certain point in time. But for whatever reason,
pricing or whatever, you didn't buy it at
that time, and then you never got
around to buying it. Those are the things
that really hurt. That money that you
didn't make, will end up being a far
bigger subtraction from your theoretical end
net worth, then the things that you did buy that
perhaps did not work as well as you hoped it would. So those are the four
points, and the four lenses of how I think about
investing and how I've learned to
think differently than the way I thought when
I was first starting out as an accountant. I was very
quantitatively-driven. I was very disciplined about
sticking to certain metrics that I thought were
markers of valuation. And I'm started to think
more qualitatively. And if there was
one of those four that's the one that I
would think about the most, it would be the third
point, the reinvestment. What will happen over
time to this business? Will get better? Will it get worse? Are the conditions behind it
improving or deteriorating? And it's a tough world. It's tough. It is very tough to find things
that you have confidence in, that will continue in
your best judgment, to continue to compounding
in value over time. But when you do that,
don't be a penny pincher-- and I'm as tight as they come--
but don't be a penny pincher when you find
businesses like that. So with that, I want to stop
and start taking some questions. And I know sir, you did. AUDIENCE: So you
mentioned evaluating management-- you think about
character and integrity. First question is, how do you
actually, specifically evaluate that? And for us that can actually
interact with management of companies, and we just look
at prices and stuff like that, how do we actually go
about figuring that out? TOM GAYNER: Well again,
I'm looking around the room and I'm seeing that I'm older
than you guys, but I'm married, and I've been
married a long time. Just by show of hands, some
of the people who are married? A bunch of you. How did you decide who
you're going to marry? You dated. And what's the point of dating? It's not really to
see a movie, or go to a restaurant, or a
ballgame or roller skating, or whatever you did. It's really to spend
time with somebody, to see if their values
overlap enough with yours, that you'll be able to get
along for a long period of time. That's the whole
point of dating. And with management teams,
and people running businesses, in effect, what I'm doing,
is analogous to the idea of dating. It's to try to find people
running these businesses where our values, at least in
the worlds of commerce, overlap enough that I'm
happy for them to have the responsibility and authority
to run that business as they see fit. Now you mentioned a
limitation, that you suggest that I'm able
to get an appointment and see people who run business
and interact with the managers and to some degree, that's true. But at the same time, I
really spend a lot more time reading about people, and
using the exact same resources that you would have
access to as well. So I read the annual reports. I read the proxy statements. I read magazine articles. And I try to think
and just sort of look, and get a gut feel
and make some judgment and discernment about
whether these people are acting in a way
that's reasonable and makes sense to me. And your calibration
is going to be somewhat different than mine. You're just different. All of us are going
to set those things that we think are
important, and where we think the bounds of behavior
should be, differently. Because we're all different,
but you have them. And I encourage you to think
about things in that dimension, because one of the
things you'll find is, you'll make a judgment. Your judgment will
not be perfect, but by virtue of the
times you get it wrong, when make an error,
you'll learn something. It's like, ooh, I don't
like that so much. And that will be
a marker to you, that the next time you see it,
you will be sensitized to it and it will help you
make better judgments. In looking at you guys, when I
first started in the investment business, I have a
very wonderful mentor named Ned Reynolds. And this was a gentleman
who's probably 70 years old and I was brand new in
the investment business. And he was very
interesting character, and it's not like he
was formally my mentor, he was nice. He was kind and he was
just helpful to people. And one day, I happened
to be standing next to him on a hot, summer day
in Richmond, Virginia. And not much was going on. We were just sort of-- market
was open, and in those days, you didn't have the CNBC
with the ticker tape but you actually had a physical
ticker tape in a brokerage office, so it would create
this sort of hum and drone of this tape going by. And he was standing there. And he had his arms
folded like this, and he really wasn't engaged
in conversation with me. He was standing by my side,
was not making eye contact, but I had been in the business
for three months at this point. And he said, Tom, the secret
to success in the investing is lasting the first 30 years. It's a powerful statement. What he said is, everything you
see in the world of finance, you will see again. And every excess
that you see happen and not just over-valuation,
but under-valuation. So like the '08, '09 period
when we had a real financial crisis-- I suspect and I hope
that that's a once-a-generation kind of event. I don't think we'll go
through that again real soon, because all of us who lived
through it in a firsthand way have had a taste of that and
we don't want to do it again. And anybody who hasn't
had that happen to them, they think it can't. But you just sort of have
to have to live through it. There's an old joke that
says, every generation is the one that thinks
that they invented sex. Not so. But everybody has
that sense about them as they go through this path,
and once you've sort have been around for a while,
you sort of see things, and you recognize things. And making those judgments
about the character and the values in the way
people behave, in a way that works for you-- that's just
a process of trial and error, with an emphasis on error. And you get to it eventually. If we're talking about selecting
stocks, or buying stock, or buying investments,
you don't need to have a personal
relationship with the CEO in order to make a reasonable
judgment about whether you think that company's
being run well or not. There's a good paper trail
and a good set of evidence out there for you to think
about and draw judgments about. AUDIENCE: My question
is how do you feel about investing
in companies in rapidly-changing industries? So versus like a brand name
company like Coca Cola? TOM GAYNER: It's harder. It's not right or wrong,
or better or worse. It's just harder. So for instance, one of the
things that's under appreciated is that-- and
[INAUDIBLE] and I were talking about this yesterday--
so on his desk in his study, he had a book of the Graham and
Dodd security analysis, which is the equivalent of the
Bible for security analysis. Everybody has to
study Graham and Dodd, if you're going to
be in this business. And I noticed on the cover,
it said, sixth edition. And I said, well, I don't know
what the sixth edition is like. When I was in school
and I was studying it, it was the fourth edition. And I can remember on the
50th anniversary of the class or something, they came out with
a reprint of the first edition. And just for grins, I bought
it, and I said to [INAUDIBLE], I said, you might want to get
a hold of that first edition. Because the difference
between the first and fourth-- it's an entirely different book. So in the first
edition, which is really the one that I would recommend
that you read-- and it might sound antique when they're
talking about railroads and all those kinds of all business,
but the concepts-- Ben Graham was a classicist as much
as he was a finance guy. He was talking about Greek
and Roman civilizations. Greek myths, and all that sort
of stuff, which are really about human nature, and values. Sorry for the long
answer to make a point, but people jump on Ben
Graham, and they think about all his qualitative
statements that he made. And when somebody says a
Graham and Dodd style investor, typically that has
come to mean, someone who's tearing apart a balance
sheet, and is a value spotter, and finding the
difference in price. But Ben Graham, in
the first edition, said that growth,
which is your point about rapid technological
change, and things are changing and you're implying
changing for the better. But you have to admit that
also sometimes things can and do change for the worse. Growth is extremely important. It's just hard to calculate
and it's hard to value that. Ben Graham further
went on in the book that he wrote that's
just a little more approachable and not so
much technically detailed as security analysis, but
the "Intelligent Investor", which he meant to write just for
anybody who wanted to pick up-- should be able to
read that book. In one of the later editions
of the "Intelligent Investor", Ben Graham made the point that
he made more money in Geico, in the stock of Geico, than
in every other investment he made combined. Because Geico was
the growth company. That's the one that
got that third point about the reinvestment
dynamic right. And if you further went on
and researched that decision about how you he got to
be connected with Geico and how he got a hold of that
big block of Geico stock, he relied on his
partner Jerry Newman to make the final deal with
the family, the Goodwin family, to buy that stock. He did not get that over
the finish line himself, and he struggled
with that, because it wasn't the classic sort of
investment that he was used to. He said, if it wasn't for
Geico, you never know my name. So that idea of growth, of
rapid technological change, of changing the world-- I
mean, this is a classic example of something they did not
exist not that long ago, and now it's one of the
leading, dominant companies in the world. All you need to do is get that
right once in your whole life, and it will change your
investing career forever. But it's hard. It's hard to do that. SPEAKER: Thank you, Tom,
for your visit here. So one thing
[INAUDIBLE] mentions is, being in the
investment business, having the right structure,
that right kind of clients. And one thing that
Markel has-- it rightly structured a
similar to Berkshire [INAUDIBLE] source of capital. Would you mind
sharing your story of how you came about at
Markel, from your prior carrier. Help us to transition, how
did you-- seems like a dream job for most people. TOM GAYNER: Yes. Indeed. Thank you. I appreciate the question. And I think a lot of the
reason you're here today's is you have a personal
interest in investing. So I'll actually connect
that notion of structure at the end of the answer to
what might be applicable to you as individuals and
individual investors. So just a short
snippet, is a sale. I started out in accounting,
and my father was CPA and we were in a small town,
and he had a tax practice and he owned a liquor
store and he had a farm and did real estate
deals, so that's what I thought that's
what accountants did. But then I went to work for
Price Waterhouse Coopers, and it was a little
more structured and not quite as entrepreneurial as what
I remembered my father doing. And as an accountant, I always
joke that I was more interested in dollars than numbers. And there's a profound
difference between the two. So just by accident,
I had always been interested in the
stock market and investing. It was something my dad and I
talked about was I was a kid. So I found a broker in
Richmond, Virginia, where I was. He was also an ex-accountant. And he worked for a firm
called Davenport and Company of Virginia. And he had two
hats that he wore. He was an analyst, so he
covered companies, and wrote research reports for
the firm, but he also had individual clients. And I got referred to him. He became a broker. We got along. And then after a relatively
short period of time, he extended a job offer to me. He said, well, you look like
you know what you're doing here. How'd you like to come
over here and work with me? And we'll be analysts and be
brokers, and do investment. And I said, well,
that sounds like fun. So I went there. And that was 1984. And from '84 through
1990, I was at Davenport and had those two roles. Well, in 1984, that's when
I read an article in Fortune magazine about Berkshire
Hathaway, and about Buffett, and just to tell you how stupid
and naive I was at the time, and just trying to shake
it off as best I can. I can remember
reading that article, and thinking to
myself, wow, every word just dripped common sense. So I went into the guy I
was working for at the time, different guy than my
partner, but I said, hey Joe, have you ever heard of
this guy, Warren "Boo-fay"? And he said, it's Buffett,
you idiot, and threw me out of his office and whatnot. And I saw Berkshire
Hathaway, and I was so stupid that when I looked at the
price and it was $380 a share or something like that, I
said no stock could possibly be worth that kind of
money, so it didn't buy it to my everlasting regret. But life has a way of
teaching these painful lessons and things working at, so
in 1986, Markel went public, and it happened to
be headquartered in Richmond, Virgina. And they had an
insurance business that made underwriting
profits, and Steve Markel, who was the chief financial
guy at the company, was interested in
investing the underwriting profits longer-term,
in equity securities and ownership of business. So the light went off for me. I missed the first
part of Berkshire, but at least I had been
given a second chance. Now here's a company that
has the same structure, the same architecture. Not the same accomplishments,
but at least the same theory of having an insurance
company as the base engine and using the profitability
of the insurance company to provide capital to make
other investments over time. So aha! So I bought some Markel
stock and 1986 to 1990, I was covering Markel
from Davenport. In 1990, Markel did a deal
which more than doubled the size of the company. Steve Markel had been managing
investments by himself and thought he might
like a partner. Said something to me about
coming out there with him. And I said, well,
that sounds like fun. That was 25 years ago, so
I've been there ever since. And the day I walked in the
door, he gave me $2 million to manage. And the total pot, at the
time, was roughly $50 million. That was all there was. Today, the total balance
sheet is $20-some billion. And we mentioned the
four and a half billion-- that's the equity investment
that we have from actually-- I'm the Chief Investment
Officer so I'm responsible for the
fixed income side. I'm responsible for
the whole thing, which is $20-some billion. And that has been grown
largely, organically with a couple of
acquisitions along the way. So it's been a good ride. That's how I got there. And you're correct. One of the beautiful things
about being at Markel is it has been a
profitable insurance company all the way along. I mean, there have
been some years where they didn't make profits,
which is normal in years of heavy duty catastrophes. We're going to lose
a little bit of money on the insurance
side but not much. But more often than not,
the insurance company has been profitable and has been
putting money into the account. And then we could apply
those four lenses, those four disciplines that I spoke of
in selecting equity securities and been compounding
value that way. So for instance the day I
showed up, and the stock was $8, and now it's $800. If you do the math, in broad
brush rough terms, roughly half of that has come from cumulative
probability of insurance operations and half of it has
come from investing that money. So it's a mutually
supportive sort of deal. Now connecting that
to you individually, the great advantage that
you have individually, is that you're
investing your money. It's your money. And you don't have
a board of directors looking at you or other people. I mean, other people might
criticize what you're doing, or second-guess
what you're doing, but they have no
authority over it. It's your money. It's your decision that you get. And if you live
within your means, you have an income of this
and you're spending this, you have excess cash flow. And that excess cash flow,
you get to invest personally. And you go to invest
it for your own time horizon, your own purposes,
for as long as you want. And that's the
exact same structure that I get to live in. So I don't have
to solicit clients that may take their money
away at inopportune times. And if you look at
the studies which talk about the average
return of mutual funds over a long period
of time, is x. The average return of
investors in mutual fund is a fraction of that. Well, why? It's because when you have
a market that's like this, and it's going up,
people put money in. And when it's down like
this, they take money out. So whatever the base rates of
return are, by their behavior, they make them worse. And fortunately, in
our company, we're structured such that we try to
take that notion of the table. We're pretty much
always investing. Whether the market's doing
this, or this, or this, we're just steady pounding
away at it, and compounding. And you can do the same
thing as an individual, if you're living on
less than what you make. And I think about one of the
great, wise people of all time, is Charlie Munger. And if you think
about his example-- we all know who
Charlie Munger is now. He's 92 years old-- and think
about sort of his whole life. And he started out as smart
as anybody you'll ever know. He was an attorney. I think he had seven
children if memory serves. They all went to private school. That's a lot of overhead. So I suspect, given a very
pleasant, personal lifestyle, Carlie Munger was not
a billionaire when he was 30 years old, or 25 or 35. But cumulatively, Charlie
Munger always, somehow or another, lived
on less than what he earned, so he
was creating cash flow that he was able to invest. And intrinsically, and
talking about John Wooden and having an internal
versus an external scorecard, Charlie Munger didn't care what
other people thought of him. Still doesn't. Didn't then, doesn't now. So as a consequence, just think
about this from a definition point of view. If you are living on less
than what you are making, you are Rich. Period. Paragraph. I'm not saying that
in a relative term to what other people might
be making or not making. Compared to your needs, compared
to what you're able to do, you are rich, because
there's a margin there. You have more than what you
need, by virtue of choices that you have made. Well, if you keep
doing that, and you're as smart as Charlie
Munger or at least you're smart enough to know
that he is a wise person and you should try to be as
much like him as possible. Well that gap, every year,
of positive cash flow, investing, making a
positive return, over time, begins to compound. And if you graph it on
a piece of-- not a log graph, but a regular
graph-- it'll hockey stick somewhere
along the way. So live on less than what you
make , invest it reasonably, and live a long time. It's a formula that
can't not work. And your kind enough. I'll just tell you one
more personal story. So I remember as a
kid, one of the things that kind of got me
hooked on this notion of compound interest
and compound returns. And I can remember this
vividly, even today. So there was this commercial. And it was about
savings and loans. which hardly even exist anymore. And it was this
picture where you only got to see this
shot from here down. So you would only see this hand. And so there was this
hand and it had $50 bills. And it was pointing out,
if you put $50 a month into your savings account
and it showed this pile being created with people putting
these $50 bills on it-- it was growing. After seven years
or whatever, you'll be able to take out
$50 a month forever. And the pile you were
taking it away from was bigger than the pile
that you started with. I might have been seven
or eight years old, but a light bulb went off
for me about just the notion of compound interest
and what compound meant in a gut, visceral sense. I want to figure
something out about that. That seems pretty cool. As an individual,
structurally, as long as you can live
on less than what you make, you have
every advantage of what Berkshire has, what Markel has. There is no better structure
where the odds of success are higher. Now again, this
company stands as testament-- There are certain
times when something happens that just is out of the blue. And I call that catching
lightning in a jar. And that's what Google did. And that's what gets done
around this part of the world on a regular basis. But catching lightning in a
jar, that's really hard to do and that's really hard
to repeat, and to make that process consistent
year after year after year after year, which is much
of the challenge, I suspect, when you go back to work. That you're tasked with
it, how to catch some more lightning in jars. That's hard to do. AUDIENCE: Hi, so
my question relates to companies that are
staying private for longer than it used to be. Like, for example,
Uber is worth, $40 billion or $50
billion in market cap and it's still private. And like, Airbnb is worth
more than $10 billion. It's private as well. So are you worried about missing
this huge compounding time period? Well, as an example,
and I saw that number the other day,
that said roughly, that the market value in
the private last round of fund-raising for
Uber was $50 billion. Also FedEx, the market cap at
that particular point in time, was $51 billion dollars. So the net market value
of both those institutions is roughly-- let's
call it the same. I'm not sure which one would
be a better investment. I really am not. So the notion that those two
are importing to be the same, the FedEx number is a harder,
more document-able number, because if you wanted to
pull out $5 billion of value from FedEx right now, you could
do it on the floor of the New York Stock Exchange. The Uber valuation is within
the context of private markets, and what people are
saying it's worth, and what people are funding. But if you owned $5
billion reportedly of Uber, that is not as liquid as what
$5 of what FedEx would be. So let's have some nuanced
judgment about the fact those are on top of one another. I missed your question a
little bit in the sense that, OK, so the fact that an
Uber can come into being and get to $50 billion
without us as the public ever having had a chance at it? Does that mean that there
won't be other things that we as public participants do have? No. I mean, there will
be other things. So we didn't get Uber as just
public market participants, but there are other
things, and by the way, you don't need to
catch an Uber, which comes from nowhere
within a period of what, less than a decade. is thought to have
that sort of valuation. FedEx, by contrast, I
think that started what, in the '60s or
'70s, so that's been 40 or 50 years in business. Well, anywhere along the line
that you decided to buy FedEx, if you'd hung in
there with it, you've probably earned a
reasonably good return and you've compounded
it over a longer time. And going forward, with
the world growing as it is and packages moving around. I mean, I know there
are alternative delivery systems, Uber being
one of them, trying to be one of them-- I
would be willing to bet you a beer anyway, that 10
years from now, FedEx is still a pretty dramatically
important and profitable and good earning sort of thing. And again, it's
not right or wrong. It's just knowing
who you are and how you do things and things
that resonate with you. I am very content and
happy, delighted, thrilled, to compound my money
at reasonable rates with something like FedEx,
and not bemoan the fact or have angst or be
stirred up about the fact that I didn't get
to invest in Uber. It's OK. I know how to do this. I don't know how to do that. So do what you do. AUDIENCE: The numbers
make Uber a good one. The question is about you
learning from the greatest investments you did not make. How do you go for that process? And how do you decide
that there is no learning to be made, even if you
can make an investment? Or how do you recognize
the importance traits? TOM GAYNER: Believe me, when
you didn't buy Berkshire at $384 a share, like I did,
you think about that every day for the rest of your life. And I have my partner Steve
Markel to thank for the fact that by the time I joined
Markel, it was $5750, and then I did. But it was because
Steve twisted my arm. To say, you idiot,
go ahead and buy it. Kind of like Jerry
Newman, helped Ben Graham get over
the hump with Geico, which just wasn't the way
he was wired at the time. It'll happen to you,
and when it does, you will know that lesson every
day for the rest of your life. AUDIENCE: Do you keep
track of companies that you're not
investing in, but they were close to your
investments [INAUDIBLE] or something where you did
not make an investment, and do you revisit them after
a year, after five years. Is that how it works? TOM GAYNER: Yes, Not as formally
as what you might think. But I don't think you need
to be formal about that. I think if you're
paying attention, if you're involved in
the financial markets, and you're reading every
day and you're thinking and you're exposed, you
know what's going on. And in fact, here's
one change that I made. When I started out in the
investing business in the Wall Street Journal, every day. And they still do
this every day. They have a list of stocks
that are making a new high and they have a list of stocks
that are making a new low. And when I started out in
the business every day, I looked first at
the new low list. I think, what's on sale? What can we get a deal on here? And I really didn't even
look at the new high list, because I figured
if I own something and it was making a
new high, I knew that. I didn't need it to be on
a list to tell me that. I knew it, because
I'd already owned it. These days, I look
at the new high list first, and then
the new low list, because if there's something
on the new high list, there might be a reason. There might be a good reason. And if I don't own it, and
I see it making a new high, I'm more inclined
to look at that and say, what does the market
know that I don't know? And is this a
really good company? And is what they're
doing likely to make it such that next year and the
year after that, and five years from that, and
10 years after that, they'd be more likely to be
making new highs than new lows. It's a very gross
distinction, but I found to be tremendously
effective in pushing me more towards better quality
companies and better investments that
compound over time. As Charlie Munger said,
time is the friend of a wonderful business and the
enemy of a mediocre business. And that was one
technique, that I used to help find
good businesses and wonderful businesses rather
than mediocre businesses. AUDIENCE: How does Google do
according to your investment criteria. So all of us are
pretty exposed to it. A lot of us get
stock vesting, so I'm interested to hear your opinion. TOM GAYNER: And tell
me your question again. AUDIENCE: How does Google do
according to your investing criteria. TOM GAYNER: Well. AUDIENCE: Be candid. TOM GAYNER: I own some Google. And I don't own a lot and
it's one of those things that I feel that I've missed,
and I feel stupid about that, because you know, I use it. I'm on Google 20 times a day. And how could I
have missed this? And the thing that was the
most challenging for me, and remains the most
challenging to me is and how the compensation
at senior levels works, and what this company intends to
accomplish for its shareholders at the same time that
they're trying to accomplish these things in the world. And I don't know
the answer to that. And I'm not I'm not
skilled at discerning that. I'm not a good investor
in this part of the world. It doesn't match up to
my skill set as well, and I'm trying to get better. It's one of those things
that I'm trying to learn. And that's one of the fun
things about investing, is things you don't know you
should learn something about. So it's not boring. It's not like I learned
something when I was in school and now I'm done. It's a nice life challenge. Like I said, I own some up
Google, and a friend of mine has an expression--
they call it when they buy a little bit of
something and I do this-- they're buying a library card. So one of the reasons
I buy some of something is to make myself think
more deeply about it and read the reports and just
be more aware of something. It's like if you're-- and
[INAUDIBLE] and I were talking about sports and you were
talking about American sports and whatnot. And I hadn't thought of
this until just now-- I'm trying to sort of connect
with the culture of sports, if you didn't grow
up playing in sports. Well I know, immediately, if
I was going to go to India, and live there, and
there was cricket, that was this national sport
that everybody was consumed by, but I didn't know
a thing about it. What I would do is bet
money on a cricket match. And it's just kind
of way I'm wired, because if I put $20
down on something. Well, I'm going to know who
the players are, who's better and what their records were,
and all that kind of stuff. So I do that sometimes. I will buy positions
in stock to make myself think about
it in the same that I'll bet $20
on a ball game, just so I have some rooting
interest when the Oakland Raiders play the
Tennessee Titans. I don't care who wins that,
but if I'm having a party and we drink a
few beers and I'll bet $20 on one side or the other
just so that I'll have somebody to root for. And do a little work on it. AUDIENCE: In the analogy to
Berkshire Hathaway and Warren Buffett, do you think
that [INAUDIBLE] grows, if you like the size. Would it be like a barrier of
[INAUDIBLE] for investment. For example, the last thing
[INAUDIBLE] acquisition you can have, and you
have a lot of fixed income right now, so if you're
gonna increase your equity investment to the level
you had before, then there would be a lot of investment
you'd need to make, so do you think size
eventually becomes a problem? Not a problem, but like
a factor consideration? TOM GAYNER: I will try as hard
as I possibly know how to, to make that a problem for us. Yeah, so we're
talking about that's our goal to have those
kind of problems, because that means things will
have gone very, very well. And that's a very high
class problem to have, to try to figure out how to
invest the flows of capital that are coming in the door. So we started out with a little
bit, it has grown to more, and we will try to
make it grow to more. So we're faced with trying
to handle that problem. SPEAKER: So with that, thank
you so much for coming here. It's been a pleasure
to listen to you. And we hope to have
you visit again soon. TOM GAYNER: Thank you very much.
Watched 75%----seems like he follows Graham/Buffett pretty closely. Always like hearing someone's successful trades' details though. That Tencent investment sounds pretty solid and similar to Alibaba/Yahoo
I would like to thank Surap (sp?) for setting up all of these talks. They are wonderful. Thanks for the effort!!