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The Manual of Ideas is pleased to bring you an exclusive interview with Tom Gayner of Markel Corporation (NYSE: MKL), conducted in early April 2009.
Markel is a Richmond, Virginia-based international property and casualty insurance holding company.
Tom has been President of Markel Gayner Asset Management since 1990 and Executive Vice President
and Chief Investment Officer of Markel since 2004.
Tom Gayner is a true class act. He has been a disciplined steward of capital on behalf of Markel shareholders, and his long-term
investment track record is one of the best in the business
(see Markel’s 2008 letter to shareholders for specific figures).
And, as you’ll undoubtedly learn in this interview, his other qualities are matched by an uncharacteristic sense of humility. In all of these respects,
Tom Gayner has lived up to the example set by every value investor’s role model—Warren Buffett.
The following are excerpts of our interview with Tom:
MOI: You have stated that the businesses you seek should have (1) a demonstrated record of profitability and good returns on total capital,
(2) high measures of talent and integrity in management, (3) favorable reinvestment dynamics over time, and (4) a purchase price that is fair or better. Perfection,
however, is rarely attainable in the stock market. Have you had to compromise on these criteria, and if so, could you illuminate for us how you decide on acceptable
versus unacceptable trade-offs? Tom Gayner: While you say that perfection is rarely obtainable in the stock market,
I would go so far as to say that it is never obtainable in the stock market. Perfection doesn’t exist in this world. All of my choices involve various
degrees of compromise and tradeoffs. As an accountant, I can tell you that my wife and children are sick of hearing me use the phrase “opportunity cost”.
Every decision is also another decision (at least) and every non-decision is also a series of other decisions.
The challenge is to get
the balance roughly right between the choices that actually exist. All of the four points I lay out are north stars that guide me. I admit though, that I have never
personally been to the North Pole.
The one area where I will not compromise is in the area of integrity. I may not make every judgment
correctly when I’m trying to make sure I’m dealing with people of integrity but I will never knowingly entrust money to people when I am concerned about
their integrity. Even if you get everything else right, the integrity factor can kill you. My father used to tell me that, “you can’t do a good deal with a
bad person.” And he was right.
The other factors can be thought of as shades of gray and nuances. We look for as much of the good
as we can find and weigh that against what we have to pay for it, our expectation of how durable the business will be, and what our other alternatives are.
I don’t have a formula or algorithm to get that precisely right, I just spend all my time thinking, reading, and adapting as best as I can.
MOI: You emphasize the impact of the passage of time on your investments. With the trend toward compression of time horizons and a focus on
short-term performance in the investment industry, we are seeing many investors—even those who consider themselves value investors—emphasizing near-term
stock price catalysts. Do you see a growing inefficiency in the pricing of “boring” investments that will deliver returns over time versus investments that
are expected to pay off at a foreseeable point in time? Tom Gayner: Yes.
To expand on that one word answer, I think there is a real time arbitrage opening up right now. An old saying is that in a bull market, your time horizons grow
longer and longer. In a bear market, they grow shorter and shorter. The bear market experience of the last few years compresses time horizons for a lot of people. Even
if they want to remain focused on the long term, there are inevitable career risks in not putting results on the books today when people are so anxious about every
aspect of their lives.
I think that means the playing field for longer term investing is getting less crowded. Fewer people are able to think about the long term
and I believe that creates an opportunity to buy wonderful, long duration investments, at better prices than has been the case in the last decade or so.
MOI: What books have you read in recent years that have stood out as valuable additions to your "latticework of mental models"?
Tom Gayner: There are a number of books that help you to think and teach you things you didn’t know. We all know Security Analysis and The Intelligent Investor and they have stood the test of time.
I think Mark Twain is a great writer and his insights and observations about human nature and money are invaluable. He was broke and rich several times in his life and his writing carries an undertone of his struggles with money. You get a twofer from Twain. You can laugh and learn at the same time.
I read endlessly. John Wooden, the basketball coach at UCLA during their dynasty is a hero to me. General Grant is a hero. Warren Buffett is a hero. Pick some good heroes and read everything you can about them.
I also like reading about history, psychology, and human nature, technological progress and scientific thought. The world is a fascinating place and you will never run out of rich material if you want to keep understanding more and more.
I think I saw a recent interview with Seth Klarman where he said something like, “value investing is the marriage of a contrarian and a calculator.” Some books, like Twain’s, the histories and biographies help you with the human nature and contrarian side of that equation. Some books, like the ones about science and technological developments, along with the accounting homework I did a long time ago, help you with the calculator side. Both elements are essential. Each is severely limited without appropriate balance and understanding from the other side.
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