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.
