Tom Gayner’s Markel Corporation is out with their 2012 shareholder letter. Tom Gayner always has interesting points to make (we will be covering the annual meeting in a few weeks), but he had some especially insightful comments on the firm’s investment process. Below is a brief excerpt on that topic followed by the full letter embedded in scribd:
We think about the reinvestment dynamics of a business. A wonderful business can take the profits it earns and reinvest them at similar or better returns over time and compound value. Organic growth companies like this are rare and hard to find and none of themlast forever. In this world, perfection is not attainable, but we try to snuggle up as close to it as we can whenever we can find it.
The second best business in the world is one that makes very good returns on capital but cannot fully reinvest the profits at similar rates. Those businesses are fine as long as the management teamaccepts the reality and
allocates capital to other uses. In our public equity holdings we own several fine businesses which meet this
definition and pay meaningful dividends, repurchase shares, or make good acquisitions. Also, within our Markel Ventures operations, several of our companies match this profile.
When we own a controlling interest in a company like this we can make the capital allocation decisions and do so in a very tax-efficient manner.While we pay full taxes at any entity when they make money, we can subsequently re-allocate the earnings from any area of Markel to any other, all around the world. By contrast,
when we earn passive income through the receipt of dividends on our public equity portfolio, the paying
companies paid taxes on their earnings and we pay a tax on the dividends received. By building the controlled interests of Markel Ventures operations, we are able to eliminate this tax drag and increase the value ofMarkel with less friction than would otherwise be the case.