Tom Gayner on “Identifying Great Capital Allocators” transcript from the Value Investor Conference. Check back for more presentations, or sign up for our free newsletter to get all the presentations in your inbox. H/T ValueInvestingWorld for the find

Below is the transcript including questions and answers of Tom Gayner’s sold out talk at the 11th Annual Value Investor Conference held on May 1 and 2, 2014 in Omaha, just prior to Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) annual meeting.

Markel Ventures Tom Gayner

Tom Gayner on “Identifying Great Capital Allocators”

Miles: It takes a great investment manager to know one, so we asked our next presenter to help with “Identifying Great Capital Allocators.” Tom Gayner is President and Chief Investment Officer of Markel Corporation [NYSE:MKL]. He currently has approximately $18 billion in assets under management. Please welcome Tom Gayner.

Tom Gayner: Thanks very much for having me here today. I’m always humbled to be asked to speak. At the same time I appreciate the invitation very much, even though it means that I have to do a bit of homework. I also recognize that I’m the guy who is standing between you and drinks right now. It’s always an uncomfortable place to be, so I’ll try not to dawdle. As I said, I’m grateful for these periodic but not too frequent homework assignments, because they cause me to spend some time reflecting and considering what I’m going to say.

I start with the basic proposition that if I’m going to say something, I’ve got to actually believe it. The good news is the process of getting ready for a talk helps me to examine my beliefs. I check to see whether they’re still viable and what might need modification, adaptation or further clarification.

I’m also thankful to Bob Miles specifically for assigning me the topic of ‘Identifying Great Capital Allocators’, because this proposed title for the talk helped me to crystallize some thoughts about investing. My time today is limited so I’ll share a few comments on the topic and then as quickly as possible get to your questions. To do so, I’m going to share some comments with you from my most recent quarterly memo that I write to our board at Markel when I give them an update on our investment and capital allocation decisions. Here is what I wrote in my most recent memo.

I am delighted to report to you that we are off to a good start in 2014. The results from any single quarter, and in fact for any time period less than about 5 years, resemble what Buffett said about college graduation days i.e., “Security profits in a given year bear similarities to a college graduation ceremony in which the knowledge gained over 4 years is recognized on a day when nothing further is learned.”

That said, graduation ceremonies are more pleasant than picking up your child when they’ve flunked out of school, and it is always more fun to report the results from quarters when we make money than those in which we don’t.

Over the years, we’ve consistently discussed our four part investment process of searching for profitable businesses with good returns on capital, run by honest and talented management teams, with reinvestment opportunities or capital discipline, at fair prices. I believe that each and every word of that distilled statement packs incredible freight. As such, I’m reluctant to pick any single notion as more or less important than another. They all tie together.

That said, if you held a gun to my head and said which of the four ideas is most important, I would respond with point #3, reinvestment opportunities and capital discipline.

One of the reasons that I propose such a simplification is that the idea of reinvestment and capital discipline embeds the other concepts. If the business is not profitable, there is no money to reinvest. If the management team is not talented and honest, there will either be no money to reinvest or it will be hived off by the management before it ever gets to the shareholders. And finally, and this is the most nuanced and misunderstood aspect of investing, a fair price may be a lot more than you would think if profitable reinvestment really can take place.

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