“I tend to be a pretty slow seller. There are two reasons… A) I made a mistake, it was wrong, and that usually involves some sort of character judgment I made about the management, being disappointed in some sort of tainted investing that seems inconsistent with what I wanted to see. Or secondly… there are ideas that are just less compelling than a new idea that you might have and you need some money to pay for what you’re buying. Generally speaking… there are huge tax efficiencies for Markel for us to be able to buy and hold something for a long period of time.”
Age: 49 (as of 2012)
Source of Wealth: Investing, Portfolio Manager, Self Made
Residence: Glen Allen, Virginia, United States of America
Country of Citizenship: United States of America
Education: B.S. Commerce, University of Virginia
Marital Status: Married
Thomas Gayner graduated from the University of Virginia in 1983 and started his career in accounting and began working at PriceWaterhouseCoopers as a Certified Public Accountant. Gayner soon became enthralled by the world of finance and active trading and decided to switch careers and took up a job as a stock broker at a small company known as Davenport and Company of Virginia. At this particular job, Gayner gained considerable exposure to research techniques and industry practices since the major part of his job was to identify value within smaller regional companies that had the potential to grow into bigger businesses during the long term.
It was during this time that Markel was incorporated into a public limited company and for 4 years starting 1986, Gayner was responsible for analyzing the company and its holdings and had many opportunities to meet Steve Markel. Markel recognized the talent he had chanced upon and quickly offered him a position career. Gayner gradually worked his way up the ladder to President and Chief Investment Officer at Markel Corporation and holds the position currently as of May 2012.
Gayner’s success is defined by his investment strategy or his technique of value investing. By definition, value investing focuses on the intrinsic or fair value of stocks and compares them to their market price. The fair value of securities is basically the present value of its expected future cash flows. The cash flows for a bond for example are the coupons and principal redemption at maturity.
For a stock, the present value of its expected future dividends constitutes its fair value. If this intrinsic value is higher than the market price, the security is termed to be undervalued and thus attractive for investors. Securities that are actively traded such as those of blue chip companies are highly unlikely to be available at a discount and thus are not usually included in value-oriented investment portfolios.
Gayner has used the above philosophy for years without regrets. In an interview in 2011, Gayner described four fundamental factors that he needs to see in a security, before purchasing it. These are:
- Acceptable and Positive Rate of Return: This factor doesn’t just make sense because a successful investor is proposing it, but the first instinct of an inexperienced retail investor is also to jump on securities of companies that have been profitable in the past and are expected to maintain that streak in the future. In fact profitability isn’t the only requirement; the company should also record a certain level of rate of return that is at least at par with the required rate of return for a company of similar risk profile and belonging to the industry.
- Ethical and Experienced Management: This is another factor that could make or break a deal. Obviously, an honest management is the biggest selling point and a good one at that adds the cherry on top of the security. Fraudulent business practices will always cost the stakeholders of a company, particularly investors, and hence it is prudent to avoid a company where the management may not be completely trusted.
- Reinvestment Avenues: Reinvestment is important to investors because a company should be able to make profitable use of its spare cash. There are many instances where a company may find itself holding excess liquidity as a result of overestimating its cash needs. Since the typical companies discussed here are worth millions of dollars, excess liquidity is also likely to be a huge sum along which translates into an exorbitant opportunity cost.
- Undervalued Securities: As already discussed, the comparison between the intrinsic value and market price of a security is at the core of value investing. Gayner specifically emphasized on this factor throughout his career and managed to pick up stocks during stock market crashes and particularly during the Collapse in 2008.
Analyzing Investments, Gayner’s Way
Good Companies Vs. Good Investments
Good companies may not always translate into good investments because of pricing reasons. Stocks of blue chip companies and other high profit tech stocks such as Apple and Microsoft have long been denounced by institutional investors because of the low value for money and return they offer. Similarly, bad companies, or companies that are out of favor at a particular point in time may turn out to be profitable investments. Gayner’s strategy on such companies remain constant: if the company is blessed with a competent management and has a reasonable line of business, with an undervalued stock, the buy decision is easy to make.
Financial institutions of all natures are very tough to evaluate. To analyze the performance of insurance companies, Gayner recommends concentrating on the Income Statements and Balance Sheet. If a company is bent on reporting a profit without really focussing on the long term value addition to its Balance Sheet, it is likely going to be unsuccessful in the long run. On the other hand, if the company is value oriented, it will give up the short run perks for long run appreciation and Gayner stresses that this is a mark of a good “buy”. However, the strategy will differ for various insurance companies, depending on whether the company is providing insurance for property and casualty, medical or life insurance.
The circumstances around each category are unique, for example, a life insurance company does not have “seasonal” disturbances with many policy holders claiming their insurance at the same time. For an insurance company covering accidents and property insurance, it could find itself paying a large number of collective claims as a result of natural disasters such as earthquakes. This kind of a payout would have a huge effect on the Final Accounts of the company.
Likewise, different companies have to be prioritized on different basis. Retail companies for example are focussed on generating revenue and thus the focus should on the evaluation of the Income Statement as opposed to Balance Sheets. In this case, it is better to study long term trends of the company, at least as long as 15 to 20 years.
On Highs and Lows
Business cycles are inevitable to an economy. In fact, most investors rely on these swings to earn their dough since the popular investment mantra, “buy low, sell high” is only applicable during these ups and downs. This is also the mentality of “get rich, quick” traders in Tom Gayner’s opinion. He recommends riding out the storm gracefully if you have liquid resourced to hold on to. In fact, if anything, the recessionary trends should be used to capitalize on picking up quality value investments. Hence, Gayner does not believe in active trading, but believes in holding on to securities in the long run, provided they offer an acceptable rate of return during the long run.
Similarly, businesses that are not involved in trading on the exchange are also influenced by these cycles, sometimes adversely when things are unfavorable. This may happen for any company as a result of declining sales in a poor macroeconomic scenario. Gayner proposes that as long as the management of the company is honest and competent in their approach to making money, the stock is worth holding on to.
Prohibitive Costs of Hedging
Hedging is a technique used to reduce the costs of an expected negative outcome, and hence makes ample sense for investors to use, particularly when managing large investment portfolios. Tom Gayner, disagrees because hedging is an expensive activity to assume. It is also based on differing opinions of various experts in their respective fields, and as a result is a risky decision to undertake. However, natural hedging, for example having opposing exposures in worldwide markets is widely practiced in Markel Corporation’s portfolios, particularly where international currencies are involved. Currencies can move up and down very rapidly and that risk largely comes under the category of speculation if investors are just left making “educated guesses”.
Diversification: “Protection against Ignorance” – Charlie Munger
A key concept of portfolio management is diversification which allows reduction of unsystematic risk or diversifiable risk. In Charlie Munger’s words, diversification is provision for mistakes on part of portfolio and investment managers. Gayner also disclosed that the biggest strength of Markel’s portfolio lies in owning businesses and experiencing growth beyond the fixed levels as those in bonds. Bonds are recommended for investors who are completely dependent on a certain source and level of income as a result of limited avenues.
On Selling Stocks
A portfolio that is constructed on the basis of value investing is normally not an actively traded portfolio. Gayner has the same opinion, that when stocks are picked up and added in a portfolio, Markel Corp generally does not intend to sell it. This is because the purchase decision is made on the view that the security is selling at a discount relative to its future potential. Hence, the security is only sold if this expectation remains unfulfilled and the issuing company of the stock performs badly in the subsequent periods.
In summary, Markel only sells securities that it believes are out of favor and sometimes these are attributed to mistakes as well. To err is human. Some securities are also sold because they are overpriced. For example, during slowdowns, most intelligent portfolio managers pick up securities that they believe will perform well in the coming years. Once normalcy returns to the market and those stocks begin to trade at a premium, they are sold. This usually holds true for large cap companies.
Profitable Investments of Tom Gayner
Gayner manages over $2 billion as part of Markel Corporation’s portfolio manager. Over the past 10 years, Gayner has managed to earn a cumulative return of almost 102 percent return, compared to a paltry 16 percent of the S&P 500 index. In 2008, the year of the Financial Crisis, his portfolio made a massive 34 percent loss, significantly higher than the benchmark index but was subsequently able to recover this value in the next couple of years and beat the benchmark by 5 percent cumulatively, despite the tough times.
He likes to invest in companies that have good managements above everything else. A solid business record comes next on the list for the investment manager. As a result, it is not surprising that his portfolio comprises of global large cap companies such as Nestle. Although it is European company, it has strongholds across the world and has high resistance to receding market dynamics. A similar investment is Diageo, another European FMCG.
Similarly, in the Oil and Gas Development side, Caulmet Specialty Product Partners has been a longstanding investment of Markel. Federated Investors is another Asset Management company that Markel/Gayner has remained loyal to. Over the years, Gayner’s top holdings have been:
- Berkshire Hathaway B
- Fairfax Financial Ltd.
- Brookfield Asset Management
- Diageo PLC ADS
- Exxon Mobil Corp.
- Walt Disney
- WalMart Stores
- United Parcel Service Inc
Tom Gayner’s Recommended Reading List
In an interview, Tom Gayner recommended some financial interest books to his readers along with general interest books that provide insight into the workings of an average person’s mind. He also recommends investing some time in learning more about hardworking people, and studying various biographies.
Security Analysis by Graham & Dodd
100 to 1 in the stock market by Thomas William Phelps
Books by Mark Twain
Tom Gayner in the News
Markel Sees Opportunity in the Market
Value Investing Conference 2007-2008
Stock Picks from a Berkshire Like Investor
The Best Yielding Stocks of Thomas Gayner, Markel Investment Management
Markel Announces Acquisition of Havco