Phil Weiss’ notes from the 2016 Markel Omaha Meeting.
Steve Markel, Tom Gayner, Richie Whitt (Insurance Operations), Anne Waleski (CFO)
Michael Mauboussin: Here’s what active managers can do
David Winters - Can you grow organically, or do you need to do deals to go from $1k to $2k.
TG - Culture of organization has done a terrific job. Markel Ventures initially labeled inorganic growth. But, over time as it belongs to organization it leads to organic growth. Same for people brought in that do new things. If you're not part of the Markel style, you are unlikely to stay as part of the organization and clarity of the message.
RW - Mix of biz is always changing. Have to be reinventing yourself. Lines of biz change over time. There are areas that you can achieve organic growth. You have to grow that way to achieve success.
Q - What are your criteria for purchasing companies and do they change over time?
TG - Criteria apply to purchasing stock, new biz, insurance biz
- Profitable with good returns on capital. For biz to last and endure it has to be profitable, have enough money to pay its bills, employees, etc. or it will go away. Some legitimate ventures of investing do not require this (such as VC), but that is not what Markel does. Wants to invest in biz that do things for rather than to their customers. Also don't like too much debt
- Biz run by people with equal measures of talent and integrity. Need to be honest and fair in their dealings with customers, employees and shareholders.
- Best biz in world is one that makes good returns on capital and can keep investing it and earning good returns. Have good capital discipline.
- Affordable price.
SM - For Markel, those four lenses are part of their DNA. Unlikely to venture too far from those four tenets. There may, however, be changes in knowledge base over time. We may miss some things, but maintaining focus on them helps eliminate problems.
Q - Views on compensation and structure of incentives and how they are aligned with how they do things.
AW - Incentives are really important. It is true that you get what you invent without question. You can underestimate how much you can get through incentive comp. Thinking about tying people to their performance and performance of the organization. Had historically emphasized individual performance. Gave people who aren't underwriters a people of the company to connect to performance of company.
RW - Underwriting grid. Critical to philosophy and model is to generate consistent underwriting profits in order to make model work. Have capital models to set the pricing. Maintain float. Pay out over time. Each person ends up with a bank (relates to profit over time). Helps increase retention. If results deteriorate, company can also recoup overpayment of compensation over time. Added growth incentive (after underwriting profit is generated) in order to help improve growth of underwriting profit.
SM - Importance of making incentives based on long- rather than short-term results. Want to encourage to think long-term and build wealth.
TG - Markel Ventures. Have people think like owners. Share in profitability of acquired businesses. Get people to think that if this was your money what would you do. Recall, however, that money is not the be all and end all. Really want there to be some element that goes beyond money. Recognition, being part of a team and a culture.
Q - Painful lessons that have been learned along the way.
TG - At Markel, it's ok to make mistakes. Just don't keep making the same ones. None of us are smart enough to not make some mistakes along the way. Try things figure out what you should do more of and what you should not do.
Markel Ventures. Don't always get it right as far as the four criteria go. Learned to have more sensitivity around reinvestment opts for the biz. Management assessment is not always spot on. Have learned it is an entirely diff matter to buy a biz that is already operating to scale, has a team, bench, succession process. Much different than a one-man operation. Have to have more confidence to go with the "one" person show. To say that this hasn't worked as well as you hoped does not mean you stop. You put the gear on and go back to it tomorrow. Try to improve.
RW - Terra Nova acquisition. In moment it was tough, considerable effort required to get it going in right direction. Now it is 1/3 of operations and extremely profitable. Let's learn lessons from this deal and do next one better. Created ability to grow outside the US.
Q - Equity port has provided a tailwind. 125 positions, with bulk in top 10. How do you weigh incremental returns from top positions vs the tax consequences of selling if you think the future performance might be bite served by selling and reinvesting in something else.
TG - Having a big gain is a great problem. May the lord bless us with more of this problem. Does the math. Figures out the tax cost and how much you have to invest in next idea. How much do I have to earn on new idea to weigh and balance that tradeoff. Something they look at all the time. As trajectory levels out, it can increasingly make sense to sell, recognize the gain and move on. Paying a big tax bill is far from the worst thing in the world.
SM - Having large gain and deferred tax is a positive. Find investments worthy of a 5, 10 15 or forever holding period is important. Not going to sell over a rough quarter or two. Will ride it through as long as believe in the long-term prognosis.