Tom Gayner (Trades, Portfolio) is an iconic investor and the newly crowned CEO of Markel Corporation (MKL, Financial), a financial holding company. Recently, Gayner appeared on the Business Brew podcast in 2023. In this article, I provide my notes on this podcast, as well as additonal commentary for context; let’s dive in.
Getting started in the industry
Gayner started life professionally as an accountant. Then, by 1986, he had transitioned to an investment analyst following Markel. In 1990, he joined as an equity investment manager. During that time, Markel was a “ small specialist insurer” which had a market capialitzation of just $40 million. Today, its market cap is closer to $18 billion. Its employee count has also grown to the thousands.
Its business model can be thought of as a mini Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) which generates an underwriting profit from its insurance operations and then invests those profits (along with the insurance float) for the long term, both in publicly traded stocks and in whole businesses via “Markel Ventures."
Gayner has even spoken to Warren Buffett (Trades, Portfolio) at early annual meetings and since then, he says Berkshire and Markel have become intertwined.
Investment Strategy
Gayner is a value investor at heart and aims to buy cash flowing assets for less than they are worth. In his earlier life, he used to “read the new low list first," with reference to 52-week lows. Then he would check 52-week highs. However, he has now flipped this around and checks the high list first. The idea is this may indicate high quality companies. The key is to separate the stock price movements from a simple “trading move” or “cyclical move."
After choosing an investment, Gayner likes to hold on for the long term. This makes sense not only to avoid emotional biases, but also to be more tax efficient.
His goal is to make “reasonably good decisions” across all its investment strategies. This then “creates more capital” which then “increases the size of scale of opportunities."
An example of one of Gayner's early investments from 2005 is AMF Bakery Systems, which was producing around $5 million in Ebita. He paid roughly $14 million for the business at the time, which was a great deal.
In 2021, Markel acquired Metromont, one of the largest precast concrete manufacturers in the U.S., in a deal which was “an order of magnitude bigger” than prior acquisitions. Another interesting observation is that Metromont was a family owned business, which is often an indication of aligned incentives with management.
Gayner also takes a similar hands off approach to the management of its portfolio companies as Berkshire does. This is a great strategy for a few reasons. Firstly, many business owners would rather not wish to answer to headquarters or be micro-managed regularly. Secondly, it makes the life of Gayner easier as he can effectively run a decentralized business operation. He believes “accountability is more important than scale," which each individual company CEO being accountable for their results.
Gayner also likes to align with managers who are long term oriented. This creates a mutually beneficial relationship, as a CEO won’t feel bad for incurring an expense today with a long term pay off. Whereas if the company was publicly traded, its stock price would likely get hammered if it missed earnings.
An example he gives is the acquisition of AMF in 2005, which still has the same CEO today, 13 years later. In simple terms, Gayner believes this means “he said he will do what he will do” and “we said (Markel) we will do what we’ll do." This alignment of communication with business partners, managers and even in your day to day work life can help generate successful results long term.
The importance of making mistakes
Gayner humbly admits to making mistakes in the past, like many investors. He states “good judgement comes from experience, which comes from bad judgement."
The trick is to be able to “live to fight another day” by analyzing the best case and worst case scenario prior to an investment. Gayner also encourages “learning by doing” which helps to generate the necessary wisdom.
The importance of keeping lots of capital
Keeping a high portion of cash on hand and capital is great both for flexibility during market opportunities and for regulated businesses. It helps to meet capital requirements, unexpected cover insurance losses, etc.
Markel has interestingly divided its capital base into two labelled terms. The first is “Blue Capital” which Gayner states is “regulatory capital” required to keep on hand. However, this “hasn’t left the building” and is “still earnings returns." Therefore this debunks the critiscim that Markel may have too much cash on hand.
Its second type of capital is called “Orange Capital," which is basically “cash, fixed income securities and the publicly traded portfolio." Its options for this capital include “funding growth” within its insurance operations or Markel Ventures or investing in publicly trading companies.
In a worst case scenario, Markel also has the option to raise capital on the public markets if there is an especially large or lucrative deal. Gayner compares this to Berkshire Hathaway, which issued stock to help acquire Burlington Northern Santa Fe for a staggering $26 billion in 2009. This issuing of stock was “controversial at the time” as it effectively dilutes shareholders in the short term. However, long term this has been shown to be a “pretty good deal” in Gayner's opinion.
Generating deal flow
Deal flow is the rate or volume of investment opportunities which an investor or fund has the opportunity to review. Greater deal flow is usually a positive sign as it means investors can “wait for the right pitch” in the words of Warren Buffett (Trades, Portfolio).
More deal volume also enables pattern recognition as an investor can set a mental baseline relative to other opportunities. Surprisingly, Gayner reveals that deals can often take a long time to go from initial discussion to close.
An example he gives is Markel’s 2015 investment into Captech. He spoke to the head at this company five to seven years before the deal happened. However, sometimes there are motivated seller opportunity which can lead to a “handshake agreement” in a “matter of days." This is usually followed by approximately two months of paperwork, due diligence etc. The ability for Markel to close deals fast is a skill. Gayner compares its opportunistic speed similar to buying a house, which is incredible given the complexity of the businesses.
Insurance-linked securities
Insurance-linked securities (ILS) are innovative financial products which basically enable insurers to transfer risk and use sources of capital market funding.
Gayner believes the use of these securities helps to lower Markel's cost of capital threshold from double digits to lower levels. This is also useful for creating returns which are not correlated with other returns in one's portfolio. This also helps Markel to not risk its own balance sheet.
Final thoughts
Tom Gayner (Trades, Portfolio) is an incredible investor who follows many of the same principles as Warren Buffett (Trades, Portfolio), such as long term investing and being a “lifelong learner." When investing, it helps to understand the “fundamental unchanging aspect of human nature." People are episodically subject to being greedy or fearful in the markets. As investors, our goal is to understand this dynamic and manage our own biases in order to take advantage of term compounding.
