My colleague Chong Ser Jing had recently shared a video with me about a talk given by Tom Gayner, Chief Investment Officer of Richmond, Virginia-based Markel Corporation, in the Google campus. For those who are unfamiliar with Markel, it is a specialty-insurance company that is structured very similarly to Berkshire Hathaway Inc, the hugely-successful conglomerate that’s run by the legendary investor, Warren Buffett. Berkshire Hathaway’s success was built upon a base of profitable insurance operations that supplied capital for Buffett to invest in stocks as well as privately-held companies. Gayner, as an important member of Markel’s leadership team,…
My colleague Chong Ser Jing had recently shared a video with me about a talk given by Tom Gayner, Chief Investment Officer of Richmond, Virginia-based Markel Corporation, in the Google campus.
For those who are unfamiliar with Markel, it is a specialty-insurance company that is structured very similarly to Berkshire Hathaway Inc, the hugely-successful conglomerate that’s run by the legendary investor, Warren Buffett.
Berkshire Hathaway’s success was built upon a base of profitable insurance operations that supplied capital for Buffett to invest in stocks as well as privately-held companies. Gayner, as an important member of Markel’s leadership team, is helping to create his own version of Berkshire Hathaway at the Virginia-based insurer.
And, he’s done a great job so far, which gives tremendous weight to his views on investing matters; according to a recent Wall Street Journal profile of Gayner, his stock market investments have generated an annualised return of 11.3% over the past 15 years, far outpacing the 4.2% annual gain seen at the S&P 500, a U.S. market index akin to the Straits Times Index (SGX: ^STI) here in Singapore.
In the video, Gayner talked about how he transitioned from being a “Graham and Dodd” investor to his current style of investing in great businesses that can compound value for years into the future. He called his talk “The Evolution of a Value Investor.” What he shared contained profound insights for investors of all stripes.
The first investing step to take
Many investors, myself included, would start their investing career (be it professionally or individually) as a “Graham and Dodd” investor.
The label is a homage to Benjamin Graham and David Dodd, the two finance lecturers who had penned one of the most important texts about investing that exists, Security Analysis. Graham’s influence was so strong in the investing field that Buffett has credited him as one of the most important mentors in his life.
In any case, “Graham and Dodd” investors are quantitative investors who are focused on the numbers of a business – they look almost solely at the financial statements of a company in a bid to discern the true underlying economic value of a business. They’d then compare this value to the price at which the shares of the business are selling at and they’d only be willing to invest if the value was significantly higher than the price.
Put another way, “Graham and Dodd” investors are also very focused on looking for stocks which look cheap on a quantitative basis and such stocks could be ones which sell for less than their book value or which have very low price-to-earnings ratios, for instance.
Ways to evolve beyond
Although the “Graham and Dodd” approach had led me to discover many stocks which are trading at very low valuations, I ended up committing many mistakes as I had invested in many of those stocks without any regards for the quality of the business and/or the management team. The problem’s compounded as those cheap stocks were often cheap for a reason: Their businesses are terrible and/or the management teams have questionable characters.
Those are crucial mistakes. In his talk, Gayner mentioned that the quality of the business and the management team of that business should be far more important than whether or not the share looks cheap on a quantitative basis. Given time, it is the former traits which will shine through – as Buffett is wont to say, “Time is the friend of the wonderful company, the enemy of the mediocre.”
As I discussed in a previous article about Berkshire Hathaway, when Buffett first took control of it in 1965, it was a struggling textile mill. It would likely have been a terrible investment for Buffett had he not channeled Berkshire’s cashflows from the textile operations to acquire private companies and shares of public companies that have much healthier economic characteristics.
This is because a terrible business – like Berkshire’s legacy textile operations – requires capital merely to stay alive, not thrive, and every dollar that’s reinvested into it tends to either produce low or negative returns. These characteristics were also true for many of the “cheap” companies I once invested in.
An evolution away from the mindset of “only cheap is good” is something many investors need to do.
We need to look beyond the quantitative investing metrics of a business and give more consideration to the qualitative aspects of a business, such as its ability to scale and earn high rates of return on their invested capital over long periods of time.
We also have to look deep into the people running the business. For Gayner, he wants to make sure that the management teams of the companies he’s investing in have both ability and integrity in equally high measures. Management that has one without the other can’t create value for shareholders. Ability without integrity can easily lead to enrichment of managers at the expense of shareholders; meanwhile, management teams that have integrity without ability may be great people to hang out with, but they will never get anything done.
It’s easy to look at a stock purely from a quantitative standpoint. However, in order for us to grow as an investor, we need to move beyond that. In many cases, the quality of the business and the management team plays a big role on the future of our investments and it is only fair that we pay a much greater amount of attention to these factors.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Berkshire Hathaway Inc and Markel Corporation.