EXCLUSIVE Tom Gayner Interview

Earlier in January we spoke with Tom Gayner of Markel.  Read on for his thoughts on the investment process, what books investors should read, some of his favorite asset managers and how he works their stock picks into his analysis, and more:

Insider Monkey: Do you have any favorite stocks or favorite industries at this time, and what do you think the market is missing there?

Tom Gayner: Well, my favorite stock at least in terms of my personal ownership is Markel itself.  That’s where I have the greatest percentage of my own net worth and actually, our business is kind of interesting these days, and with the Alterra acquisition that we just announced, I think it’s going to be a rather interesting and productive year for us.  The market is a little bit uncertain on this so we’ll see.  But, as the year progresses I kind of like Markel.  I’ll tell you the truth, lots of times if you ask me a question like that I will have a strong conviction in something that is a big holding for us and we like it, and love it, and are buying it.  I like times like that.  Right now, I will tell you we’re a little bit inactive and that’s for a variety of reasons.  One, I don’t have names that just fall off the tip of my tongue right now of pounding table buys like I would have a year or two ago.

The last couple of years what we have been buying are the big multinational global brand name kind of companies.  Ones that pay nice dividends, have good ROEs, and buy back stock and all the kinds of things you like to see.  That has worked pretty well and those things have moved up pretty nicely and as such, in general, they’re not as cheap as what they were a year, or two, or three ago so I’m not pounding the table on that.  I’m kind of waiting for inspiration to strike on where I might go next.

Insider Monkey: So, a year, or two, or three years ago what were you pounding the tables at, what were you excited about?

Tom Gayner: Wal-Mart, and Nestle, and Diageo, and Anheuser-Busch, Berkshire, things like that in terms of that category of global multinationals.

Insider Monkey: Okay.  Let’s take a step back and go through your investment process from where the initial idea comes from to where the buy decision is made.

Tom Gayner: We look for four things in general broad brush terms.  The first is we want businesses that are profitable with good returns on capital and don’t need to use a lot of leverage to get to good results.  What that does is preclude things like venture capital which is a fine and legitimate discipline, but that’s just not our discipline, we don’t know how to do that. So we want to see businesses are profitable and that will have a few years history of returns on capital.

One of the things I really like about that, is when you see a profitable business that is durably profitable year after year, that to me is a real social stamp of approval that they are doing something that the world wants and needs, and they’re good enough at it that they can do it and leave a margin of profit left over for themselves which is a very good marker of durability.

Because if you have a business which is not profitable and not doing too well, to me that means they’re doing something that the world doesn’t care about or doesn’t need, or they’re not good enough at it relative to some of the competitors such that they can have appropriate profit margins.

The company that will do best over the long run is a company that is making their customers very happy and they are satisfying their needs.  Profits are a very good barometer to tell you whether that is indeed happening or not.