Tom Gayner Holds Court at Markel's Omaha Brunch

"Warren Buffett is the John Wooden of his era — so we’ll still be talking about him fifty years from now because of his principles and the things he did."

May 30, 2023

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Earlier this month, I highlighted one of the hidden gems of Berkshire Hathaway’s annual shareholder meeting: the newly-renamed Markel Group’s Omaha Brunch.

This much-loved annual event features a lengthy Q&A session second only to The Warren & Charlie Show. Not only does Markel share a very similar philosophy and culture to that of Berkshire, but CEO Tom Gayner possesses a downright Buffett-like way with words and innate ability to distill complex concepts down into simple terms.

The brunch also allows top MKL 0.00%↑ brass to make the case for their company to an audience of like-minded investors.

“The people who are most likely to understand what we’re doing are people who are already in Berkshire,” Gayner told Bloomberg Radio in 2021. “If you own Berkshire, you’re already qualified [to be a Markel shareholder].”

(And, remember, Berkshire itself is a Markel shareholder — after snapping up 3.5% of the company during the first half of 2022.)

This year’s Markel Omaha Brunch packed an incredible amount of wit, wisdom, and knowledge into two-plus hours. I can’t imagine that anyone could watch the video of Gayner’s Q&A (h/t ImayriF for tracking it down and sharing) and not get major Berkshire vibes from his folksy answers and rational thought process.

Plenty of others ape Buffett’s act for personal gain. But, with Gayner, it feels authentic — and Markel’s long-term track record of outperformance backs that up, too.

SAFETY FIRST: It’s probably no surprise that, in light of the First Republic and Silicon Valley Bank meltdowns, shareholders had questions about Markel’s fixed income portfolio — and, in particular, the sticky subject of duration matching.

Warren Buffett said it best, “If interest rates go up, bond prices must go down — and if the bonds are long-term and the rates rise sharply, prices go into a power dive.”

I posted that quote on Twitter a few weeks ago and Karan Gurnani drolly replied, “SVB execs must’ve missed that talk.” 🎯

But, thankfully, Tom Gayner did not.

We don’t talk about it very much, but had you asked me this question a year ago, five years ago, ten years ago, twenty years ago, I would have answered it in exactly the same way.
What we do in fixed income is we take the balance sheet and we look at what our expected insurance liabilities are — and we think about not only the amount of what they are, but the timing, the duration, of when we would expect to have cash flow needs. We really wish to match — as much as possible — the flows of fixed income maturities to our expectations of when we make claims payments.

Say you’re in a period of rising interest rates as we’ve been here recently, the mark-to-market value of that bond portfolio goes down. You’ve seen this play out with some real drama — and some failures — in the banking industry, driven by that dynamic.
In the insurance industry, the good news is that with those values of the bond portfolio (marked-to-market) going down, really that means that the net present value of our ultimate insurance liabilities are going down, too. And they’re going down in a matched way.

He added that GAAP accounting only reflects the mark-to-market changes in the bond portfolio — and not the NPV changes on the liabilities side. “In our minds, we think economically — not by GAAP accounting — and we keep it matched.”

DISCOUNTING DECIMALS: To answer a question about Markel’s preferred discount rate used to evaluate potential stock purchases or Ventures acquisitions, Gayner told a story about his middle daughter who studied finance in college.

One of her biggest and most time-intensive projects was to calculate weighted average cost of capital (WACC). After endless hours of study — and a few all-nighters — she arrived at an answer of 10.174% and received an A for her dutiful work.

She then said, “Well, dad, let me ask you this: when you’re looking at stuff, what do you use as your WACC?”
I said, “Ehh, about 10%.”
It made her cry. (Laughs)
She had the temerity to approach her professor after that and she goes up to him and she says, “I asked my dad about the WACC and how he does things — and he’s kind of been okay at [capital allocation] over his lifetime — and when I asked him, he said, ‘About 10%.’”
The professor looked at her — and I give the guy credit — because he said, “Your dad is right, [but] we just don’t know how to teach that.”

While there are dangers in oversimplification, just as many (or more) arise when people make the investment process too complicated. The best and safest decisions don’t require decimal points.

MARKEL MANAGERS: With Markel Ventures (subsidiaries like CapTech and VSC Fire & Security) becoming an increasingly important engine in the Markel machine, Gayner spoke about what he looks for and values in managers.

“We want management teams,” he said, “with equal parts talent and integrity.”

They need to be talented enough to get the job done and they need to tell us the truth. If you have one without the other, it’s worthless.
If they have integrity but no talent, they may be nice people and we like them and get along and all that, but they’re not getting the job done — and that doesn’t do anybody any good.
If they’re talented and doing very well but not telling us the truth, that’s not going to end well for us. We will lose in that circumstance, so we view things through that lens.

Reminiscent of Buffett’s managerial wishlist of intelligence, energy, and integrity.

MERGER ARBITRAGE: Markel currently owns more than 650,000 shares of Activision Blizzard — including some purchased in Q1 2023 — partly as an arbitrage play on Microsoft’s $68.7 billion acquisition of the video game maker. (Coincidentally, MSFT 0.00%↑ is one of Markel’s larger stock holdings, too.)

With that deal now hanging in the balance amid regulatory squabbles, Gayner was asked how he views the situation — and, more broadly, merger arbitrage as a whole.

Activision is a fine business in and of itself.
There are some deal arbitrage situations where if that deal falls apart, boy, you’re really left holding the bag and that didn’t work out. Whoops.
But, in our case, for us … one of the filters that we would use is, “Look, if this deal doesn’t go through, are we going to be happy with what we own anyway? Would the disruption with the deal falling apart create an opportunity where we would be more likely to be buyers than sellers of the thing that’s going down?”

And that’s not just talk. Markel really likes Activision. The company started to buy ATVI 0.00%↑ stock in 2018 and has steadily added to its position over the years.

While those recent purchases were likely made with one eye on the arbitrage spread, Gayner did not sound particularly bothered one way or the other about how this will all play out.

BABY BERKSHIRE: The similarities between Berkshire and Markel are obvious — with both sharing a special emphasis on insurance operations, owned subsidiaries, and a growing collection of stocks.

And, since Berkshire dwarfs the Virginia-based holding company in size and stature, some observers have taken to calling Markel a “Baby Berkshire”. (I’m just as guilty of this as everyone else…)

Thankfully, Gayner is fine with the moniker — though he stresses that Markel also needs to do its own thing without any slavish copying of Berkshire’s methods.

John Wooden last coached a basketball game in, what, 1975? It’s almost fifty years later and we’re talking about John Wooden this morning. Warren Buffett is the John Wooden of his era — so we’ll still be talking about him fifty years from now because of his principles and the things he did.
But just as it would be unrealistic of me to think I’m going to be the next player at UCLA or even the next coach at UCLA or even anything more than just going to a UCLA game perhaps, we can’t do that and be just like Berkshire. We can learn from [Berkshire’s] example just as we learn from the coaching of John Wooden.

Gayner added that Berkshire serves as “a spectacular role model, a spectacular playbook, a spectacular way of learning and understanding”.

BUT, WAIT, THERE’S MORE…

Gayner marveled at Warren Buffett and Charlie Munger’s performance the previous day at their own marathon Q&A session. “92 and 99 years of age? 58 years of doing this? We talked about duration of the fixed income portfolio. Well, I like the duration of [Berkshire’s] management team.”
- Will Gayner be the next nonagenarian CEO? He deflected the question with a joke, but added: “My plan is to work indefinitely.”
On the importance of trust: “If you don’t trust us, you should not own the stock. And, frankly, that’s the case for any insurance-based thing. If you do not trust the management, do not own the stock.”
Gayner recommended The Panic of 1907 by Robert Bruner and Sean Carr. “If you’re trying to understand and come to your own conclusions about what is likely to happen today,” he said, “you will be much better off doing your own thinking if you read that book.”
Great minds think alike: Yesterday,
The Rational Walk
published an excellent recap and analysis of the Markel Omaha Brunch. Highly recommended.