I’m posting this a day early because I’m getting a jumpstart on the holiday weekend. Yesterday, I watched a Talks at Goggle video (embedded below) on Tom Gayner. Value investors out there might recognize the name.
Gayner is the CIO of Markel Corp, an insurance company modeled after Berkshire Hathaway. In the video, Gayner talks about his story, how he evolved as a value investor, and what he looks for in a company. He offers up his four points on what he looks for:
- A profitable business with good returns on capital without using too much debt to do it.
- Management with both integrity and talent.
- A business with a compounding feature (thinks about the most).
- Valuation
His main focus is on the compounding feature. You might have heard of serial compounders. If you understand how compound interest works, these businesses have a lot of room to grow. Earnings can be consistently used to grow the business at a high rate over many years, preferably decades.
He gives the example of McDonalds versus a five-star restaurant. You won’t see Michelin-starred restaurant chains because the business can’t be repeatable to a huge degree. But you can stick a burger joint on a street corner in every town. The McDonald’s business model is highly repeatable (and officially under attack with the new burger chain craze). It was a serial compounder for several decades.
Buffett, who’s literally a serial compounder, has gobbled up compounders for years like Geico and Coca-Cola.
Shelby Davis called them compounding machines, defining them as low cost to run businesses with no factories or machines to upgrade every few years (Davis was referring mostly to insurance companies). This gave the companies the added benefit of doing better during times of rising inflation.
Investors go wrong by overestimating the growth potential, underestimating the competition, and paying too much for the stock.
Gayner thinks the biggest mistake is being too stingy on price and missing out because the opportunity to buy is so rare (he checks the 52-week high list to suss out compounding machines).
So if you find a high return business that can reinvest its earnings at a similarly high return the business and your money will grow exponentially over time. The key is to buy in at a fair price.
Last Call
- I haven’t been paying attention. What’s going on in Greece? (short version) – Fusion
- A Comprehensive Summary of the Greek Crisis (long version) – Chicago Booth IGM
- Why It Feels Like We’re Falling Behind – M. Housel
- Charlie Munger on “Loading Up,” Tracking Error, and Value Investing – Alpa Architect
- The Panic Tax – Cordent Wealth
- Delusions of Future Outperformance – A Wealth of Common Sense
- Good Advice, or Advice that Sounds Good? – J. Zweig
- A Billionaire Explains What Investors Always Get Wrong – Washington Post
- Mutual Funds in Lake Wobegon – Morningstar