Thursday, November 10, 2011

Markel's Tom Gayner on How to Outperform the S&P 500

Tom Gayner is Markel's (MKL) President and CIO and manages roughly $ 2 billion of equity investments for the company.

Over the past 20 years or so he has managed a fund at Markel Gayner Asset Management, Markel's Investment Division, that has outperformed the S&P 500 by several hundred basis points per year.

One nice thing about following Tom Gayner is that, much like Donald Yacktman, the turnover in his portfolio is relatively low so when he commits capital to something it's not some short-term trade.

Major holdings are generally high quality businesses with the potential for long run value creation.

Last May, he spoke at the 8th Annual Value Investor Conference in Omaha. It occurs each year right before Berkshire Hathaway's annual shareholder meeting.

Some excerpts from the Q&A session:

On beating the S&P 500
"...sometimes, I think that is easier than others to do. So for instance, going back ten years ago, I owned a lot of small-cap stuff and tiny companies. That's because, or 12 years ago, that was the era when Coke (KO), Pepsi (PEP), GE (GE), blue chips were all selling for 30-40-50 times earnings, and at that time we owned zero, none of them."

"...well here's a joke that picks on the airline businesses because that's sort of an easy target: If you want to beat the S&P 500, here's what you do, you buy 500 stocks, and then you sell the airlines. You should do better. Probably won't be 500 basis points, but it will get you something."

Better Days Ahead for the S&P 500
"...the S&P is probably due for a pretty good day. As I look at the businesses that comprise the S&P, and really let's talk about the S&P 50, the biggest 50 companies that earn 90% of the dollars, those are good businesses, global-spreading businesses, they're efficiently run, they're doing the rights sort of things with their balance sheets."

"...if I was guessing, over a long period of time, I think the S&P 500 will be a pretty tough index to beat...in general, it's kind of a good place to be. And what that implies is that generally, a lot of large companies are pretty attractive investments."

On Berkshire Hathaway
"...it has been the largest holding in our portfolio since 1990 and it continues to be so. I think the powerhouse that is Berkshire continues unabated. So I'm very comfortable with that being the largest holding that we have."

On Selling
"I tend to be a pretty slow seller. There's two reasons I would sell something, let's start with that: A) I made a mistake, it was wrong, and that usually involves some sort of character judgment I made about the management, being disappointed in some sort of tainted investing that seems inconsistent with what I wanted to see. Or secondly, and this is a little bit true right now, there are ideas that are just less compelling than a new idea that you might have and you need some money to pay for what you're buying. Generally speaking, it's not just a matter of the fact that I don't like to sell, but actually there's huge tax efficiencies for Markel for us to be able to buy and hold something for a long period of time."

On Wal-Mart
"I look at the numbers, I look at the annual reports, I look at the quarterly updates, I see the sales going up, the share count going down, the balance sheet in great shape, the dividend going up. I see thousands of people going in every Walmart every single day, I see the global expansion, I'm aware of the risk of the political unpopularity of the company from time to time, but at the kind of prices that I started buying it, where it was 16-17 times earnings, now it's at 12ish, I continue to buy that sort of thing. There's not a whole lot of rocket science or higher math involved in deciding that it's a good investment. But in this environment, it's typical of this sort of thing."

Examples of some recent top holdings include: Berkshire Hathaway (BRKa), CarMax (KMX), Fairfax Financial (FRFHF), Brookfield Asset Management (BAM), Diageo (DEO), Exxon Mobil Corp. (XOM), Walt Disney (DIS), WalMart (WMT), and United Parcel Service (UPS).

So mostly larger capitalization stocks.

It's a recurring theme but, unlike ten year ago, it's the larger companies that have become more attractively valued while smaller caps in general (though, of course, there are many exceptions) look by comparison relatively expensive.

Adam

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