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Summary

  • Markel Corporation has many similarities to Berkshire Hathaway in terms of targeting safe, stable, large-cap, dividend-growing companies.
  • Markel recently disclosed some new positions, including stakes in Google, Aaron's Inc., Now Inc., Rent-a-Center Inc., and CME Group.
  • Markel Chief Investment Officer Thomas Gayner may be showing signs that he is willing to take the necessary risks to achieve greater returns.

Markel Corp. (NYSE:MKL) has long held the nickname "Baby Berkshire," as Chief Investment Office Thomas Gayner tends to apply Buffett's investing principles to a much smaller specialty insurance conglomerate. Buffett has warned that Berkshire Hathaway's (BRK.A, BRK.B), giant size will make it unlikely to repeat the outsized returns it has produced in the past, leaving many to examine Markel as a possible alternative and a better investment vehicle, capable of achieving those outsized returns due to its much smaller size.

There are a lot of similarities between the two companies; they invest in stable, large-cap companies with a strong history of raising dividends, but neither Markel nor Berkshire pays dividends themselves. They both tend to avoid doing stock splits. They both place heavy emphasis on the financial and insurance sector. In fact, one of Markel's top stock holdings is Berkshire Hathaway itself, with both Class A and Class B shares collectively making up over 11% of Markel's portfolio.

However, this past quarter Markel Corp. revealed some new stock holdings, and one of them in particular struck me by surprise: Google (GOOG, GOOGL). Markel acquired 12,500 shares of Google Class C shares.

Warren Buffett has long avoided technology stocks (with the notable exception of International Business Machines (NYSE:IBM), but that may be in part due to their longevity, low beta, and stable dividend-raising history, which is not the case with the more volatile Google which has never paid dividends and purely focuses on growth). Warren Buffett and Charlie Munger have considered Google to be a riskier bet because they do not "know enough about the companies, their potential competitors, and where technology might be going." While they do view Google as a possible winner, they only invest their money in what they consider to be "inevitable winners." The nature of the tech industry is that it changes very fast, and this may make it more difficult to forecast profits.

While Buffett and Munger have refused to invest in Google because it's too risky for their preference, they have had a lot of good praise to say about Google, describing their business as "incredible," and having a "moat filled with sharks."

Buffett may consider Google to be an aggressive and risky investment, but many consider Google to be quite conservative and safe. Pundits such as Jim Cramer often compare Google to more speculative internet companies such as Salesforce (NYSE:CRM) and Facebook (NASDAQ:FB), suggesting by contrast that Google is much more stable. The characteristics that make Google safer is its wide moat, sustainable competitive advantage, moderate valuation, and strong balance sheet. Google has $58 billion in cash and only $8 billion in total debt. Google is also benefiting from a trend of growing internet users worldwide.

I would also consider Google to be a safer bet than the world's biggest tech giant, Apple (NASDAQ:AAPL), based on some qualitative aspects like stronger brand image, user dependence on its search engine, and diversity of acquired assets. Another reason Google is a safer bet than Apple is its price history; Apple's stock lost about half of its value from September 2012 to April 2013, during a period when the rest of the market made significant gains. Google has never had such a crash during a period when the broad market was doing well (although it did crash in 2008 when the broad market crashed too). This shows that, despite its volatility, Google probably won't lose 50% of its value on a random basis, and at least has some level of stability that Apple has failed to display.

While Google certainly has a lot more volatility than the broad market, it still appears to be poised to dominate. I would stop short of calling it an 'inevitable winner,' but I would still consider it to be a 'likely winner.'

Thomas Gayner's decision to invest Markel's funds into Google shows that he is willing to be reasonably aggressive to achieve the desired results. This aggressive action combined with the company's smaller size (less than 3% of Berkshire Hathaway's market cap) may give Markel a greater chance of producing those outsized returns it has shown in the past.

Source: Markel Corp. Willing To Go Places Berkshire Hathaway Is Not?