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  • A Mini Berkshire Hathaway - Markel 0 comments
    Oct 8, 2009 1:28 PM | about stocks: MDLZ, MKL, BUD, DIS, COST

    We begin a series this week about corporations similar to Berkshire Hathaway. There are several companies that use either insurance float or free cash flow to invest in other well run firms. While Berkshire is limited in investments today due to its massive market cap, plenty of smaller businesses take the same course.

    The first firm in the series is Markel Corp (NYSE:MKL). This family-run insurance business attempts to break even in their underwriting business, and have 18% annual book-value increases from investments.
    In their investments, they seek 4 main qualities:
    • a profitable business with good returns on capital
    • talented and honest management
    • reinvest in the company to grow
    • fairly priced stock
    The Chief Investment Officer, Thomas Gayner, has stated that the perfect balance of the above 4 factors is impossible, but that the most important of the variables is integrity. He refuses to invest in a company where he doubts the trustworthiness of the managers.
    Like Buffett, Markel uses a value investment style. In Gayner's own words, "I often find opportunity in companies where a compression of valuation has already taken place. GE is an example. Six years ago, it was at 40x earnings. Its earnings have continued to go up, but now the shares trade closer to 15x earnings. The stock six years ago was just overpriced." Several years ago, Markel acquired Terra Nova, which also had a significant investment portfolio. They sold all of the securities the next day because they did not mesh with the Markel value philosophy.
    Markel also looks to invest in durable companies with a barriers to competition, where they are comfortable that it will remain a premium firm in the next 20-30 years. This leads them to companies like Anheiser-Busch, Disney, Costco and Marriott. Can you imagine one of those businesses not being at the top of their industry in 2030?
    They have had a lot of cash on hand the last few years, and remain conservative because as 2008 showed us, leverage can be a quick way to hurt a good business and even a solid investment thesis. However, don't let the financial crisis make you too conservative, or else you will miss future opportunities in the market. Opportunities will always be around, because investors make the same mistakes repeatedly, regardless of the lessons during the crisis.
    Gayner is worried about inflation, but doesn't know when it will come. He has his fixed income holdings in short term securities, regarding long term bonds as the worst possible investment at the moment, as he expects an interest rate spike at some point. With stocks, make sure you own firms that can raise their prices along with inflation (Kraft is an example - KFT).
    Stocks: MDLZ, MKL, BUD, DIS, COST
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