What We're Reading ~ 5/27/15

On investing in bad businesses [Aswath Damodaran]

10 non-investing quotes with great investing lessons [Clear Eyes Investing]

Kahneman: clients driven by losses, not gains [Think Advisor]

Mary Meeker's 2015 internet trends [Kleiner Perkins]

Qualcomm: the biggest bargain in large cap tech [Capital Observer]

Are declining businesses good shorts? [Young Money]

The ability to focus and make the best move when there are no good moves [Farnam Street]

Big cable is coming for big wireless [Bloomberg]

Charter's deal for Time Warner Cable is classic John Malone [FT]

Meet Altice founder Patrick Drahi [Venture Beat]

Inside the trillion dollar war on packaged food [Fortune]

What makes Danaher such a stock market star? [Bloomberg View]

Goldman on 7 trends that will reshape the auto industry [Bloomberg]

Sergio Marchionne: Detroit's chief instigator [NYTimes]

A look at Markel's Tom Gayner [WSJ]

Tech firms seek ways to fend off activist investors [WSJ]

'The Big Short' movie starts filming [WSJ]

Interview with Brunello Cucinelli, king of cashmere [PI]

Markel Meeting Notes From Berkshire Hathaway Weekend

Thanks to Grizzly Rock Capital for compiling and sharing the following notes from the Markel (MKL) meeting during the Berkshire Hathaway weekend.


2015 Markel Meeting Notes During Berkshire Weekend

• Having LT shareholder base is "critical to what Markel does"
• Culture!
• Organized in 1930 as small insurance agency.  Steve joined company 40 years ago in 1975.  Company was still a small insurance broker.
• Went public in 1986.  Raised $5 million and market cap was $35ish million dollars
• Worked with cousins on growing the business.  Wanted the credibility of being a public company.  Recruit and develop talented associates around core 4 principles
• Today, over last 28 or 29 years Markel developed a number of businesses and bought many others.  Market cap is $10 billion
• Spending time over the past few years making sure the market is "built to last" and managers are in place to continue the success.  World of insurance is not limited and Markel should be able to continue to take advantage of opportunities.

Questions & Answers

How have you implemented the "Markel Style"?  How do you react with people don't fit?

• Markel style is attempt to describe culture and values.  
• Every Company has a culture – whether they say it or not.  
• Notion of teamwork and joy of building the company. Some people are just wired to like that.    
• Needs all associates to have the same culture to grow.  Mathematically harder with scale.  
• Other side to story is entropy. “Becomes a flywheel”  
• Have formal HR practices – if the person is not “Markel style” they won’t be there long term  
• “Believing in teamwork is more important than the individual”   
• Disdain for bureaucracy  
• Having a focus on shareholders   
• Being interested in sharing the results.  Meritocracy  
• If someone is more interested in building net income than net worth, that isn’t the Markel Style
• Key when doing an acquisition is figuring out who the people who don’t fit and “getting them off the books” (in a kind way)

Question regarding CarMax (KMX) and credit ability thereof?  Prospect of moat erosion over time?

• Every business subject to competition
• CarMax treats customers very fairly
• CarMax has data on each car that comes in and customer trusts them 

Alternative sources of capital going into the reinsurance market.  Number of hedge funds getting into the space.  Underwriting secondary? What would it take on the reinsurance market versus Alterra?

• 50k foot level: focus on uncorrelated risk for others without focus on uncorrelated returns.
• "It appears God hates cheap re-insurance."
• 100% of what the new guys into the space are doing yet only 20% of what Markel is doing.  Thus, Markel can choose not to participate in reinsurance if the rates aren't profitable.
• 360 degrees of insurance - underwrite, reinsurance, international, etc
• Have other places to put the money
  
  
  
  

What is the biggest threat to Markel over the next 5 years?

• Challenge to identify one thing
• If growth is strong, maintaining the "fly wheel of Markel style" does get harder with scale
• Bc of success, lot of smiling faces and proud people
• "Don't want to believe our own BS"
• Need to have the most up-to-date information technology and working hard to make that happen
• One thing to focus on insurance side is distribution
• CFO answer: (1) liquidity - very conservative with regard to liquidity.  Have to keep an eye on liquidity
• Success can make it easy to say no to new risk even if the pricing is good
• Success that breeds complacence is a dangerous thing
• 3 people that Tom Gayner has tell him if he is out of line: Susan Gayner his wife, COO of Markel Ventures Mike Keegan, and Steve Markel. 

Participated in the Fairfax India raise.  What are the thoughts around investing in a "cash box"?

• Steve Markel - #1 reason is that they have a high degree of confidence in the management of the venture and track record of investing in India profitably.
• Fairfax India is a handful of Indian companies yet will be 8 or 10 public or private positions in Indian companies.
• Fund hasn't made any investments.  Market price moved from $10 to $12 but no change in underlying economics.
• Markel was looking to get into India yet India is somewhat restrictive in terms of allowing foreign control investors
• Markel invested $40 million so modest relative to the size of Fairfax India as well as Markel.

Expand on scalability?

• Working on moving from successful boutique to a strong global entity
• Focus on systems implementation and culture
• "Too hard on the relationships to do these things more often than 10 years!"
• With Alterra, they went full integration day 1.  Some previous acquisitions they were less quick on removing people who wouldn't be successful in the Markel culture.  Biggest thing was that Alterra was a quality organization.

Incentive compensation?  Why is your 12.0% return hurdle for incentive compensation at the current level?

• In an almost ZIRP environment, a double digit rate would be significant.
• On the investment side, the insurance business needs liquidity to pay claims and needs highly liquid securities to do that
• Need to focus on reducing the combined ratio down to ensure profit
• Yet Markel can hold other securities which should help returns
• Biggest focus is on reducing expense ratio including initiatives on getting the expense ratio down.  Have plans over a few years to do just that.

Amount of equity securities?

• Markel would hold up to 80% of book capital in equity securities
• Number is probably in the "high 50%s" range currently as Markel has been bying equities weekly since the Great Recession
• Munger talks about focus and concentration.  However, top 20 positions account for 70% of portfolio.  Reason for 120 companies is that Tom Gayner wants a bench.
• Example is Amazon which Gayner bought and then sold quickly
• Number 1 reason Gayner likes Brookfield Asset Management (BAM) is that the mgmt team have boots on the ground and go where the opportunities are

Lisa Rapuano's Presentation on Markel & Bed Bath and Beyond: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Lisa Rapuano of Lane Five Capital Management who pitched Markel (MKL) as well as Bed Bath and Beyond (BBBY).


Lisa Rapuano's Presentation at Value Investing Congress Las Vegas

•    Probabilities, know how much to bet and how to react – can you handle it psychologically. •    Think about what can go right- the probability – how much can we make? How much money can we lose, and what’s the probability – think of scenarios ahead of time.
•    Process leads to three outcomes – compounders, contrarian investments (what Lane Five is known for) and finally getting involved as an activist or being proactive. They have become more aggressive in this act.

•    Compounders – good ROIC, strong balance sheet, moats and strong capital allocation. Infrequent. Temperament requires to invest in these businesses” Generally boring, underperform in up markets – require patience to acquire when the price drops and patience to keep in it as it under performs.

•    Contrarians – priced very cheap, higher expected returns – lots of ways to make money, yet much greater variations between these outcomes. Can be less correlated to the market. Always some management team screwing something up. Have to be selective in turnarounds – see if the peers have a good business model and margins. 
•    Look for shareholder turnover, new low lists. Look for sell-side to give up on the name. Could be difficult to hedge. Patience for the turnaround, patience for entry and exit. Need to be resourceful as people don’t like to talk about these names and finally, you need to have humility. 
•    In regards to timing in contrarians – COCO example. Has been on the new low list for four years! Bought it at the first deep dip, triple downed two years and still sitting at the same price. Much longer and much worse. Time is killing the IRR.
•    One investment – waited for the new management team to come in and understood the business and incentive plan – patience for entry.

•    Activist engaged investments – generally talks with them tries to be collaborative, sometimes they need a push. This can work on the compounding side. This takes a lot of money for lawyers, you can become illiquid and it is a fairly large time commitment. Generally once you are on the board – generally worse than you think!
•    Why does Lane Five pursue several paths? Likes the way the portfolio comes together. If you are wrong about one – doesn’t sink you, further time cycles are different.


•    Compounder idea – Markel (MKL) the biggest position. Specialty insurer with an investment portfolio ran by Tom Gayner. Disciplined underwriter. Excess capital reinvested into equities at high rate of return. Bonus system – paid in 5 year trailing BV growth, in excess of 11%. Valued at an insurance multiple. Made an acquisition of Alterra – which significantly increased investable assets. Markel ventures is another growth leg – able to invest capital in private businesses.

•    Contrarian idea – Bed Bath and Beyond (BBBY) – a  home goods retailer – people think internet will outdate BBBY – their variant view is that BBBY is similar to home depot or goods, where people want to see the item in person, further they have strong pricing – and continue to be competitive vis a vis online competitors. Fabulous capital allocation – share repurchases and useful CapEx measures. Four other concepts which have good economics. BBBY trades lower on all multiples versus peers – even while having better returns than most. Unlevered FCF $1B used to repurchase shares. They don’t talk to the street – non-promotional mgmt. team. 

Be sure to check out the rest of the Value Investing Congress presentations.

What We're Reading ~ Analytical Links 4/17/13

A new site aggregating conference call transcripts [ConferenceCallTranscripts.org]

Intel (INTC): Anatomy of a tech value trap [Reformed Broker]

Why equity long/short investing is not dead [HFIntelligence]

Sticking to a plan in the face of emotional volatility [Abnormal Returns]

Rare interview with Liberty Media's (LMCA) John Malone [CNBC]

Jeremy Grantham on how to play resource scarcity [Advisor.ca]

Aereo has TV networks circling the wagons [NYTimes]

The death of value investing [Business Insider]

Thermo Fisher (TMO) nears deal for Life Technologies (LIFE) [Reuters]

On Dish Network's (DISH) bid for Sprint Nextel (S) [Bloomberg]

Interview with Markel's (MKL) Tom Gayner [GuruFocus]

Diabetes in Mexico: eating themselves to death [The Economist]

Top 5 websites capturing larger share of real estate traffic [Inman]

As big investors emerge, Bitcoin gets ready for close-up [Dealbook]