Good but not great = great
For me, the highlight of the 2019 Berkshire weekend was not the AGM itself but another event that took place at the Marriott Downtown the next morning. Don’t get me wrong – like everyone else that is in Omaha that time of year I am a big admirer of Warren and Charlie and I think their performance onstage is remarkable, especially at their age. However, the warmth, wisdom and passion on display from Mr Tom Gayner on the podium at the Markel Brunch was a revelation.
I have long been an admirer and student of Mr Gayner and it was therefore with great excitement that I recently found myself travelling from Richmond (London) to Richmond (Virginia) for lunch with Tom. The lunch was part of the ‘Richmond Legends’ series that raises charitable funds for the World Pediatric Project, a childrens charity based in Richmond, Virginia. I highly recommend anyone to take a look at the work they carry out on www.worldpediatricproject.org
I met with Tom in the Richmond equivalent of Gorat’s for a wonderful conversation about matters investing as well as life more generally. In addition to a healthy chicken salad, I was served Tom’s insights and wit. This was followed by a tour of Markel’s offices where I had the opportunity to listen to the phone not ringing.
Good but not great
One of the things I admire about Tom is his candid self-assessment. He recently discussed the concept of ‘good but not great’ on the ‘Masters in Business’ podcast with Barry Ritholtz. To me, this concept involves building redundancy into your system, whether at the company specific level (strong balance sheets, brand strength etc) or at the portfolio level (cash levels, diversification etc). It also requires certain characteristics such as patience, lack of what Charlie Munger calls the ‘locker room mentality’ etc.
Now, being good but not great amounts to being great when it comes to investing, but not as conventionally perceived by Wall Street. Rather, it means generating healthy long-term returns without the glamour of short-term performance chasing. It means worrying about the downside and focusing on long-term compounding by owning great businesses. These are ideas that we fully subscribe to and constantly try to practise in what we do.
There is also a general sense of financial prudence to what Markel does that makes me think of Bernard Arnault’s concept of being ‘short-term paranoid but long-term optimist’ i.e. preparing for the bad outcomes but allowing participation in the long-term value creation of equities in general and great businesses in particular.
The recent appointment of Morgan Housel to Markel’s board of directors is a reflection of this kind of thinking. Among many wonderful insights in his great book ‘The Psychology of Money’, Housel discusses the importance of ideas like playing your own game (as opposed to someone else’s) and focusing on not being stupid (as opposed to focusing on being smart). For anyone who hasn’t read the book yet, I cannot recommend it enough.
Coping with underperformance
One of my questions to Tom was when to let the market inform us vs when to disregard market fluctuations as noise. This is a relevant question for ourselves at the moment given relative performance (which we don’t spend much time worrying about as such in the short- to medium term) in the violent recovery from the CoVID sell-off. It was also an opportune time to ask Tom this question given that he referred to Markel’s performance in terms of share price performance in the last five years as unsatisfactory in his most recent annual letter (although operationally, performance has generally continued to be strong).
Appropriately given that our conversation took place in Virginia, Tom responded by quoting Thomas Jefferson; ‘In matters of principle, stand your ground. In matters of fashion, go with the tide’.
Of course, some investors will follow the fashion while others will follow the principle. This is not to say that either is better than the other, however it is important to determine which type of investor you are. In our case, we try to follow the principle. However, it is crucial to avoid stubbornly sticking to convictions without regard for whether they work or not and in this context it is key to have trusted advisers/sounding boards that will challenge your opinions.
The ability to stick to your principles also depends on having a culture and structure (e.g. in terms of the funding side) that are consistent with the way we invest. Tom certainly has this at Markel with the long-term vision going all the way back to the Markel family as well as the ability to deploy long-term/permanent capital generated by the insurance business. He has also created an environment that is supportive of this approach; the phone rarely rings, allowing Tom to quietly read and think. However, he does also normally spend a large part of his time travelling to visit companies as well as Markel’s offices around the US and elsewhere.
How, then, do we know when the market is telling us something important as opposed to generating noise? First of all, we don’t! In this game, we can never be certain what the ‘right’ answer is before the event. What we can do, and what Tom does, is to focus on the process – or in Charlie Munger’s words, ‘…work, work, work and hope to have a few insights’. There are no magic formulas to be found here.
Ultimately, culture and structure allowing, what really matters is the inner scorecard. If we can generate 10 % or so returns over time, that will do fine. Beyond that, it’s about being aligned with our investment approach and being able to live the life we want. All very Buffett.
We discussed the evolution of Markel from insurance to investment operations to Ventures etc. Tom says that while the implementation varies between e.g. public and private assets, the analysis is really the same. However, it still took many years before Markel ventured into Ventures; this requires people with the right experience, a network/dealflow etc. This is consistent with the sentiment of ‘crawl, walk, run’ that I have heard Tom express in the past and which refers to the gradual evolution of an organisation or strategy. I think there is a lot to be said for that type of organic approach if you are a long-term investor in equities and we certainly subscribe to it.
- Focus on the inner scorecard
Tom plays his own game. While I have listened to him many times in the past, it was very instructive to see how he also lives these values as reflected in anything from where and what he eats to his way of interacting with other staff at Markel. Tom also genuinely seems to enjoy what he is doing; he laughs a lot more than most people I have met in the world of institutional money management.
However, this is not to say that all of us should try to be Tom Gayner. Rather, as expressed by Guy Spier following his evolution in thinking about Warren Buffett, we should try to be the best version possible of ourselves. I have different interests and priorities from Tom and my temperament and intellect are different as well. I try to follow a number of principles and concepts developed or expressed by Tom but I am not blindly modelling myself on someone else. Neither should you.
- Focus on the process
There is no way of knowing whether your portfolio is going through a temporary slump or whether it is facing structural challenges. All you can do is to focus on the process i.e. come in to work every day hoping to gain a few additional insights and let this compound over long periods of time. While very generous with his time, Tom seems very focused on what he is doing and doesn’t seem to have all that many distractions from investing.
- Independent thinking
Tom does not care about convention. He is an independent thinker and proud of it. I have seen this in many of the investment greats; while not contrarian for the sake of it, they will start with first principles. Like many, if not all, investment greats Tom also reads widely, both fiction and non-fiction. That can make you a better investor as well as a more interesting dinner companion.
- Honest communication
Contrary to much of the investment world, Tom – like Buffett and others – is very candid about his mistakes and learnings. How refreshing compared to some other hedge fund titans that seem to be in a constant state of denial. This transparency is important, not just for others but also for yourself in terms of looking for how to improve over time.
We like to stick to a handful of principles when looking for companies to invest in. So does Tom; he can explain his investment philosophy in a few short sentences and is not looking for the esoteric. Not only does this make our research process more robust, it also improves risk management when it comes to knowing what you own etc.
- Building a network
While it is helpful to have a set of guiding principles, it is also important to challenge your own convictions. One way of doing this is by surrounding yourself with trusted advisors that will tell you when they think you are wrong. Tom also has a wonderful network of other great investors like Tom Russo, Chuck Akre etc that he can exchange ideas with. Start developing this network early; it is a long-term project.
- Good but not great = great
My ultimate takeaway is this. There is seemingly nothing unusual or unique about Tom (although, of course, there is). It’s about uncommon common sense, temperament, sticking to some basic principles, focusing on the inner scorecard plus some gradual evolution. All of this reminds me of Richard Oldfield’s book ‘Simple but not easy’. Being good but not great can lead to great outcomes over time e.g. by not blowing up, not anchoring yourself on your short-term returns etc.
If I had to summarise my meeting with Tom it would be in the following way. In investing, doing unspectacular things consistently for a long period of time can lead to spectacular outcomes. However, the ability to do those unspectacular things consistently of course requires you to be spectacular. That is my real insight from reading, listening to and meeting with Tom. He is an outstanding investor and, more importantly, an absolute gentleman. He is also a true role model and I would like to thank him for sharing his wisdom and experiences so generously. Let’s all aim for good. Who knows; it might make us great.