By Royce Funds. Originally published at ValueWalk.
Tom Gayner: No catalyst
The interview goes on to discuss Tom Gayner’s style of buying stocks. For example, many value investors buy after a bout of bad news from a company, which pushes the price down to a level that appears attractive.
Gayner doesn’t use the same methodology. For him, there’s no “trigger” event that pushes him to make a buy or sell decision.
Usually, Gayner spends time to get to know a company and its management, building up a position over time; he’s in no rush to take a position. An example given is Brookfield Asset Management, a company Markel owned a position in at the time of the interview.
“… our original relationships with the people there go back decades. You may not know the history of the company, but it was once the unglamorous part of the Bronfman family empire, which owned many small stakes in the types of companies that dominate the Canadian exchanges, in industries like paper, energy and timber. Over time it has parlayed those holdings into bigger stakes in more companies around the world…As we better understood that ethic and the results it generated, we gradually increased our position.”
Gayner’s strategy at Markel is to use a relatively concentrated portfolio. The top 20 positions accounted for around 70% of assets at the time of the interview with around 70 to 80 smaller positions making up the rest of the portfolio. Gayner believed that the correlation between these smaller value positions would be high, so there’s no need to be overly concentrated. Gayner prefers to spread the risk across many highly correlated, cheap stocks, with a few large cap value compounders at the top of the portfolio.
“…the highest allocation to equities of the residual has been about 80%, with the lowest closer to 40%. It’s been moving up for a couple of years now and is today in the mid-60s. With 10-year Treasuries yielding less than 3%, we’re finding plenty of equity ideas that are relatively attractive.”
Tom Gayner: Investment returns
Tom Gayner: Learning from 2008
Value Investor Insight’s interview with Tom Gayner then moves on to discuss the financial crisis, and the lesson Tom Gayner learned from this turbulent period.
In Tom’s words, the most important lesson he took away from the crisis was to be, “really, really, really careful about things that are leveraged.”
Going into the crisis, Markel’s portfolio had a large position in banks and GE:
“…I didn’t fully appreciate the risk. GE…was the perfect play on growing global affluence, with very broad geographic reach and exposure to industries…that the developing world increasingly needs. Next time I’ll look for all of that in a company that doesn’t have a levered beast within it like GE Capital.”
Markel also had a large position in CarMax when the financial crisis took hold (at the end of the first quarter of this year, CarMax was Markel’s biggest position accounting for 8.6% of the group’s equity portfolio). Gayner didn’t sell any of his CarMax shares throughout the crisis as “The biggest issue was its autofinance business, but I didn’t think it threatened the company’s ultimate viability and I always believed the basic fundamentals of the business were intact.”
When the shares hit their lows of 2008 ($7.61), Gayner added to his holdings, and this bet has paid off. Since the lows, CarMax shares are up around 780%.
Sign up for ValueWalk’s free newsletter here.
