Monthly Archives: May 2012

Markel 2012 Omaha Meeting (part 1) –

The holding company can invest in Markel Ventures without regulatory issues. Markel could own the Markel Venture companies through its insurance companies but it would involve regulatory issues.

AMF Bakery Systems has paid large dividends to Markel.

They like to keep a cash buffer of $600 million to $1 billion. They now have about $1 billion cash at the holding company level.

Berkshire Hathaway is their largest holding. Buffett is explicit that Berkshire is undervalued.

They own Carmax which Gaynor thinks has a long runway of growth.

Will cheap financing affect deal flow? Yes, but they are willing to do nothing. Patience.

Because of bonds current riskiness, they are keeping the duration shorter. They do not stretch for yield.

They look to grow intrinsic value. This is a function of investment leverage plus underwriting profits. Investment leverage (total investments/equity) is about 3 to 1.

Book value has historically grown at 20%. Leverage used to be 4 to 1. Interest rates are now low. Underwriting margins have been low. They expect strong double-digit growth over the long-term. Market Ventures changes the game. There will be more earnings and cash flow in Markel Ventures. They wants mid double-digit returns.

Gaynor believes that over time the Markel culture drives intrinsic value. They have a 25-year history of following the same core values.

The insurance business is inherently feast or famine.

Markel has some regulatory concerns but philosophically they would like to put more capital to work in equities. They have a very long runway.

There are more specialty insurers, but they believe the basic insurance cycle is still in tact. The underwriting cycle and the cycle of bull and bear markets are very similar.

Regarding the cost of capital and hurdle rates, they don’t get interested unless they are going to make at least >10% (double digits). They use 10% as their cost of capital.

What is the intrinsic value of Markel? Decompose Markel: investments per share, profitability of the insurance business (multiple of cash flow), and the value of Markel Ventures. You get a big number.

It is a leap of faith (or not) how you think about insurance liabilities (float). Do you treat it as a true liability? Gayner argued that if you’re given $1 to hold and you never need to give it back it should be worth more than $1.

You need to earn this trust.

Investors should think about Markel’s float growth over time.

Links of Interest – May 25, 2012

Ackman JCP Presentation

The Aleph Blog » Blog Archive » Book Review: The Alpha Masters

Distressed Debt Investing: My Favorite Ideas from Ira Sohn

Free exchange: Humbler horizons | The Economist

Apple by the Numbers [Infographic] « Apple News « GiveMeMind

The Brooklyn Investor: Greenlight Re Investor Meeting Notes 2012

Value Investing Lecture by Joel Greenblatt With Strategies of Warren Buffett and Benjamin Graham

Clayton Christensen’s “How Will You Measure Your Life?” — HBS Working Knowledge

Berkshire Hathaway 2012 Shareholder Meeting Notes (part 3) –

Buffett stated that Berkshire is not even close to running afoul of the Investment Act of 1940.

Google and Apple are great businesses. They will be difficult to dislodge. Buffett does not get to the level of conviction he needs to buy them. He thinks IBM is less likely to stumble.

Buffett would not have selected Apple ten years ago. What makes him think he can now predict what it will do over the next ten years. (My comment: this is a useful filter to counter hindsight and overconfidence bias.)

Buffett likes the very positive long-term economics of BNSF.

Munger: Getting good and bad breaks is in the nature of things.

REITs and MLP’s would not be attractive to Berkshire because it must pay corporate tax.

The $20 billion of cash that Buffett holds is not a magic number. They think about risk all the time and build in a margin of safety. They are not interested in explaining why the lost the business.

They think about what could go wrong, and they put in place a huge margin of safety. 99 out of 100 years will be punished as a result of this conservative approach. 1 in 100 will be the payoff.

Buffett keeps photocopies from the pages of newspapers that chronicled financial collapses, as a reminder. He mentioned the financial collapse surrounding Pacific Northern.

Regarding Combs and Weschler, Buffett is always more concerned with how a record was achieved. He has seen hundreds of great records – very few from people he would hire.

Combs and Weschler make $1 million per year plus a bonus for each point of outperformance of the S&P 500. 80% of the bonus is based on their individual performance and 20% on the other’s performance, so as to foster cooperation. This is the same comp package that Lou Simpson has. It is based on a rolling average of three year performance.

Buffett recently increased each of their allocation of investment capital to $2.75 billion.

They have a much bigger universe of potential investments than Buffett because of their size. They will do a great job running more money.

Combs has already racked up a large gain.

The majority of people would starve with this comp structure. Combs and Weschler could make more with a different job but with a less desirable life style.

When looking at an investment, Buffett looks at every aspect of how the world may develop over the next five to ten years. They look at all aspects of both the business and the industry. They are looking for a high level of certainty.

Managers at Berkshire have an advantage because they do not need to think about investors, lawyers, etc.

It is very hard to imagine Berkshire getting a bad result.

Getting real GDP growth of 2 1/2% over one’s lifetime if remarkable. Given the U.S.’s mature economy and the increased level of global competition, Buffett and Munger think real GDP growth of 1% is all you can expect. Add to that 2-3% of inflation – which will be lumpy. This gives an expected return on equities of 6%: 1% real growth + 2-3% for inflation + 2% dividends.

Buffett thinks superpacs are wrong. There is enough push towards a plutocracy already. You need to make a stand. He will not spend money to mislead people.

Investing in Berkshire is not for those with a short-term outlook. You should actually feel better today than a year ago because the margin of safety has grown.

They don’t pay a dividend because they think they can get more than a $1 of present value by retaining it within the company. Dividends will come out in due course but, hopefully, that day is a long time in the future.

MidAmerican may be able to put $100 billion to work over the next ten years.

Munger: Buffett has continued to learn.

They could do better with $1 million of capital because there would be many more places to look.

How do you minimize mistakes? Think about things that would not allow you to play tomorrow. Buffett does not worry about mistakes because the next mistake may be different.

He has learned more about people over the years. He will recognize the extraordinary ones perhaps more easily going forward.

They have tried  to learn a lot from the mistakes of others.

Buffett loves to read about financial markets. There is plenty of folly in this area.

They don’t build barriers to entry; they by them. You could not knock off Coke with $20 billion.

GEICO should be valued both on the basis of its float and its underwriting profit. They will grow as far as the eye can see because of their cost advantages.

Ajit must be smart on each deal. He cannot look it up in a book.

If you do 100 deals, you will learn if you are doing things right.

Earnings power is affected by current Fed policy.

Munger: the U.S. would be better off not using its natural gas now. Munger prefers to suffer now so better things will be in the future.


Links of Interest – May 18, 2012

Notes From Ira Sohn Conference Presentations 2012 ~ market folly

Graham & Doddsville Spring 2012 Newsletter

The 3 Way Trade That Could Imperil Google – Seeking Alpha

Google’s Market Share in Your Country

INSIGHT-Motorola deal offers Google tax, patent benefits | Reuters

Google vs. Bing: I switched to Microsoft’s search engine for a week. Here’s what happened. – Slate Magazine

Barry Diller’s Latest Effort to Torch the Tube — New York Magazine

Value Investing World: 2012 Berkshire Hathaway Annual Meeting Notes

Berkshire Hathaway 2012 Shareholder Meeting Notes (part 2) –


Some hedging required in operating businesses.

Buffett thinks about worse case scenarios all the time – more than most. They won’t take risks that threaten the business.


Valuing GEICO is different than valuing Gen Re.

GEICO’s intrinsic value is greater than net worth and float. This is not true for all insurance businesses. GEICO will have growth plus underwriting profits.

Buffett would love to buy operating businesses at 9-10x pre-tax earnings if they had similar characteristics to Berkshire’s operating businesses. He would pay even more for Berkshrie’s businesses since they know the businesses.


Buffett would not buy gold. He prefers productive assets.

JP Morgan

Buffett bought JP Morgan for his personal account. He could not buy Wells Fargo in is personal account so he bought JP Morgan. His best ideas are in Berkshire.

Munger likes focused, long-term investing. Munger thinks investors should be thinking about the 98 1/2 percent of things that drive results, not the 1 1/2 percent.

If Buffett was not running Berkshire, he would own a lot of WFC in his personal account.

Acquisitions and Dividends

Buffett would use Berkshire’s stock in acquisitions, if it sold for intrinsic value. Buffett does not want to pay a dividend. It does not make sense to payout 100% when it is worth 110% in Berkshire.


They once were the primary source of information. Now there are other means which are more timely.

The areas where newspapers are the primary source of information has gone way down. They have lost primacy. However, they are still primary in a great many areas, such as local sports, obituaries, marriages, etc.

They are expensive to distribute.

Many newspapers give information away for free which is a poor business model.

There is a future for newspapers in areas where people care about local items. They are not as bullet-proof as they once were.

Berkshire makes reasonable money with the Buffalo News.

Buffett may buy more newspapers in the future. They need strong local interest – a strong sense of community.

Concern about Interent

The Internet is a powerhouse. The Nebraska Furniture Mart is probably OK.

GEICO was affected by the Internet.

Amazon has millions of happy customers. The Internet is really terrible for most retailers.

Buying businesses

It took a long time for Berkshire to be top of mind when someone wants to sell a private business. There is generally no #2.

They generally vote yes in proxies of investee companies. They don’t rule out businesses where they don’t see eye to eye.

If they saw a particularly dumb acquisition, they might vote against it.

They would buy a great P&C insurance business, but there are not many.

Share repurchases

Berkshire’s willingness to repurchase shares under 1.1x book value has not put a ceiling on the stock. It signals that there is not a lot to lose.


There may be a large fine but the fundamental dynamics of Walmart have not changed.

Buffett does not think the earnings power in 5 years will be affected.

Munger: A company that big will always have someone doing something wrong.

Takeover concerns

A takeover of Berkshire by a hedge fund is unlikely. Members of the Buffett family will maintain large voting power for many years to come. The size of Berkshire makes a takeover unlikely, and Berkshire is continuing to grow.

Munger: Berkshire’s momentum is in place for the next $200 billion. Berkshire will continue to attract private sellers.

Capital intensive businesses

Buffett thinks the utilities businesses can return 12%.

BNSF’s capex exceeds D&A, but Buffett is confident that Berkshire will be allowed to earn a decent rate of return on these investments.


It is difficult to predict how fast Berkshire’s float will grow. It could shrink.

They are looking for ways to intelligently grow float.

Declining businesses

It is best to stay away. The real money is in growing businesses. Buffett doesn’t look for a cigar butt in a declining business.

Avoiding dumb things

The most important thing is to understand the earnings power of a business in 5-10 years plus its competitive position.

Investing in IPO’s is dumb. The seller picks the timing.

It is dumb to invest where the winners can’t be picked.

They have a number of filters. If something does not get through the filters, it is rejected. You don’t have to do a lot of great things to do well.

You can’t have a big disaster.

They avoid investments where someone is earning a large commission.

They look at things that other smart people are buying. If Graham Newman was buying something, Buffett would take a look.


Meet Hipster Berkshire: The Markel Annual Breakfast

By Michael Olsen, CFA, The Motley Fool – DailyFinance

If Berkshire Hathaway‘s (NYS: BRK.A) annual meeting is the main event in Omaha, and the Value Investing Congress is a delightful foodie dish, the Markel(NYS: MKL) brunch is that somewhat unknown, fringe trendy pub you frequent with your friends — before it’s cool, while it’s still accessible, and because it stays open for love of the craft. Each year, Steve Markel, founder and CEO of Markel, and Tom Gayner, the company’s colorful and successful chief investment officer, hold a brunch.

What’s amazing at this point in Markel’s lifecycle is that the meeting’s not better attended: Markel, for all intents and purposes, is a mini-Berkshire. It’s carefully refined a unique underwriting model and culture, and it skillfully deploys its insurance profits into best-of-breed companies at value prices. Better, it’s managed to fly under the radar — the company has a middling $4.3 billion market cap. It’s more of a value cognoscenti favorite than mainstream dish. But don’t mistake its potential: It’s an organization that over time appears truly built to last.

(continue reading)


Links of Interest – May 11, 2012

How Will You Measure Your Life? – Harvard Business Review

Jardine Matheson: An Under-the-Radar Asian Growth Story (Contest)

Norfolk Southern Shares Can Head North –

DirecTV Gains As Bernstein Turns Bullish; Stock Too Cheap? – Forbes

Columbia Business School’s Graham & Doddsville Spring 2012 Newsletter with Jim Chanos, Tom Russo and Julian Robertson

Don Yacktman Sees the Beauty in Ugly-Duckling Stocks –

Notes & Presentations From the Value Investing Congress Omaha 2012 ~ market folly

The New Ben Graham Speaks

Gabelli: Invest in booze – YouTube – includes his thoughts on Berkshire Hathaway

Lauren Templeton: Methods Sir John Templeton Used to Take Advantage of Crisis Events

50-year buying opportunity – authers note – markets –

Berkshire Hathaway 2012 Shareholder Meeting Notes (part 1) –

The following is the first part of my notes from the 2012 Berkshire Hathaway shareholder meeting. I have tried to be accurate, but I make no guaranty that I have been so. The notes are not complete, but rather the thoughts I wrote down during the meeting. I hope they are useful. Please take them with a grain of salt and cross check them against other sources.

Managing risk

Buffett’s successor must be the chief risk officer.

Insurance divisions are already overseeing their own risk. Leverage will be avoided in the future.

Berkshire may not have access to all the deals they could do with Buffett, but there will be opportunities. They will do some things better after Buffett.

The special side deals such as the warrants have not been material.

Berkshire has a strong board with deep experience managing risk.

Repurchase of Berkshire shares

Berkshire has always tried to have an attitude of partnership towards shareholders. When Berkshire issued B shares, Buffett said in the proxy that he would not buy them at the offering price.

Buffett stated that Berkshire’s intrinsic value is significantly higher than 110% of book value. Buffett feels very comfortable with 1.1x book. Significantly (dramatically) undervalued.

Some of Berkshire’s businesses are undervalued; some are fairly valued.

Buffett would love to buy “tens of billions” at 1.1x book. The value of each shares goes up if shares are repurchased at 110% of book. It’s obvious.

He won’t go below cash buffer of $20 billion.

Many companies repurchase their stock at overvalued prices.


American banks are in a better position than European banks. American banks have taken large losses already have large liquidity. The system is in fine shape.

Euro is gasping for air. $1 trillion Euros just pumped into the system. European banks rely more on wholesale funding.

Munger – Having a union in the U.S. is a big structural plus. 17 countries make it a lot tougher.


MidAmerican will pass on cost savings on coal.

KW hours down 4.7% (last year?).

The ratio of gas to oil is not 50:1 vs. the longterm average of 6:1.


Buffett stated that nothing is being done at GEICO to introduce telematics. He does not yet think that it is a factor. They are watching it and he is open to it.

GEICO is worth 15 billion more than book value. Even that price would not tempt him to sell it.

Investment Education

MBA’s have been taught a lot of nonsense about investing.

If Buffett were teaching about investing, he would teach two courses:

  1. How to value a business
  2. How to think about market prices

Ray Kroc did not think about options; he thought about how to sell more hamburgers.

You must know the difference between which businesses can be valued and which cannot. Buying cheap businesses works.

Insurance Pricing

Rates in Thailand have gone higher as a result of flooding and Berkshire is selling more insurance. Losses in New Zealand have been huge on a per capita basis.

Berkshire has proposals out for $10 billion in business.

Market for insurance is significantly better in parts of the world.

Energy Subsidies

There is a $.022 per KWH subsidy from federal government for the next ten years. Solar and wind would not work without subsidies. Wind does not work as base power generation (storing issue).

Berkshire can use tax breaks in energy companies in full because it pays so much in taxes. Up to 80% of other companies cannot use these tax credits. This gives MidAmerican a significant advantage.


Buffett would do an acquisition greater than $20 billion. He just considered a $22 billion acquisition.

Buffett won’t use stock in the future, not even for 30-40% of a deal.

He wants $20 billion in cash to be on hand. He would not do a $40 billion deal because he does not want the company to be susceptible to a shock. Money is building up month by month.

Berkshire invested $8.8 billion in U.S. last year.

Buffett’s Health

Buffett is feeling good. Munger won’t allow himself to be tested for prostate cancer. Munger views Buffett’s cancer as a non-event given his highly positive prospects.

Insurance Run-Off

Buffett would buy insurance run-off operations at the right price.

Advice on starting out

Buffett would do the same thing again. He would aggregate investment funds earlier. He would develop an audited record as early as possible. He would try to get to the stage of buying entire businesses ASAP.

Berkshire’s stock price

The stocks price has been cut in half four or five times. Cap Cities once sold for 1/3 of the prices that its assets could be sold for.

Read chapters 8 and 20 of The Intelligent investor. Mr. Market makes lots of mistakes.

High to low prices for Berkshire stock is less than that of other stocks.

Make decisions based on what a business is worth.

The stock market is the most obliging way to make money. There is lots of information. This isn’t available with farms. The rules are in your favor if you take advantage of it.

Munger: Get yourself into a position to buy businesses.

Macro risks

Buffett never let macro events affect a buying decision. There will always be good and bad news out there. Buffett bought his first stock in 1942.

Look to valuation, not headlines.

He keeps liquid reserves because he does not want to go broke. The 1st rule is to always play for tomorrow.

Berkshire’s businesses

BNSF has dramatically improved its position. It is an extremely efficient way to move things. Could not be duplicated for 5x or 6x (what Berkshire paid?).

GEICO is much better than its was 5 years ago. It is approaching 10% of the market.

MidAmerican and ISCAR have both done well.

Mistakes have been made when they misjudged the competitive position of the business.

Munger: good fortune will continue after Buffett’s death.

100 Ways to Beat the Market: #33: Don’t bowl without the bumpers

On occasion, Mohnish Pabrai has told a story he learned from management guru Tom Peters about imitation. Apparently there were two gas stations on the same corner. Each propriator could clearly see what the other was doing. One of them began building his business by extending full service to some, but not all, of his customers. The rival concluded that this wouldn’t work and refused to copy the practice even as he saw his competitor take away business.

The lesson: imitating smart practices works and – equally important – many, if not most, people fail to practice intelligent imitation, even in the face of evidence that it works (better than what they are currently doing). Mohnish practices what he preaches and has built a successful money management business largely – by his own admission – on imitating the practices of Warren Buffett and Charlie Munger.

At a recent talk he gave (via Skype) at the Ivey School of Business in Ontario, Mohnish spoke of the value of only making an investment if the stock is already owned by a successful value investor such as Warren Buffett or Prem Watsa. (Buffett himself benefited from cloning, for example, getting involved in GEICO when he learned that Graham was on the board.)

Mohnish compares this to only bowling with the bumpers up. He argues that you will make fewer mistakes than going it alone.

This is excellent advice. These great investors have enormous experience and are backing their ideas with serious capital, much of it their own. Mohnish goes on to argue that you could be successful by being a blind follower, but that few are willing to do this. He may very well be correct.

Nevertheless, I believe it makes sense to only invest when you understand a given investment. The issue is one of human behavior. It can be hard enough to stay with a position through periods of extreme volatility; this is doubly difficult if you don’t have conviction borne of your own understanding, particularly if you are a focused investor.

If you want to beat the market, one very intelligent thing to do is to limit your investments to those that are owned by a great value investor with a long-term proven track record. The market affords no style points for being innovative and creative. Money is earned by being right.