Simple Lessons From an Investing Genius

Peter Lynch once said, "Never invest in any idea you can't illustrate with a crayon."

Even though my artistic talents would make the average 5-year-old look like the second coming of Vincent Van Gogh, I think there's a lot of wisdom in Lynch's statement.

Another investor I admire, Markel (NYSE: MKL  ) Chief Investment Officer Tom Gayner, recently expressed a similar sentiment in a much more eloquent way. In his company's second-quarter conference call, he said, "The businesses we own are largely transparent and describable in two minutes by any reasonably knowledgeable observer of business and commerce."

The man
Gayner doesn't have Lynch's name recognition, but he's a superb investor in his own right, and we can learn a lot from his approach. He's so good, in fact, that last year, Legg Mason's Bill Miller told CNN Money that Gayner would be the perfect next CIO at Berkshire Hathaway. That's some lofty praise.

So how does Gayner do it? Here are four simple investment takeaways we can glean from his comments:

  • Invest in profitable businesses with good returns on capital.
  • Find honest and talented management with capital discipline.
  • Seek out companies with attractive opportunities to reinvest their capital.
  • Buy at a fair price.

It's simple advice, and it works. Through 2007, Markel's equity portfolio returned 10.7% annually over the previous 10 years, a track record far outpacing the performance of the S&P 500. Though Markel's equity portfolio has fallen by nearly 15% through the first half of 2008, the kind of market environment we've been in provides fertile ground for snatching shares of high-quality companies. In Markel's last conference call, Gayner remarked, "I've never experienced this high-quality approach as out of favor as it is right now, especially since valuations were historically reasonable for these firms as we entered the year."

About those companies …
If that's truly the case, what is Gayner buying? Here are a few companies he picked up last quarter:



Brookfield Asset Management (NYSE: BAM  )

Cemex (NYSE: CX  )

Cohen & Steers

Costco (Nasdaq: COST  )

Nike (NYSE: NKE  )

Disney (NYSE: DIS  )

If you're looking for some stock ideas right now, that's a high-quality list to work with.

Costco, in particular, is a simple business. It's a poster child for Gayner's investment criteria, not to mention an exceptional candidate for a long-term holding. CEO Jim Sinegal holds more than 2 million shares of the company and is known for treating his employees well. And even while passing huge savings onto customers, Costco has consistently managed to produce double-digit returns on equity. What's more, even though company is facing some profit pressures in this economic environment (who isn't?), Sinegal believes Costco could double its store count over the next 10 years.

Another one of my favorites on that list is Cemex, one of the world's largest cement producers. This is another business that's easy for all of us to understand. Cement is a crucial material for infrastructure such as roads and buildings. We can't live without it, and Cemex earns quite attractive margins making and selling it. The company is run by a highly experienced management team that continues to make smart investments for the long term. And the stock happens to be dirt-cheap because of the current global slowdown in construction.

The Foolish bottom line
Don't make your life more complicated than it already is. Look for high quality, easy-to-understand companies run by managers you trust. Find them, be patient, and wait for a good price to come your way.

If you're looking for profitable companies with smart and capable management selling at attractive prices, consider Motley Fool Million Dollar Portfolio, the new offering I work on with Fool co-founder Tom Gardner. You can learn more about an all-access pass to follow along, as Tom and our team invest $1 million of the Fool's own money in recommendations from across our premium services. To learn more about Million Dollar Portfolio, just click here to tell us where to send all the details.

Million Dollar Portfolio Associate Advisor Charly Travers owns lots of books but no shares of any company mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway, Cemex, and Legg Mason. Berkshire Hathaway, Legg Mason, and Markel are Inside Value recommendations. Berkshire and Disney are Stock Advisor picks. Cemex is a Stock Advisor and Global Gains recommendation. Brookfield Asset Management is also a Global Gains pick. The Fool's disclosure policy can't hope to stop LeBron James -- it can only hope to contain him.

Read/Post Comments (3) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2008, at 11:00 AM, ronbeasley wrote:

    Cemex is Markel's smallest holding. Markel only owns 10,000 shares. That amonts to less than two-tenths of one percent of their $1.5 billion portfolio. Those shares were purchased during the second quarter, but that level hardly represents a conviction that this is an attractive value.

    It appears that the Motley Fool is trying to use Markel to support one of its own recommendations. Suggestion - read what the investors are actually doing by looking at the filings, don't count on this kind of rhetoric.

  • Report this Comment On August 20, 2008, at 3:46 PM, PamelaPAR wrote:

    I'm also concerned about the insider selling.

  • Report this Comment On August 29, 2008, at 5:34 PM, paulmaher1957 wrote:

    One more piece of information supporting the "myth" of disappearing petroleum was published by the American Association of Petroleum Geologists in 2002. After measuring the oil level in wells around the world that had been pumping for years, they discovered that there has been NO depletion in the oil levels. Many scientists worldwide believe that oil is not a product of biological decay, but rather a biochemical reaction involving an organism that converts the methane gas found at extreme depths into petroleum "waste" products. <>

    Consequently, we may very well have a limitless supply of oil at our disposal.

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