Simple Lessons From an Investing Genius

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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, has expressed a similar sentiment in a much more eloquent way. In a conference call last year, 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, Legg Mason's Bill Miller told CNN Money that Gayner would be the perfect next CIO at Berkshire Hathaway (NYSE: BRK-B). 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 2008, Markel's equity portfolio had returned 3.6% 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 1% through the first half of 2009, 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, "We began to mildly and systematically add to our equity holdings. We will continue to be measured in increasing our equity allocation, but we did begin to allocate money to equities in the second quarter, and I would expect us to continue to do so."

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

Company
Abbott Laboratories (NYSE: ABT)
Coca-Cola (NYSE: KO)
Campbell Soup (NYSE: CPB)
Leucadia (NYSE: LUK)
McDonald's (NYSE: MCD)
Wal-Mart

Source: Gurufocus.

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

Wal-Mart, 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. In all economic environments, consumers flock to Wal-Mart because the company delivers huge savings. Wal-Mart has consistently managed to produce double-digit returns on equity, creating value for shareholders.

Another one of my favorites on that list is Coca-Cola, one of the world's best-known consumer brands. This is another business that's easy for all of us to understand, and most of us consume its products on a regular basis. There is no risk of technological obsolescence with Coke, and we can be confident this company will be around decades from now. With a 3.1% dividend yield, Coke is a great choice for investors looking for some income in their portfolios.

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 selling at attractive prices, with smart and capable management, 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 the Fool's own money in recommendations from across our premium services. To learn more about Million Dollar Portfolio, simply enter your email in the link below to tell us where to send all the details.