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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 five-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 2008 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, 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 2009, Markel's equity portfolio returned 6.3% 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 2010, 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 see attractive purchase opportunities. There is a solid list of attractively priced global franchise companies that tend to pay dividends near the level of what we could earn on bonds. We will get the capital appreciation and growth for free. "

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

  • Anheuser-Busch InBev (NYSE: BUD  )
  • Automatic Data Processing (Nasdaq: ADP  )
  • Charles Schwab (NYSE: SCHW  )
  • ExxonMobil (NYSE: XOM  )
  • Teva Pharmaceutical (Nasdaq: TEVA  )

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

Anheuser-Busch InBev is the largest brewer in the world. It uses its global distribution system and marketing prowess to maximize sales volume and, with 13 billion-dollar brands in its stable, Anheuser-Busch InBev is a high-quality consumer stock.

Like Anheuser-Busch InBev is in beverages, Automatic Data Processing is the 800-pound gorilla among human resources outsourcing companies. ADP does everything from payroll processing to 401(k) plan administration. The company pays a very generous dividend and the current yield is 3.2%.

Charles Schwab is a highly regarded brokerage that traditionally focused on serving retail investors but has made significant strides growing its institutional business in recent years. While Schwab's dividend yield of 1.6% isn't that enticing, the company has raised its dividend every year since 2002, and with a low payout ratio and a strong competitive position, that trend should continue.

If you're interested in a large-cap energy play, ExxonMobil could strike your fancy. With $24 billion of profits over the last 12 months, this global giant is immensely profitable and a sound foundation for most investor's portfolios. Profitability, and the share price, will fluctuate with gyrating oil prices, and ExxonMobil's stock is a lot closer to its five-year low than its five-year high.

Teva Pharmaceutical is one of the most successful generic drug companies in the world, and it has both the expertise and financial resources to capitalize on generic versions of biotech drugs. That will be one of the most important drug industry trends over the next decade, and Teva should prosper from it.

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, our real-money portfolio designed to put together a winning team of stocks. To learn more about Million Dollar Portfolio, just click here.

This article was originally published Aug. 16, 2008. It has been updated.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Motley Fool Hidden Gems and Million Dollar Portfolio Associate Advisor Charly Travers owns lots of books and shares of Markel. Berkshire Hathaway and Markel are Motley Fool Inside Value choices. Berkshire Hathaway and Charles Schwab are Motley Fool Stock Advisor recommendations. Automatic Data Processing is a Motley Fool Income Investor pick. The Fool owns shares of Berkshire Hathaway, ExxonMobil, Legg Mason, Markel, and Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (6)

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 October 22, 2010, at 12:22 PM, johnnypajamas wrote:

    Markel has gone no where but down the last three years or so...taking a chunk of my hard earned income with it... if Tom Gayner steps in to run BRK I say look out BRK...

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