When Warren Buffett released his latest annual letter to Berkshire Hathaway (NYSE: BRK-B ) (NYSE: BRK-A ) shareholders early last month, the investing world understandably went crazy dissecting his every word.
But while I always enjoy Buffett's ever-quotable advice and consider his reports mandatory reading, I want to highlight some wisdom from another notable annual letter which was quietly released only a few weeks later. Even now, it seems to have gone largely unnoticed by the broader investing public.
Without further adieu, here are six fantastic insights gleaned from Markel's 2013 letter to shareholders:
On dynamically creating shareholder value: "[W]e get to choose from a varied menu as to how to allocate capital to continue to build the value of your company. Most companies do not enjoy the 360 degree range of choices we do to build value."
Like Berkshire, Markel can grow and profit through a variety of diversified segments including insurance, a long-term portfolio managed by renowned value investor Tom Gayner, and fairly priced acquisitions of steady supplementary businesses -- think stuff like bakery equipment, dredges, and flooring for truck trailers. Boring? Perhaps. Wildly profitable with minimal long-term volatility? You betcha.
On the Twitter-ized recap of Markel's 2013: "It takes a bit of time to update you on how things progress each year. If you just want the Twitter version of less than 140 characters, here it is ... 2013 a great year. Doubled insurance business with Alterra acquisition. Rest of Markel grew by double digits. Expect more over time."
A great year indeed; Markel closed on its acquisition of Alterra last May, grew total revenue 44% to $4.3 billion, earned comprehensive income of $459 million, and grew per share book value by 18% to $477.16. Over the past five years, Markel has grown its book value per share by an average of 17% per year. Not too shabby for an otherwise "boring" business.
On the world as a chaotic place: "Our net income totaled $281 million in 2013 versus $253 million in 2012. This is the most volatile of the line items in the 20-year table. We understand this volatility and hope that you do as well. At many organizations, volatility causes people to go nuts. Experience has shown they are tempted to tamp it down and pretend that the world is a smooth place. We do not share this delusion."
This is my favorite excerpt from this year's letter. Why? Because I'm heartened by the fact Markel is unafraid to view the world as what it is: A volatile, chaotic place which often causes massive fluctuations in any business' results. When disasters occur and markets crash, investors and businesses alike tend to panic. But by accepting this chaos as the norm, Markel is all the more prepared to effectively handle it.
On the merits of holding "forever" stocks: "We'll trade a little volatility in reported net income for $500 million anytime we can. A little over ten years ago the amount of our deferred tax liability was approximately $50 million. It's accurate to say we accomplished zero in our investment operations for the last decade. Correct! We added a zero. Please root for us to do so again."
At the end of 2013, Markel was sitting on $1.7 billion in unrealized gains on its equity portfolio. If Gayner were to sell those positions and take profits, Markel would incur a tax liability of over $500 million. As it stands -- and keeping in mind Gayner's preferred holding period is "forever" -- that extra $500 million remains in Markel's coffers, helping to further compound shareholders' returns.
This speaks directly to the humility -- and utter Foolishness -- of Markel management. Heck, a few years ago Markel CEO Alan Kirshner insisted one of the things he admires most about his team is that "they're not afraid to hire people who are as smart or smarter than they are." He elaborated, "That's really the secret of success. You'd be stupid if you didn't listen to these people."
On short-sighted revenue growth "We are focused on the long-term creation of value at Markel. We therefore focus on bottom line profitability over multiple year periods, not just short term increases in total revenues. Our compensation as senior managers, and our wealth as fellow shareholders of the company, depends on profitable revenues, not just revenues."
Markel's management is compensated on the five-year-rolling average of growth to book value per share, which means their interests are beautifully aligned with those of shareholders. Starting this year, that's also part of the reason Markel decided to shift its emphasis away from static book value amounts and toward five year compound annual growth rates.
In short, by focusing on profitable top-line growth over the long run, everybody wins.
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