As a product of their own experiences, no two investors see the world the exact same way. That can lead different people to value different traits in a company. For those looking to buy shares in a consistent compounder, Markel (MKL -0.06%) is a great stock to consider.
It copies one of the most successful business models of all time, and it offers diversification and proven leadership to boot. Most importantly, it lacks many of the red flags that could come back to bite you if the market heads south. Some might even call it boring. And in times like these, that could be the best addition to your portfolio.
A process that works
Markel shares many similarities with Warren Buffett's Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%). It's usually the first thing investors point out about the company. That's because the its primary business is insurance. For writing policies -- in Markel's case it's often to unique businesses like horse farms, summer camps, or yoga studios -- it collects premiums. Those payments by customers give management money up front, before they have to pay out any claims.
Most insurers invest this money into super safe U.S. Treasuries or other conservative fixed-income instruments. While both Berkshire Hathaway and Markel do that -- 72% of Markel's investments were in cash and fixed income at the end of last year -- they also buy stakes in businesses. Sometimes that takes the form of acquiring a company and other times it means buying stock. That diversified approach has helped Berkshire deliver nearly 5,900% gains for shareholders since 1990 compared to 2,300% for the S&P 500 index. It might surprise people to learn that Markel has outperformed them both, returning 6,000% in that span. Its shareholders are hoping to realize similar outperformance over the next 30 years.
Diversification in one business
Markel operates in three distinct business units. It has the previously mentioned insurance unit and investment operation, as well as a segment called Markel Ventures. That unit is made up of smaller businesses the company has purchased outright. Similar to Berkshire -- and unlike most large companies -- Markel doesn't typically meddle with management or its operations. It's becoming an increasingly large part of the business and helps diversify the company even more.
In the most recent year, Markel Ventures revenue was almost evenly divided between companies that produce physical products and those that provide services. It generated $254 million of the corporation's $816 million in net income. Markel has invested about $2.7 billion over the past 15 years to build the portfolio of companies. Interestingly, management had talked about creating a portfolio of acquisitions 15 years before it started. Selecting them has required both quantitative and qualitative skills.
Tom Gaynor is an accountant by trade. He's been co-CEO of Markel since 2015 after serving as chief investment officer of the firm. He's best known as an investor, and that is how his story at Markel began. He was first introduced to the company as an equity analyst and has carried that skill over in his more than 30 years at the specialty insurer.
Gaynor professes to look for four traits in an investment. The first is profitability and high total returns on capital. The second is the business' ability to continue investing at high returns over time. The third is a fair price. And finally, high talent and integrity. That last one he says he'll never compromise on, stating "you can't do a good deal with a bad person." Notably, the first stock he bought after taking the investment reins at Markel in 1990 fit those criteria. It was Berkshire Hathaway.
The investment returns prove the approach works. Markel's equity portfolio returned 15.2% in 2020. It almost mirrored that over the previous five and ten year periods, earning 15.5% and 14.7%, respectively. It beats the 11.6% return of the S&P 500 over that decade. From 2001 to 2010 it produced 7.6%. That was during a decade that the S&P 500 fell 5%.
That long-term focus permeates every aspect of the company. In his appearances and interactions with Wall Street, Gaynor emphasizes the long term. One example is the company's "never sell" acquisition strategy. Another is its tendency to report returns over five and 10 year periods. It also uses generational language in its strategy. For investors, it's that mindset that has produced outsize returns in the past. There's every reason to believe the same process will create similar outcomes in the future.