Markel: Smart Money's Baby Berkshire?

04/07/2017 2:50 am EST

Focus: FINANCIALS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Markel Corporation (MKL) bears such a close resemblance to Warren Buffett’s Berkshire Hathaway (BRK.B) that analysts have dubbed it the “Baby Berkshire", observes Nicholas Vardy, editor of Smart Money Masters.

The nickname is apt. With a market cap of just $13.74 billion, Markel is just 2% the size of Berkshire Hathaway’s $432 billion.

Warren Buffett often has said the biggest enemy of Berkshire Hathaway’s future market-beating returns is its size.

He conceded that Berkshire’s unwieldy size is also likely to impair its investment returns in the years ahead. Markel offers the best of both worlds.

On the one hand, Markel has a Buffett-inspired investment strategy, with time-tested results. On the other, Markel has a relatively small, $4.15 billion investment portfolio, which increases its chances of generating market-beating investment returns.

Tom Gayner, Markel’s Co-Chief Executive Officer, has run its investment portfolio since he joined the company in 1990. Gayner is a very public disciple of Warren Buffett and operates with a Benjamin Graham–like margin of safety.

Founded in 1930, Markel is a specialty insurance holding company. Both Markel’s underwriting and investment strategy are modeled explicitly on Berkshire Hathaway.

Markel even holds a shareholder brunch in a conference room at the Omaha, Nebraska, Hilton hotel each year — on the day after Berkshire Hathaway’s annual meeting.

Over the years, Markel has established a reputation as one of the leading players in specialty insurance markets. It has insured everything from classic cars, boats, show horses and the red slippers Judy Garland wore in The Wizard of Oz.

Much like Berkshire, Markel’s core specialty insurance business is profitable and generates a significant float. Markel then invests this for the benefit of shareholders.

Few insurance companies invest a significant percentage of their portfolio in stocks. Most industry players invest in cash equivalents to ensure they can always pay claims.

Markel invests a much larger portion of its float into stocks. This strategy results in higher returns for the investment portfolio over time — although at the price of higher volatility.

Here, Markel’s philosophy again echoes that of Berkshire Hathaway. Markel invests its shareholder equity with a long-term view, believing that stocks of quality companies at fair prices will outperform bonds over long periods of time.

As a bonus, Markel manages its $4.15 billion stock portfolio for less than 0.01% in annual expenses. That’s about one-70th the cost of the average U.S. stock mutual fund.

One of the best-kept secrets in investing is that Markel has outperformed Berkshire Hathaway since the late 1990s. Under Gayner’s stewardship, Markel’s shares have risen from $21.75 in 1990 to $984 for an average annual return of 15.1%.

Ironically, Gayner’s biggest position is Berkshire Hathaway. Today, it makes up approximately 12.3% of Markel’s stock portfolio. It also is a position Markel has held for over 25 years.

If you buy Markel, you own a consistently profitable insurance company, with one of the world’s top investors at the helm, as well as a shareholder-friendly long-term management. And you get all of this at a fair price.

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