Crush the Market and Sleep Soundly With This Stock

By Steve Symington - October 22, 2012 | Tickers: BRK-B, BRK-A, MKL, UA | 0 Comments

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Recently a friend of mine told me with a smile, "Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) is my favorite mutual fund."

While he was obviously kidding about the "mutual fund" part, Berkshire arguably remains the world's most successful holding company and represents one of the most compelling investments the world has to offer.  With a compounded annual gain from 1965 through 2011 of 19.8% (and up nearly 20% so far this year) anyone who put $5,000 into Berkshire in 1964 would be sitting on nearly $30 million today. That's a 6000-bagger, folks.  Now I feel a little sheepish for being so excited when my shares of Under Armour (NYSE: UA) quadrupled in two years.

That said, while I believe Berkshire will continue to outperform the market going forward, I favor another smaller, similar company even more: Markel Corporation (NYSE: MKL).

Bigger Isn't Aways Better

While Markel's $4.6 billion market cap is nothing to sneeze at, it's easy to underestimate just how much room it has to grow.  By comparison, Berkshire's capitalization is nearly fifty times as large at $225 billion.  

On one hand, being small certainly creates some disadvantages for Markel.  For one, while Berkshire's massive balance sheet and larger base of equity allows it to invest both its float and shareholder equity in stocks, Markel can only prudently invest shareholder equity.  Markel management has stated, however, they "[...] should be able to move in the same direction as Berkshire (as Markel continues to grow). "

On the other hand, being the little guy affords Markel one huge advantage: A much larger investment universe. Even Warren Buffet has conceded the best opportunities for high returns exist for those who have less money to invest, telling Business Week in 1999, "[...] it's a huge structural advantage not to have a lot of money.  I think I could make you 50% a year on $1 million.  No, I know I could.  I guarantee that." 

For Markel, this is where its President and Chief Investment Officer Tom Gayner comes into the picture. Interestingly, Gayner has never owned a "hot" stock (unless, of course, you count stocks which only became "hot" after he purchased them).  Instead, he focuses on buying stocks of profitable, undervalued businesses and waits for the price to reflect the value.  If this sounds boring (or if you haven't heard of some other investors who found success with this methodology), you should note Gayner's value-oriented approach has helped Markel become a 20-bagger (!) since he took the helm in 1990.

In addition, a quick glance at Markel's news feed over the past two years shows no less than seven headlines reading something to the effect of "Markel announces acquisition of (insert random obscure company name)." These headlines are largely thanks to the work of Markel Ventures, of which Gayner is also President.

Markel Ventures operates separately from Markel's core insurance and investment operations, and perhaps its website describes it best when it writes Markel Ventures' purpose is to "[...] make strategic and generally controlling investments in businesses that operate outside of the specialty insurance marketplace."

Currently, Markel Ventures is comprised of a number of businesses that serve niche markets like bakery equipment, food processing, dredging equipment (don't feel bad; I had to look it up, too), laminated wood flooring for truck trailers, behavioral health programs, retail analysis services, and elevator wall panels.  

I don't know about you, but I literally yawned as I reread that list.  However dull they may seem, though, all Markel Ventures companies have met the following criteria as described on its site:

• Small, profitable businesses with good returns on capital.  More specifically:
  • Revenue – $25 million to $250 million
  • EBITDA – $5 million minimum to $50 million
  • Enterprise value – $25 million to $300 million
• Talented management teams (to remain in place post-closing) and a culture of integrity
• Ownership – Majority control; prefer at least 80%
• Reinvestment opportunities and capital discipline
• Fair prices 

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