Good Investing Talks - Tom Gayner, how do you build your portfolio? A talk with the Co-CEO

Episode Date: March 7, 2021

I had the pleasure to do an interview with Tom Gayner of Markel. We talked about capital allocation and much more.

Today, it's a pleasure for me to have Tom Gainer of Markell Corporation on. Hi, Tom, how are you doing? Tom and I am well. Thanks so much for having me. Great that you are here. As we are planning the interview, I ask you to bring free songs as you have been a DJ in your youth. And I want to connect to this for the start of our conversation. I ask you to bring a song that describes Markell's last 10 years, a song.

a song or even the opera or whatever you want to say for the year 2020 and a song for the next 10 years what are these songs but before we go into this question let me just show the disclaimer that we are on a safe side here you can find the disclaimer link below the video and it says just do your own work and what we're doing here is no advice and no recommendation always do your own work and i'm also happy to drop a message from our sponsor this episode is supported by the mit investment management company mitymco that is their short name manages the financial assets of mit therefore they partner with talented investment managers all over the world especially mitymco is eager to connect with emerging fund managers. Metimco wants to invest alongside young and unconventional investment

firms. They want to add value by bringing resources in the creative perspective to the fund management journey. So whether you are a one-person shop just getting started or a team of investors building something unconventional, Mitimco would love to hear from you. No firm is too small, too early or too uninstitutional for Matimco. You can drop them a line at partner at motimco.org and visit at their website, Mitimco.org slash emerging managers. So the email is partnered mitymco.org and the website is metymco.org slash emerging managers. You also see it here in the picture. But now back to the interview.

Thank you very much for listening to the message of Metimco. I'm happy to come back to my conversation with Tom on the three songs I ask for. Maybe let's start with the song that describes Markel's last time. 10 years. What have you picked, Mr. DJ? Well, you were kind enough to send me that question in advance. And the problem with getting a question in advance is that implies that I'm actually going to do homework and be diligent and think about it in preparation for a meeting like this. And so often I prefer the spontaneity of answering your question at the moment without any pre-thinking things about that. So when we first started talking about music and

favorite songs, the real answer to that is that's like asking me to name my favorite children or my favorite family members or something like that. There are so many songs. Music is a continuous backdrop to my life. Turn it on first thing in the morning when exercising or running or something like that. And I just have the randomizer threw up things from the playlist that I've built over the years because I like to be a little bit surprised. So there are a lot of songs that I draw energy from and motivate me. Now, we'll confess. So, for instance, if you're trying to do this word response, kind of response,

a quick and unfiltered. When I thought about what song would best describe the next 10 years of Marquale, I went to Frank Sinatra, the best is yet to come. So I was the first one that came into my mind, but I love music. And then the song that talks about the last couple of years. And the last 10 years have actually been quite good, last couple of years. We've had some challenges. There's a group called Wilson Phillips, and they did a song called Hold On.

So your listeners may or may not be familiar with that. But that was something that popped into my head about music. And then, you know, another favorite, favorite song, and to call it a song, is a little bit cavalier and a little bit almost disrespectful. But since you're a German by native, this occurs to me, Beethoven's 6th symphony is my favorite piece of classical music, but I love a lot of pieces of classical music, but if you ask me to name a piece of classical music real quick, that would be the first one that pops into my head and evokes sensation and emotions for me. So those are

just little tiny snippets and examples of music that's of interest to me. I see you haven't lost your talent as a DJ and for picking some interesting songs. And I'll add some of my father that was a I developed my love of music from my father and when he was asked what kind of music he liked his response was I like any kind of music as long as it's good and that would really be my response too because I don't want to I don't want to unnecessarily narrow the music that I would listen to and I don't wish to have preconditions in a closed mind so again in the same way that one should approach life you should approach music the same way be open-minded be willing to listen to some stuff you you haven't heard before you might

You might learn something. I don't want to listen to just the things I've already heard, although I do that a lot. Let's look at 2020, a really challenging year. How did it open your mind going through this year and what came new to your mind in this year? Well, I think this year, one of the themes that came out and I tried to write about in the annual report quite a bit was just the notion of resilience. And you've heard that from a lot of people. so things that we did not see coming that we had not planned for that we had not expected happened and those were tough gut punches and there were moments of despair and challenge that we had not

game plan for quite frankly but yet we continued to press on and dust ourselves off and go to work every day and figure things out and that happened in personal life it happened with your family, adopted by colleagues at work for Markle as a whole. So to be tested in the way that 2020 did test us and to come out on the other side and demonstrate that this is indeed a resilience machine and a mechanism that is designed to handle things that you can't foresee and in fact do reasonably well to that time. That's very encouraging and very inspirational. You issued in May 600 million of preferred stocks, and you weren't that aggressive on buybacks, if I go through the numbers. There was one critical question coming from Twitter on this.

Was this a misjudgment of risk you did in hindsight? Certainly in hindsight, it could be well criticized that we were in a position that we thought that the extra $600 million dollars of capital that we raised that we did do as a practical matter through the first quarter of 2020 when you look at the combined ratio in the insurance operations plus the drawdown in the equity markets and an uncertain environment into what the next day would bring to be double safe, double secure. That had a cost to it. There is no question about that. But it also has an epic payoff in that double assured the resilience and survivability of the Markell Corporation.

So tactically, when we sit now with nine, 10 months of hindsight and how things turned out, you know, we were fine. But in the moment, we felt it was important to add to the capital base. There's some expense doing so, but there's some returns from doing so as well. Have you shifted anything structurally based on the experience you made in May or April of this year? I think it's not unlike what would normally happen in the insurance business, which is our heritage and core business. For any insurance risk you write, all of the data that you have relates to things that have happened in the past. Now, you use that and you would be unwise and ignorant not to pay attention to,

to what has happened in the past, but the risk you're writing for is the future. And sometimes the future is different than what the past has been. Each time you go through something like that and you get surprised, and we've had that with things like Hurricane Katrina, Rita Wilma, that episode of life, the Northridge earthquakes back in 92. All of those went beyond and through some of the model of expectations of what losses would be. but in each and every instance, you refine your models, you have new data, you have new learning. So it's more robust the next time around.

But I think that is the fundamental nature of the business that is likely to continue to be the case forever. And you just have to always be resilient and enough, have enough margin of safety that things that surprise you and you don't foresee, well, they may hurt. They may sting. They may leave a bit of a mark. But there are also the times when you learn and figure out. how to iterate in tactical and strategic ways to be to be better the next time around. For the future 10 years, you named the song, the best is yet to come. How do you want to measure this the best that is yet to come? What are your measures for your success in the next 10 years?

Well, I think from an external point of view, there's layers to the answer to that question. from an external point of view, if you were not an associate of Markell or you don't have first degree of connection to the company, say you were only a shareholder or only observing the stock price, I would certainly hope that 10 years from now, the stock rates would be meaningfully higher than it is right now, because that would be the culmination of all of the efforts and all of the things that are going on on a daily basis around here. for someone who's here and an associate of the company or a customer of the company or somebody has ongoing relationships with the company, we have the win-win-win architecture where we want

associates to be better off because they are part of this company. We want customers to be better off because they've done business with us. We want shareholders to be better off because they've provided capital to us. So the way you can measure the third one is just looking at the stock price. the feeling that an employee has, well, you can have some metrics like turnover and surveys that give you employee satisfaction scores, but I also think that it is a mistake to think you can be overly precise about that. It's a sensation of thinking about whether your relationships are working or not. So as an example of that, here in a few short months,

I will celebrate my 40th wedding anniversary. And I can tell you, thank you. There are no scorecards, there are no report cards, there are no gimbab charts, or anything that talk about how the marriage is going. But 40 years later, we are still in it together and we laugh and we smile and we enjoy our family. So it's going well. And that sensation that you have in personal relationships, there's only so much one can quantify it and to over quantify it probably would risk damaging the relationship.

relationship itself, at least in the context of the marriage, I think it sure would. But as you know, investors have a certain law for numbers and looking at Michael's performance, what are in the numbers you indicate shareholders to look at besides the stock price? Book value was already mentioned in some comments coming from Twitter. Some said your growth in book value declined from 15 to 10. they ask if it's structurally or if you come back to the 15% or I would also add my question, is book really value really the number to look at? Right.

I think book value is not as descriptive a number for Markell as what it used to be. So if you went back 20 or 30 years when Markell was exclusively an insurance company, think of an insurance company and the three financial statements that completely, comprise the financial statements, the balance sheet, the income statement, and the cash flow statement. Well, in an insurance company, the balance sheet is the most important of those three financial statements. And the book value for share, which you would derive from looking at the balance sheet and looking at balance sheet year every year after year, that did a very good job of describing the economic progress of Markell over time. With the addition of both,

Markle Ventures and our insurance-like securities business and insurance services businesses, those really are more income statement businesses and cash flow businesses than they are balancing. Their asset light in the term that you'll hear people say. So the book value that would be attributed and associated with those businesses does not really speak to or describe their economic performance very well. So in those businesses, I think, and for Markell, you would look at cash flow metrics. EBIDA is one.

We've talked about that being the least worst proxy for the economic performance of the Markle Ventries businesses. And I would say, actually, you can do that for ILS and insurance services as well. So we're somewhat of a hybrid. And I think it's interesting to note that, for instance, in the Berkshire annual report this year in the letter that came out, Buffett abandoned. the book value chart that had historically been at the front of his letters, what had happened in the book value per share over the years, and referred solely to the market price per share

appreciation over time. And I don't know whether he used these words exactly or not. I can't recall. But in essence, what he's telling you is that the market, in essence, gets it right and ultimately figures out what the appropriate values are and the directional information you glean from looking at the market price per share over time does indeed do a very good job of describing the underlying economic performance of the business itself.

To be successful in the next 10 years, learning is key. Maybe share a bit with us what you're currently trying to understand. as an investor, as a businessman, what are you trying to understand, what are you trying to figure out at the moment? What are topics that move you? Well, that's a fascinating question because I think any fair answer to that would involve multiple, multiple layers. And the big risk here is in simplifying and only speaking to one or two or three dimensions when there are constant dimensions. Andy Grove, who was one of the

founders of Intel and one of the great executives that's ever walked the face of the earth. One of the books that he wrote was called Only the Paranoid Survive. And there's a certain calibration of paranoia that you should have that if you have too much of it, you can't function. And you'll go into the mental illness state of what paranoia describes. If you don't have enough of it, you get complacent. And you don't have enough fear of the things you don't know such that you'll go stale and get left behind. So you've got to have that paranoia meter at a certain level that

just keeps it in balance. So the fact of the matter is not being complacent and just always having curiosity and always just wondering what the next thing is would be the best way I would describe how I would think about what you should learn. My wife who runs a business when she's interviewing people and trying to find colleagues and associates to hire, she would use the phrase. She likes to find people who ask the, and then what question, and what's next, and have just a sense of natural curiosity about them, such that they're always just trying to figure out the next thing and the next thing and the next thing after that. So to answer your question, I think obviously the way in which technology is changing daily

operations, changing the sense of knowledge one would have about any particular thing. Those are table stakes, and you have to be better and better and better at that all the time. The thing that I think perhaps is undervalued and that I would expect to be something that a competitive advantage of Markell over time is the idea of empathy and always keeping the human dimension first and forefront in your mind and always trying to. think about things from your customer's point of view, from your colleagues' point of view, rather than your own natural point of view. That mindset and that sensation is not natural. It's not automatic. It's not the way people would be wired automatically. So to have that as part

of our culture and our system and constantly reinforce that message about, well, how do other people see this? How is the customer going to feel about this? Thinking about things other people's points of view. I think we can match people in the realm of technology. And I don't think we can ever allow ourselves to fall too far behind. And I think it's unrealistic to think we're ever going to get too far ahead. But in the sense of empathy and trying to see things from other people's points of view, I think we can always be world class of that. And I think that applies in no matter what business you're in. Are there any examples you can boil this, what you're trying to understand down to something

concrete, graspable? I'm hard pressed to think of some off-the-cuffe example that would that would bring that to light. But I can recall just many, many conversations around our dinner table as examples with my kids growing up

where they would say something in the way a kid would, and I would introduce what we called the concept of other people, sometimes with air quotes, the concept of other people. So I was just drilled into my kids around the dinner table and it's something I say around here a lot because I

find myself in situations where sometimes it seems like we're not really thinking about other people. So let's just stop, pause and think about something from someone else's point of view. And it's amazing what sort of insights you can gain from that. stop pause is a very interesting point to go to my next question because it's about investing concepts and where have you discovered certain concept you used in the past where you said stop pause rethink this does it really make sense do i have to modify it what are examples where you have changed your usage of investing concepts well uh for instance and one of the ways in which technology and the environment is different today than what it was 20 or 30 years ago,

if you looked at petrochemical companies and oil companies for a long, long time, those were some of the leading most profitable businesses in the world. In the last 10 years, it appears the fundamental economics of those businesses may have changed dramatically. So were we shareholders in, Take example, ExxonMobil, 20 years ago, the answer to that was yes. Are we shareholders in ExxonMobil today? No. And I don't claim to be making a statement that says it was a good idea at one point or bad idea. I don't know, but I do suspect the fundamentals of that business are different than what they were 20 years ago.

So to think that you can just own something, the thesis would be sound and the thesis for owning it would be unchanging. forever. That's probably oversimplifying the case. And you do need to rethink why you own things and what you think the next five or ten years old as opposed to be too wedded to what the last five or ten or fifty years held. Is there another example for you addressing on investment concepts? Well, another example would be many retailers. So it would be a critical sort of component of mind, my thinking that says, look, I'm not a smart guy, but I try really, really, really hard not to be a dumb guy. And there's, there's a big difference between the two. So smart people can figure out the new, new thing and what's coming next sometimes

and make these spectacular returns. And I've never really been very good at that. When you think about any white-hot story over the last 20 years or some name that jumped a mind is something that, well, if you bought that early on and you held on to it, you just make tons of money, my skills at picking that have been very, very limited. But if you look at things that have really deteriorated and gone away and just become terrible businesses, have been pretty good at staying away from those. So as an example of that, we own a reasonable size position in Amazon. I was not an early, early investor in Amazon, but eventually it did sort of,

to figure it out and stuff beats so block-headed that this was really a substantial, sound, profitable, growing business with amazing competitive advantages. So we started buying some. And because we have regular cash flows, we're able to dollar cost average and continue to buy more and more. And there was never one particular entry point or price that had made some dramatic statement, but we accumulated it over a number of years. And we've done dramatically well with that. Now, in addition to owning Amazon, I also thought about, well, if Amazon is doing well, what might they be displacing and who might be in their competitive crosshairs such that the economic circumstances of those businesses are severely diminished? So we got out of the way

and really didn't own any mall-based or Main Street retailers for the last 10 or 15 years. simply from the insight that if Amazon is doing well, it is some aspect of a zero-sum game. So who are they doing well at the expense of? Things like that would be ways that the thinking plays out. What belief did you have to give up to be able to own Amazon in a good way? well you needed to be I'm an accountant by training you needed to be a better accountant and as I've always joked the way I went from accounting into investing is that I was an accountant it was more interested in dollars than numbers and there's a big difference between the two so for instance in the early days of Amazon it appeared to be unprofitable but you had to look at the nature of the expenses they were incurring that if they have been a manufacturer and building a plant,

what would have happened in an accounting sense? So it would have expended a bunch of money, and it would have been capitalized. It would have created this asset, and then the expense would flow into the period income state it's bit by bit by bit by bit over what the accountant's deed would be the useful life of that asset. Well, since marketing and building up customer lists

and things like that were really the equivalent, of manufacturing plants, Amazon appeared to be unprofitable, but really what they were doing was creating a long-lived asset. And you just needed to be able to think through that and make some assumptions that if they spent X, well, while they showed 100% of X flowing through the income statement that year and made it look like they were losing money, that X they were spending, if you're really thinking about it in net present value kind of math, what would be the lifetime value of the customer relationships that they were getting for that and match up your time frames to a longer term rather than year by year, you would have seen more easily that on an

economic basis, they were profitable way before Gap financial statements, made them look like they were profitable. Amazon is a good bridge to the point I want to do in the next part of our interview. it's looking at the conditions your decisions are made and try to re understand them better and even look a bit deeper into your portfolio and we have the chance as a lot of data is already public to take a look at this portfolio i want to use this point to just tease it on for the audience that we are walking step by step to this portfolio investing in it's not only this portfolio you're partly responsible is also the portfolio of Markell ventures but before we go

into these two buckets and you will help me try to understand how you're acting there I want to understand where the money for all this investing is coming from so have you found a golden pot on the the end of a rainbow somewhere in the countryside or where do you get the money for investing? Well, no. We've not found the golden pot. And by the way, I'm not aware of anybody who ever has, although the stories are told of it continuously,

and there are a lot of people chasing this. But I'll set that aside. Fortunately, I joined Markell back in 1990. At the time, it was a relatively small specialty niche insurance company. But I got to know Steve Markell, Tony Markell, and Alan Kirchner. and what I thought about them was they were really smart, they're really creative, they were kind, they were good people, they were fun to be around, and I just have this sensation that over time they would do very well. I was also familiar with the Berkshire business model from that time, and I had seen how Buffett had taken an insurance business and used the profitability. of the insurance business to leg into ownership of publicly traded equities and then control

of entire businesses. So the playbook was out there. Buffett had described what he was doing from the early 80s. I first got tangential awareness, but by 1990, when my opportunity to join the company, had come about, the playbook was pretty well developed, pretty mature, and pretty much out there. So Markell was in Richmond, Virginia. I happened to live in Richmond, Virginia. I happened to be the analyst at a small local broker firm who was covering them.

So I had all sorts of overlapping touch points and cross points to become aware of the company. In 1990, Markell did one of their double the size of the company deals. Steve Markell had been handling the investments largely single-handedly. At that point, he had more to look after. He asked me if I'd like to help him. I said, well, that sounds like fun. That was my strategic plan for the rest of my life. So that's what's been going on since 1990 is that there was an insurance engine.

That insurance business has historically operated with underwriting profitability. And culture, the DNA, the creativity of Markell has always been willing to invest the bulk of that insurance profitability into the ownership of equity securities, both publicly traded. and in the case of the Markle Ventures companies, controlling the interest in those companies. And that was the Buffett playbook that was out there for anybody to see and follow. Referring to the Buffett Playbook, I did get a question from a shareholder of you, Michael Gilkins. Is your current cash balance freely investable or does it serve for future claims? Like Buffett mentioned that he could invest relatively freely? Well, we don't have as much range of freedom as what we have.

If you look at the size of Berkshire relative to the amount of insurance premium that they're right, and the nature of our insurance versus a GEICA, which would be a law of the large numbers. And the variability of the outcomes would be pretty daggone tight. There would be more variability in the insurance we would have. So that comes with a little more constraint over how widely we could invest. But by and large, the cash balances at Marquale, which are higher than they historically have been, are indeed largely available for us to invest proactively when time, circumstances, ideas lead us to things we want to do. We're in a good position to be able to do those things. And you need to have those sorts of cash balances at hand when the time comes to act.

because the time you come to act, if you're not in a position from your balance sheet to act upon it, well, then that's just an idea that you play on paper, so it doesn't really do us or the shareholders any good. So we always want to be in a position where we have the liquidity and the capability to act on a good idea when it comes around. Now, what that also means is that at any given instant, you probably are always carrying some degree of cash and short-term liquidity that is in excess of what you're using. at that particular moment. But you never want to be in positions where you don't have as much cash as you want. So we'll accept the burden of carrying too much. That's a very high class problem.

Maybe let's take a short look into the insurance business, which is not your main playground, but I think you will acknowledge about what's happening there. Which part of the insurance business you're a bit bearish on? and which part are you most bullish on in your insurance operations? Well, within our insurance operations, clearly we have talked about the fact that we've not earned the sorts of returns that we think we should for our shareholders in reinsurance over the last couple of years and heavy-duty property catastrophe insurance coverages.

So we have been cutting those back over the last couple of years. We have been charging more, increasing rates and getting more. rate per unit of risk, but the actual cost of the risk have increased at a faster rate than what we could get rate for. So we've, again, taken another step back from that portion of the business as we roll into 2021. And the rest of the portfolio and the rest of the book, that business has been doing pretty well. And I'm pretty optimistic about what we will continue to be able to do going forward. Does your insurance operation has developed through the last years,

a certain angst against lemonade or other new fresh fintech? Well, there's several aspects of that. So, for instance, to some degree, some of the insurance services operations that we would have are part of the way that fintech actually conduct business. So if you look at the fintech world, typically their expertise would be in marketing or risk selection and slicing and dicing what kind of business they want and how to write that. At the same time, insurance is a regulated

business and it requires a capital base to support the claims that ultimately come from insured losses that anybody who's writing an insurance is going to have. So in many cases, we've actually partnered with some of the fintech companies, and we would do the back end of that business to have balance sheet, would have regulatory mechanisms, all of those sorts of things, and we think that's important because whether we wish it or not, whether we think it's a good thing or not, it is reality, and fintech is out there, so we need to work with them when circumstances are appropriate for us to do so. We need to observe and learn and see what they're doing, adapt and change our processes when they have a good, new, fresh idea.

That's just the nature of the world in which we live is that new ideas, new technologies are always coming around, and you need to be constantly trying to develop them yourself and staying aware of them and adapting your own operations as appropriate to remain competitive. What happened with your cooperation with Tesla? Tesla was a client of some of our insurance services operated. So it's a perfect example of where Tesla had an idea about what insurance cost should be and wanting to offer an insurance product to their customers. But they needed licensing, regulations, things of that nature.

So we were able to provide that with that on a fee for service basis. I think, and again, you correctly identified that this is not my day job, so I'm not at the point of expertise about that. I think they have found some other people to do that for them right now, but that's the nature of things. We were a fee for service provider for Tesla. Then let's go again on the higher level. How does climate change influence the insurance business at Markell?

Well, largely through the kinds of losses. that are recurring. So the property catastrophe losses that we spoke of, one never knows exactly what causes the wind to blow or the earth to shake. But climate change is clearly one of the factors that's out there in the world in which we live. So we look at the data. We look at the experiences as to what is happening. We try to have some measured view about what might happen going forward and whether one can collect enough premium to pay those risks or not. And if you can, okay, and every day you learn more, but also the rate you might charge for something where you think climate change might indeed cause higher losses.

You either need to charge more for that risk or not write it. And we would do both of those every single day. Is there a tendency that you're losing business due to this or that business isn't doable anymore? I would say that every day there is business that we are accepting and business that we are declining. And if we are correct in our sense of what the true costs of the risks are, that should be improving the net economic position of the Mark Al, corporation with each and every decision. That's a practical matter. We get some of those right and we get some of them wrong.

The thing that would matter to our clients and Mark Health shareholders over time is that we get more of them right than wrong and that the size of the decisions would be such that when we get them right, that more than offsets the times we get them wrong. But it is inevitable. The nature of insurance is that we pay out a lot of claims. If you look at the single biggest expense of our insurance operation, it is the dollars we pay out in claims. And that is as it should be.

That is the marker and the metric for taking care of your clients and making sure that you were there to provide them with some money, some cash, some capital at their time of need. That's what they bought insurance for. What is the impact of low interest rates for, Michael, on the whole bench? Sure. Well, interest rates and the interest income. one would earn from the normal heavy allocation of fixed income that any insurance company would have is part of the equation of what makes the economics of the insurance world work.

So if you collect a dollar of premium today, generally speaking, that is in anticipation of some loss that might happen in three months, three years, somewhere down the road. So any and every insurance organization that exists has embedded and attached to it, an investment operation that holds that money and invests it until the time as the claim is paid. You would calculate in rough or precise terms how long you think you're going to hold onto the money and how much you think you would earn an interest income while you're holding onto it to help price the policy that you ultimately offer to the customer. So all other things being equal. And that's an important statement because generally speaking in this world,

you never get to be in a situation where all other things are equal. But if all other things are equal, then whatever rate you would offer a customer for a insurance product, you would need to raise that to increase the amount of income you would expect to generate from the underwriting profitability itself rather than from the investment earnings you would earn. while holding the money. So it's just part of the equation, but there are other steps and facets to that that go into it. And one of the key things to remember is that if interest rates go down, that's not a unique situation for Mark L. That's true across the industry. Everybody is dealing with lower interest rates. If interest rates go up, then everybody will deal with higher interest rates.

it's an environmental factor that anybody in the in the insurance world would have to deal with. Do they profit your investment portfolio? In a short-term basis that they would increase the mark-to-market valuation of a fixed income portfolio, but I think you should keep going and decide whether they really help or not. Lower interest rates would take your math of net present values, and everything that already exists, everything you've already done, if interest rates go down, you would think they would be worth more. And your financial statements would say that they are indeed worth more.

But what I always think about is not just what has already happened, but what happens next? What's the and then what question? So the ability to reinvest that money, which is where the real compounding takes place in the future, not the past, the mountain gets higher and taller and harder to climb when interest rates are down. But the amount of return that you need to earn, earn good real rates of return, well, that goes down too. So I don't think about interest rates that much because I have no control over you. And so why spend your time thinking about things over which you have no control?

I'm better off using my limited brain cells. think about the things that I perhaps do have some control over rather than that I don't have control over. And interest rates just fall in that category. But you have to factor them in a bit if I use the picture of mountain climbing, that you have an idea of the mountain and find good strategies to climb it. This is the challenge of capital allocation. What is your framework at Markell for capital allocation? Well, let me go back to that question about interesting because they're really, again, I have no control over them, but they do pervade and drive everything. So when I was a kid, I grew up around Philadelphia, and there was a museum in

Philadelphia called the Franklin Institute. And I loved that museum. I spent many a Saturday just roaming the halls in the Franklin Institute. And I recall one of the things they had at the Franklin Institute was this room where they had scales that were trying to teach you something about gravity and how gravity worked in the relationship of the sun to the earth and where gravitational forces came from. So you would stand on this scale and that scale was called Earth. And you knew roughly how much you weighed so you would step on that scale and that number would make sense to you and tell you how much you weighed. Well, then you would step on a scale called Jupiter or Mars, which was either closer to or further away from the sun. And a number would come up as to what

you weighed if you were on the surface of Jupiter or if you were on the surface of Mars. And what it was trying to reflect was that there were different amounts of gravitational force that applied on those other places. So interest rates really are like gravitational force. And if interest rates are at the base rate and the 10-year treasury when I came to work here in 1990, I can't remember what it was, but probably it was 10 or 12 percent or something like that, maybe nine. I don't remember the number, but something along that level. Well, if that's what the 10-year rate is, to earn real returns, you needed, if the rate was nine, you needed to earn 10, 11, 12, 15, something like that to start earning real, not nominal, but real rates of return.

And you could. Now, if the base rate right now, I mean, the 10-year treasury, as we sit and talk today is about 140, 150, something on that level. The idea that you need to earn 15% on your capital like you did when interest rates for 10, 11, 12%. That's not true. And I don't think on large amounts of capital you really can earn exaggerated returns like you could nominally 30 years ago because the world-based rate of capital being provided these days is 2% or, you know, where you are, I think the base rate is perhaps negative. So an entirely different environment from a nominal point of view. But whatever it is, nominally, well, add a couple hundred basis points to that.

And if you're earning that, well, you're starting to earn historically very good, real rates of return, which produce compounding. So how is you, again, getting back to the question I already dropped, how is your? framework for the capital allocation of this capital? Well, the capital. Sorry to talk over you there. The framework, and this is where I think the beauty of Markell starts to exist, is that we have a 360-degree view of capital allocation. So, and we've written about this in the annual report for many years, the first and foremost thing we would look to do is we would look at our existing operations, business we're already doing. people have been part of the organization for time of proven their ability to earn good

rates of return and whether those are in the insurance businesses or some of the ventures businesses or the ILS businesses when those people who are already part of the team have opportunities that they think they can earn good returns on capital and they raise their hand and want some capital to support that that's the first and most joyous way in which we would allocate capital secondly we would look at for acquisitions to increase the size and scale of where we can deploy capital and earn good returns on that.

Thirdly, we would look at publicly traded securities, whether those are equity securities or fixed income securities where we think we could earn good rates of return. And fourth, we would look at our own common stock and possibly repurchase that if we thought we had fully funded the first three buckets of capital,

allocation and that our stock was reasonably priced and over the years there have been points of time when we've been firing all four cylinders at the same time and some of which we've not and currently we're at a position where we are looking at all four of those options and acting on all four of those options but that's that's really the framework we look around each of those each of those opportunity sets. How do you decide between the different buckets, buckets, sorry? Well, they're in that order for a reason.

So how we decide would be that we are trying to allocate capital to its highest and best use. Now, if we have somebody who's been here for five or 10 or 15 years, and they have a proven record of being very good at running their business and earning good rates of return, maybe they come and suggest that they have some idea that could produce some just making up a number, a 12% return. While somebody else who you don't know, who have no relationship with, comes across the transom and suggests some idea that they could produce 15%.

Well, 15% is more than 12. So shouldn't you take the 15%? Well, maybe. Maybe not. you should attach some degree of certainty, some degree of confidence that you have into whether those returns will actually take place or not. So it is my bias. And I think it reinforces our culture that for people who are inside the organization that have done a very good job, we want to say yes to those people. That creates energy. It creates goodwill. It creates

positivity. It rewards people for good work. And we should do that first before we allocate limited capital to someone coming across the transit who can say wonderful things, but we don't have any first aid experience, whether they can do wonderful things. So those are extreme examples, but we're on a risk-adjusted basis, if you want to call it that way, a degree of confidence-adjusted basis. We're trying just to make sure we're allocating capital, to its highest and best use. Use this example, I want to use this example of the 12%, and maybe say someone comes and says he has a 20% return he could make.

How do you decide in this example who's the better user of the capital? What do you factor in your hurdle of decision making? Well, again, with that example, which we're playing out, the 12% that was internal, you have hard data on that. That's somebody already inside the organization. So you have a proven historical track record that gives you data which you feel confident in because you've seen it. It has taken place under your own eyes.

When anybody comes at you with a story or a proposition or a theory that is extra, journal, you can and should have a different threshold and process by which you evaluate that. Now, one of the reasons we come to work every day is because we do want to talk to people like that. We do want to hear their stories. We do want to consider what else is out there. Our history and our DNA is designed to accept and accommodate new ideas and new ways of doing things and new ways of thinking about things. But it's a different hurdle rate than what would happen for somebody who's internal. But you're investing in outsiders and what are factors that make you confident to invest in these outsiders?

Well, that's in the same way as would take place for insiders. We are not ever going to be 100% right. So we try to be thoughtful, we try to be rational, we try to be reasonable, we try to be informed, and then you make your decisions, and you see how it plays out. And it always just gets back to this law of large number sensation that you want to be right more often than you're wrong, and you want to be dollar-weighted, or whatever currency you're in, you're going to be dollar-weighted right more than you're wrong. I mean, for instance, I enjoy playing poker. I have some friends that I've been playing poker with for 30 years.

And it would not be uncommon to go through a night where if there were 50 hands of poker played in an evening, maybe I only played in five of them or eight. Folded my cards 40 times. But on the time and either lost very small amounts of money or folded even before you had to put an anti-in. That's okay. But when you stick around and you keep betting and you stay in a hand, you want to win those. And at the end of the night, if there were 50 hands played and you lost or didn't participate in 45 of them and you made a little money in three, but you had two really nice wins, that's a nice night of poker. And that's exactly the

sensation of what we're talking about here. Let's take a look at Michael Ventures. What is the history and the concept behind Michael Ventures? Are you now one of the crazy venture players throwing billions after unicorns? Or what is standing behind Michael Ventures? Right. Well, I can assure you that, yes, we're not throwing billions after anything. And we've not thrown them after unicorns or things of that nature. So we're not pursuing venture capital kinds of ideas.

We're pursuing proven businesses. So the concept and the belief Markle Ventures circles that to what we were talking about in terms of capital allocation where first off, we invest in our existing businesses, our existing people, and fund that to the extent that we have opportunities and ideas to do so. And then the second thing we would do after that is acquisitions of companies and businesses that we don't already own. Now, historically, the way Markell got started, those were insurance businesses. And for a long time, many of the deals we did were limited to the realm of insurance. In 2005, which was the first year we started in Markell Ventures, there was a company called AMA baking equipment. It happened to be headquartered here in Richmond, Virginia. I happened to know the gentleman who was the CEO of the business.

I happened to through just relationships around town, find out that it was for sale. and found out what the circumstances of the company were. And I thought this was a great opportunity to buy a business that was not in the insurance realm, but would produce good economics. And we started with that. In 2005, we bought it. And that was the first transaction in the base of Markell Ventures. Now, in 2005, we were getting into a market environment for prices were starting to go up in general.

I mean, it was sort of a hot market out there. So what I thought businesses were worth and what sellers thought businesses were worth, that gap started to open up. And we were not able to buy any other businesses for a couple of years. And the next Markell Ventures business, we didn't buy until 2008, when financial markets started to be different and prices started to be different and opportunities started to open up to buy things at rates and prices that we thought would produce good returns. So we've bought a number of, I think 17 at this point of businesses over the years. They're wonderful market leading companies at what they do. We do everything from the AMF, which makes commercial baking equipment. So if you eat a hamburger and have a hamburger bun, there's very good odds that it was baked on our equipment.

And we think there are a lot of hamburgers and hot dogs being eating all around the world. And AMF's been a leading company at supplying that since the next. 1930s. Let me show the overview of these businesses and connected with a question. What are the free businesses? It's hard to choose from businesses you're owning. And like it's maybe the same to choose from children. But currently the free businesses you think here are the best stories for shareholders.

They could be especially happy about owning these businesses. Well, I think all of these are wonderful businesses in their. own ways. Now, some of them are very profitable and they have very large market share in the business that they're in. And as a consequence, there are opportunities to grow or perhaps somewhat less than some other businesses because they're already very much the leader in that market. But that's okay because they produce very wonderful returns. And the returns that they produce, we can then reinvest all around Markell in that 360 degree view that we're talking about. So the good news about all of these businesses that you look at is that they are very good

at what they do. They take care of their customers. They take care of their associates. They make their customers happy. Generally speaking, those businesses are all ones that have a lot of repeat and return customers, which is a validation of the fact that they are doing a good job of taking care of of their customers. Some of them have the opportunity to take that money and reinvest it and grow. Some of them are somewhat constrained in their ability to grow, but they're part of a team that can use that capital to continue to grow and expand all of Markell. So they're all unique stories, but I think Markell shareholders should be pretty happy with each and every one of them. Is there any business shareholders can get an attachment to Markell in their everyday life and

they don't even know it? Well, in terms of consumer products, I'm trying to think. So, for instance, Brahman, which makes handbags and leather products and things of that nature, any shareholder in the world, and I would encourage them, I'm reaching to my pocket right now. So this is a Brahman men's wallet. Generally speaking, they tend to sell more of their products to women for handbags, but men can get in on the action too. I've got a Brahman wallet.

I've got a Brahmin briefcase. So I encourage you to go on brahman.com and look at their products. And yeah, you can you can walk around with a piece of Markell any time. Probably most people are not going to buy commercial breadmaking equipment for their home kitchen or a trailer, which could haul cars around because they got their car. That's good news. And again, so these are indirect pieces. So for instance, Havco, and you can see over my right shoulder here, that wall is actually a Havko. floor that typically would be found in the back of a tractor trailer. So for tractor trailers that

you see going up and down the road, hauling everything you need, whether that's groceries, furniture, everything that gets moved by a truck, well, we have a wonderful business that makes flooring for those trucks, but the stuff doesn't fall out on the road. So while you may not know that your stuff, whatever you have, got carried to you. on a half-co floor. There's actually pretty good odds that a lot of what you live and use on a daily basis is indeed hauled around in trucks that have half-co floor floors on it. Before we go on into the more public market you're investing in, the stock market,

you have an insight into the private market with the business under the umbrella of Michael Helo Ventures and the stock market. how do you see currently the differences in both markets and how is the acquisition climate in the private market from your stance right well one of the points the buffet made many many years ago when berkshire was starting to more profoundly invest in controlling interest of businesses and expanded from the public security side was that he said being an investor made him a better businessman and being a businessman made him a better investor And I have found that very much to be true.

So if you are solely focused on public securities and things of that nature, well, you can be very good at that and there are skills that are involved in being that. But I find there is a layer that gets attached to when you're actually responsible for running businesses as we are within Markoventures, you see these things in flesh and blood and people and the real sensation of what's involved in running a business and the things that are necessary to run a good, durable, enduring business over time. That flow and that sensation and that information that you get in each realm helps the other. So I think being responsible for the businesses themselves helps make me a better stock picker and a better picker of investments to

to own and invest in, because I know how hard it is to run a good business. Similarly, having lived my life in the investment world, when it gets to capital allocation decisions within a business, I think I have firsthand experience with how that works and which ones tend to compound and work better over time, such that I can be helpful in the business setting itself when the capital budgets are being set and the notions of what acquisitions they might do or how they're making their capital decisions because they've had firsthand experience in the equity markets as well. So it goes back and forth.

And I think the ability to operate in both spheres makes you better at each one. What are examples for this getting better if you would go back to the young Tom starting off at McHale with investing? What lessons would you give him? I think the first and foremost lesson that you get in that sense is to have a better appreciation for how hard it is to run a really good business. That's a challenge. So, for instance, some of the mistakes of omission that I've made over the years would be if you had a really good public investment and you found a company that you thought was doing a really good job and you had some notion for what it was worth. and you thought it was selling it a discount and you bought it.

And then it went above that and above your target price. If you use that kind of mechanism or your sales target price, whatever, and you sold it. And then you proceeded to realize that probably that sale in the long run was not wise because the things that made that business good continued largely to be in place. And it compounded year after year after year after year. And you made a profit. You wouldn't be criticized for not making a profit because you did, but you realize that if you had just held on, you would have done way, way, way better over time because it could have compounded. So my appreciation and sense of that has helped me to hold on to public equity positions more so than might have been the case earlier on in my career, because I know how spectacular it is to run a really good business.

Similarly, if you have a business that is just fundamentally challenged and structurally difficult, sometimes it is tempting for an equity investor who can buy and sell things and trade much more easily when you're trading pieces of paper than buying and selling and being responsible for real businesses and flesh and blood human lives, you can be seduced by a cheap price and own a mediocre business at a great price, and maybe you can trade that. I've really lost interest in doing that. When I was younger, I did try to fool myself into thinking that I could successfully execute those sorts of strategies, but I've come to the conclusion that that's just

too hard to gain. And from observing what a good business is and maybe businesses that aren't so good and have structural challenges, when you find good ones, stick to them and stay with so no more cigar butts not if I can help it that's good the decision I want to go back to the acquisition

or the buyer climate you're having in both markets what do you see in the private market and what do you see in the public market are there any big differences currently I think in general prices are high and I think that relates to a lot of things there's market psychology going on the dispersion of prices, I think, is a little bit higher and wider in public markets than it is in

private markets as a broad brush general statement because there are pockets within the public markets where prices are very, very high. And we are in a period of time where there have been some spectacular successes in the venture capital-like companies and the newer entities that have great promise of things that are going to be someday, but have not necessarily proven out that case so far. So there are a lot of things in the public market that you would find like that. There are cases in the public market where there are companies that are not so exciting to people or not as attractive or interesting, and the psychology and the frenzy hasn't really developed. So there's actually some reasonable pockets of valuation in the public markets

in private markets because private equity has grown so much because the number and nature of transactions is so much more than would have would have been 10 or 20 years ago. The notion of prices in private markets tends in very broad, best general terms, to be on the high end and everybody thinks their business is a great one. So they all want the high price and they all want a price that is what the last person got. without perhaps adjusting for the dispersion of what their business is worth or how good it is compared to other people's business. What are the niches or the regions you still find attractive?

Well, for instance, I get back to Markell these days. I mean, if you looked at the insurance industry in general, as I look at, and here's an example, and it's not a large hold, and it's not something that we've invested big dollars in or that I have an opinion about. But earlier this week, Allstate raised their dividend by 50%. And if you look at Allstate's returns on equity

and their performance over the last couple of years, I would argue that Allstate is pretty good at what they do and have consistently done so for many, many years and produced pretty good returns on the capital. They have a good consumer brand name. And had that happened in a different industry right now, I think probably investors would have snapped to attention and thought that was a signal of great good news. As it turns out on that day that Allstate raised their dividend by that much, I don't know if the stock was up, down, or what, but it didn't move very much. And I understand that the dividend rate has no actual theoretical implication as to what the stock should be.

but if you look at the fullness of their performance over a reasonable period of time, it seems to me the market's not head over heels in love with it. So that would be an example of something where the valuation seems reasonably attractive. And I think if you look across the insurance industry, for a variety of reasons, not the least to which were the losses that the industry had in 2020 with the pandemic and whatnot, investors aren't head over heels in love with the insurance industry. as I'm looking around and thinking about where valuations might be attractive, our own insurance business might be pretty attractive.

Is I want you back currently a song that comes in your head when you're thinking about your stocks? Well, I want you back. Yes, it's funny you should ask that. So in the Jackson 5, which was I think with the original group that recorded that, we're talking about remote work and the ways in which the world has changed. I'm an extrovert. I like being with people.

And I play the song more than once over the course of the last week in thinking about reconnecting with colleagues who are working remotely. I love to see you in person and cherish and welcome opportunities to do so. And in fact, one of the things we would hope this year is that our annual meeting, which is on May 10th, we're very hopeful that we're very hopeful that we, we can have that meeting in person. And we love the time that we get to spend with our shareholders. We love the relationships that are built in person.

We love serendipitous conversations that can't be planned or scripted. And we have no control over what the circumstances will be, but it appears as though the trends are getting better. Vaccines are on the horizon. The incidence rates are going down. So if circumstances permit, we're going to have our meeting, May 10th in person. And we would love to see you.

We would love to see your listeners and people who are listening in person and we would welcome the chance to host them in Richmond, Virginia, that time if we can. So yeah, we want you back. And will you announce on your annual meeting them that if you can say this here or maybe let's phrase this differently?

Is there a chance that the song will be played in relation to stocks you bought back and you got back? How attractive do you currently think the valuation of your stock stock is? Right. Well, I think it might well. And by that time, we'll be reporting our first quarter results. So let's stay tuned for what you might see as examples of we want you back. That's that I will. Surely that I will. Let's take a look at your portfolio as already promised. You can have a look at the positions you have to disclose on Data Roma or other portals. What comes for me as one first observation when I see the portfolio is the number of stocks you are owning. You have 150. How should one understand this number? Is it really different positions? or do you think positions as groups?

How do you think about the positions you have? Well, I think there's a lot of layers involved in answering your question. So one simple answer is, do you think of positions as groups? In some cases, yes. The answer to that is yes. So for instance, Diageo is a very large holding for us. Brown-Forman is a modest-sized holding for us. To some degree, I would group those together and that they both are producers of alcoholic beverages. There's other degrees of overlap that

would exist in terms of the consumer product. So if you were doing a Venn diagram of some of those, there would be a large amount of overlap. Similarly, you'd see some concentration in the realm of insurance or financial, and you could have some overlap. Now, the top 20 names. Here, you have the numbers based on sectors. Correct. And that's not my work. I don't know which analyst said that, but it's probably directionally correct. I don't really think about it from a, from a sector point of view. But if you looked at the top 20 names, that would oftentimes be 60%, maybe maybe up to two-thirds, maybe 55%, something like that, depending on how things were on any given day. But the bulk of the portfolio would be accounted for by the top names.

Now, one of the ways that I've thought about it, my whole life, has been that the top 20 names, it's kind of like a baseball organization. So if you were looking at a major league team, the New York Yankees, the Baltimore Orioles, they would have farm teams. So there's the major league roster, and let's call the top 20. teams, the roster of the major league team. Those baseball teams have AAA teams, double A team, single A teams where they're evaluating talent. They're looking at players. They're looking at athletes. And some of those athletes are going up on the list. Some of those

athletes are going down on the list. I find just for my own mentality, owning some stock in something causes me to pay more attention to it, to be more connected to it, to think about more than I otherwise would. If the stock goes up or down by reasonable percentages, when it's a small player, I accept the point that it's that in and of itself is not going to move the needle for Markell, but it can inform other decisions and things can get promoted or demoted over time. So that process in and of itself, I find to be quite helpful. another more subtle point.

And I've listened to some of your interviews with some other folks that you've talked to. Some people, there was a very famous investment book by guy named Charlie Ellis called Winning a Loser's Game. And this book dates back maybe 40 years now or something like that. And he talked about the example of tennis. He says if you're a world-class tennis player and you're playing at Wimbledon, generally speaking that each shot you hit you're trying to win the point so you're attempting to defeat your opponent on the other side of the net by hitting a shot that they can't get back to you if you're a recreational tennis player or anything other than the very very very top tier and you

wanted to be very good at your club or the local parks or anything at the very very very very anything other than the very, very top tier, the number one strategic thing you should do is try to hit the ball back over the net and let the other guy hit it into the net because the mentality is always to try to hit that winning shot, go for that extra choose and to be excellent. And it is an unnatural thing for competitive people, such as myself, such as the people you interview, the people that you would broadcast to, We all want to be the best, but there's a really bizarre thing in the world of investing that to be among the very best and to not necessarily think that you would be the best in

the world, but really, really, really, really good at what you do to adopt that mindset of a little more calmness and just trying to be good and hit the ball back over the net rather than try to get the win, that in and of itself can produce better returns and they can be more durable returns because they have less risk of having something traumatic or really bad happen. And they can be more scalable because the ideas can apply to more capital over more time. So I'm really trying to win the losers game, as Charlie Ellis would talk about. And so I completely acknowledge that there are a lot of people in the end. investment world who are smarter and better than me. And they talk about to use their advantage

and to use their intelligence and their skills to really see that pay off. They want smaller numbers of names in their portfolio. They want a 20 stock portfolio or a 10 stock portfolio or boy, if you were really smart and you knew, you would have a one stock portfolio. I have the one that's going to go up the most. Why don't people do that? Well, because you know, in your or heart of hearts, or at least you should, you're not that smart. And I'm going to accept the fact there are a lot of people who are smarter than me. So they could have a 10 stock portfolio or a 12 stock portfolio or even a 20 stock portfolio. I think, A, I'm not that smart.

And B, within the context of being a steward who's responsible for the assets of an insurance company and to make sure that we're always there to honor the claims that policyholders will have, it is appropriate to dial back that degree of ferociousness or intensity and trying to win, win, win, win, and play a game of, to some degree, not losing. And that is a subtle and somewhat dangerous line to get it just right. Because if you play too much not to lose and too defensive, you're going to sink into a morass of mediocrity. and I don't know how to tell you how to calibrate that or where to have that line,

but I can tell you for 30 years I've thought about that and for 30 years our success has been such that, I could argue that we do a pretty reasonable job of trying to calibrate that and figure that out. And I've heard the commentary that that's just too many stocks. from the vast majority of your audience, that might well be the case. But I have different circumstances here and the nature of the money that we are managing here

is different than many of the other folks you might have on. How are you keeping focus with 115 positions? Because I have 115 signals that are screaming at you at a certain point or just won't have a bit of intention. Well, generally speaking, if data is good, more data is better. So to your point about having 115 things that are bombarding you with information and flow, I think those things and that flow is extraordinarily helpful in helping make decisions about the things that are at the top 20 tier.

So I accept your point that it may seem like the focus is diffused. But in my wiring and the way of doing things, I find that those signals are helpful in helping me to make better decisions on the things we've put more throw weight behind. Let's go back on the idea of focus and the quality of data you already mentioned. What are these aspects you're laying your focus on to an end? understand the signals from the positions you have? Well, we included in the sensation of the positions that we would have and the sources of data are the actual operating businesses of Marka Ventures. And, by the way, also that includes the insurance business, who the underwriters around here

are seeing economic activity and insuring pieces of economic activity. So it has been of immense value over the years. for me to wander the halls and talk to people of the organization and to see what their business flows are like and where things are getting better, where things are becoming more challenging. So I can't put my finger on any one particular aspect or a particular point, but to come to work every day, always be curious, to always be listening, to always trying to have sensation of what I'm hearing and learning from all. all of the different sources that I have, that's what I do all day, every day.

And I like having more of those rather than fewer of us. If you think of the handwriting of the portfolio, is it just your handwriting or do you have a kind of model like Warren has all the positions up the billions, the one billion, two billion, three billion are his, the bigger ones that investment he does. and he has Ted and taught who are doing the smaller positions? Well, over the years, I've added two folks to the team who will help in the equity management process, Dan Gertner and Sara Badan.

Sarah's been here three or four years now. I lose track of time. Dan, 10-ish sort of years. Again, I lose track of time, so don't hold me on that exactly. The good news is the relationships with those guys is such that I feel like they've always been here, although the fact of the matter is, I guess it was here 17 years before hiring Dan. Now, one of the wonderful things that has been the case at Markle over the years is we've

had some wonderful shareholders and we continue to. And I always tell our large shareholders, I said the ironic thing is that you're smarter than I am, but in actuality, I'm managing money on your behalf. So the relationships and the friendships that we've built over the years with some of the large shareholders of Markle, those are wonderful ways to have conversations and to stay plugged into thoughtful observations about businesses and companies and who's doing what. And I've just tried to stay plugged into that flow. And over the years, I've found those all to be parts of the mosaic that comes into the Markell portfolio. So I don't have specific sentence diagramming type techniques to tell you how this name got in or that name got in or what I was thinking when I bought this or what I was thinking when I bought more of this or sold that. But that's what I do all day, every day is to try to stay plugged into the flows, which help me be thoughtful about that.

What does make us talk qualify for being a smaller position in your portfolio like 0.01% holding? what does it make, what does it qualify to scale up, maybe make it a 3% position? Right. Well, the four lenses, and we talked about this in the annual report, we want to run good businesses, profitable with good returns on capital, that don't use too much debt and too much leverage to do it. We want the management teams to have equal measures of talent and integrity, because one without the other is worthless. We want the businesses to have reinvestment opportunities and or capital discipline, and we want to be able to buy them at fair prices. So those are the four lenses that we would look at everything through it. So if something

somehow or another found its way into the portfolio, it means I've made some initial judgment about each of those four aspects. And every day that goes by, every month that goes by, every quarter that goes by, I'm continuously rethinking that and retesting the hypothesis. and re-evaluated it on each of those four dimensions and when I think that I'm right and that things are continuing to play out, well, we buy more and more of that, and when I'm wrong, we sell them and do less and less of it.

Peter Lynch, and again, older investment literature, talked about sort of the general experience that people tended to psychologically be more comfortable selling winners and things that they'd made money on and holding on to losers until they broke even on just the psychology of that. Well, we're pretty good at not doing that. And Peter Lynch called that pulling the flowers and watering the weeds. So we try to do the opposite of that. We look at the things we've done. And again, this is why I think it's of value to have some small positions and tiny things that you've scattered around. Those are seeds in the garden. And some of those seeds

start sprouting and showing the promise of becoming good plants. Well, those plants, you give them more soil, you give them more fertilizer, you give them more water, you give them more sun. You nourish them and they become bigger and bigger positions. And the ones that don't, well, you plow over that ground and try a different seed. It's a very organic type of process. You gave one of your bigger plants to the market, and it's a classical question.

I can't leave you without it. It's Carmex. And I heard many talks of you and Carmex was always mentioned, so I have to do it too. Why did you sell it in Q2 2020? And do you have any thoughts on Carvana? That's the question that was also asked by uncovering value on Twitter. Right. Well, I don't have any carvano.

We've not on that stock. So I'm not a position to respond to that question. Carmex was one of the things that we sold in the aftermath of the first school. of 2020 when we were looking at difficult conditions, both in the insurance and the economic environment. And it was my judgment at the time, and we looked at every single security we owned that included equities and fixed income. We looked at the economic landscape and the environment that we were operating in and what we thought was out there. We were looking at our insurance businesses, and we thought that it was prudent to trim the sales a bit and reduce our

equity exposures, tactically, if we were in a position to have held on to all of those securities, we'd be better off today than what we were by virtue of having sold them. So I have some sadness and some disappointment at having made some of the sale decisions that I did. But at the time, at the bridge, looking at the circumstances and conditions, I was looking at, those were the prudent decisions that I thought I had to make. So we made and faced with the same set of circumstances and conditions, again, would make the same decisions. We need to protect the balance sheet first and foremost at all times, so that we're always ready to answer the bell for the next round of the flight.

And that is the first and foremost duty that I have as the steward of the assets at the Markel Corporation. One has bad luck with airlines, the other one has bad luck with cars or use cars. You had this travel to India with Saurup as well. What came out of it? What impressions did you take from India and the Asian markets and will we see you becoming more active in Asia or even Europe? Well, that trip to India was a life-changing trip. There are certain trips of my life that I've been on

that I am so grateful for and I so look forward to being able to travel again because I think you learn things through travel and seeing different places and different people that you can learn in no other way. And the hallmark, the number one thing that I would take away from the trip in India is this notion that truth is complicated. And it's a composite thing. I think as human beings, we're all flawed. So when we say something is true or not true, we are we are dangerously oversimplifying things so as i observed from a very very limited time in india anything that i thought that was true i also said well there's parts of that that are not true it's a composite it's it's not singular and anything that i thought was untrue there were probably

elements of truth in that as well so i think that as a central idea for much of this discussion and a way to think about investing and way to think about life is a pretty good takeaway. You shouldn't be as certain of things as you might have otherwise been, and you should always leave a little room for interpretation, error, and being wrong, and always be willing to adjust and adapt your thinking as time goes by because things are usually more complicated than you think they are. What are examples for this learnings? Every single thing you could possibly imagine.

okay i can't put my hand on a single example but that's my point uh issues if you look at something uh in fact one of the one of the ways in which i've adapted my my speech and words in that i would use to to describe things it's a common saying so you know uh this isn't black and white there's shades of gray oh i used to say that and people say that all the time i'm not saying that anymore. I'm saying this isn't a matter of black and white. It's shades of four. It's complicated and shades of gray. When you use that expression, what you're doing is you're saying there's two endpoints. There's white and there's black and gray exist as a single plain spectrum between those two endpoints. And I don't know anything in life that's that simple. So I'm not going to use

that word anymore. I'm not going to use that phrase. It's not a matter of black and white. It's shades of four or shades of seven or shades of moth because i just want to give the sensation that you shouldn't be so linear and you're thinking because life's complicated but that's okay it is but in the best thing it's it's a bit binary you're making i have the decision to own something or to not own it how did india influence your decision to own certain securities or to not own it yeah i I would not ascribe a decision about a specific security or not to that trip. It would add to the sense that your security is a part of the portfolio. They're part of a mosaic.

So yes, it's binary as to this particular thing you own or don't own, but think of the technology we are using right now in the way in which we are seeing one another. There are certain amount of pixels that are involved in us being able to see one another. And if one of those pixels on this screen, given the resolution is off, we're still going to see and experience ourselves in essentially the same way. Now, if you keep doing that and you keep having deterioration of the pixels or the number of pixels we use diminishes, well, then the relative influence of each and every pixel goes up and the quality does start to deteriorate. But it's a spectrum on things that are better or worse and I just think you're well served to continuously

try to make things better and very much avoid making things worse and if you just dedicate yourself to doing that every day relentlessly every day it's going to turn out very well and I can't put to find a point on any one pixel as to how that works I have a certain deterioration on my question list so we're coming to the end of this great interview thank you very much for taking the time for the end i want to give you the room to add something we haven't discussed is there anything you want to add no but i think actually the way in which we closed and the notion of the idea of things being complicated and the value of just simply doing your best i can think of no more valuable thing or a better way to bring closure to this conversation.

And I appreciate your interest. I appreciate the questions of viewing your listeners and hope to be able to see you in person in a perfect world on May 10th in Richmond, Virginia. If not, we'll then as soon thereafter as possible. I hope in Omaha 2020. I hope it works out and I hope we see us in person. Thank you very much for taking the time. and thank you very much for the audience to joining us here.

And I wish you all the best for the end to all of you. Thank you. Thank you.