The Knowledge Project with Shane Parrish - Tom Gayner: Invest Like The Best

Episode Date: January 23, 2024

Tom Gayner, CEO of Markel Group, reveals the lessons he’s learned from Charlie Munger and Berkshire Hathaway, how he invests, and the specific way he thinks about opportunity cost. Gayner shares the difference between good debt and bad debt, where he disagrees with Munger, and why he focuses on the basics. This intimate conversation offers a level of insight and honesty that Tom hasn’t offered anywhere else. Gayner is currently the CEO of Markel Group and the Director of The Coca‑Cola Company. He also serves as chairman of the Davis Series Mutual Funds board and on the boards of Graham Holdings and Markel. Listen and Learn. -- Watch the episodes on YouTube: https://www.youtube.com/c/theknowledgeproject/videos Newsletter - Each week I share timeless insights and ideas that you can use at work and home. Add it to your inbox: https://fs.blog/newsletter/ My New Book! Clear Thinking: Turning Ordinary Moments into Extraordinary Results is out now - https://fs.blog/clear/  Follow me: https://beacons.ai/shaneparrish Join our membership: https://fs.blog/membership/ Sponsors: Eight Sleep: Sleep to power a whole new you. https://www.eightsleep.com/farnamstreet Sidebar: Accelerate your career. https://www.sidebar.com/shane Metalab: https://www.metalab.com     Learn more about your ad choices. Visit megaphone.fm/adchoices

And there do come points where you're past the point of no return. Those words exist. That sentence exists because it means something. Acknowledge the point is out there and just try to be thoughtful and aware and make a decision that you think is reasonable, rational, thoughtful. If you're judging yourself by the outcome in the short run, you're going to make more mistakes than you otherwise would. You should have some sensation of the process and doing the right sort of process, which again is that discipline. of just being thoughtful about things, that I think is going to be the best you're going to get.

Welcome to another episode of the knowledge project, a podcast about mastering the best of what other people have already figured out so you can apply their insights. to your life. I'm your host, Shane Parrish. Every Sunday, I send out the Brain Food newsletter to over 600,000 people. It's considered noise-canceling headphones for the internet, and it's full of timeless wisdom you can apply to life and work.

It takes about five minutes to go through every week. Sign up for free at fs.blog slash newsletter. If you're listening to this, you're missing out. If you'd like access to the podcast before public release, special episodes that don't appear anywhere else, hand-edited transcripts, or you just want to support the show you love, you can join at fs.blog slash membership. Check out the show notes for a link.

Today, my guest is Tom Gaynor, the CEO of Markell Corporation. Tom is widely respected for both his investment, acumen, and his character. He joined Markell in 1990 and has been instrumental to its growth. It's the first time I've really gotten a chance to sit down and chat with him. We've had casual conversations before. but this was different. In this episode, we talk about the lessons he's learned from Charlie Munger, how to get the universe to do the work for you, how he invests, the value of writing his thoughts, his thoughts on leverage, the way he thinks about risk, the value of avoiding

stupidity, the specific lessons he's taken away from investing through multiple financial crisis, and how he positions himself for an uncertain world. Well, the topics are often investing in business, Tom is a master at simplifying complicated topics in a way that's accessible to everyone. I think everybody's going to take something away from this conversation that think about differently or they learn differently or they actually do something different. It's time to listen and learn. I think we should start with Munger. He passed away yesterday and I know had a big influence on my life and a huge influence on your life. I'd love to hear your thoughts and some of the lessons you learned from him. Wow. You said we booked three hours for this and

three hours would not even begin to do justice to 99 years of his life. What an amazing teacher. His statements about the best way to get what you want is to deserve what you want and working backwards from that idea and that concept. And as recently as the most recent annual meeting, I think the story was told about what you should do is write your own obituary and then work backwards from what you wrote you wanted to be. And his life just stands as a testament to that over and over and over again. Now that's at the 80,000 foot level. And I think that's really where his most dramatic influence and communication skills as a teacher. can really land with people.

The next level down was sort of the transition he fostered in Buffett to move from the digging around in the balance sheet, finding businesses that were cheap to finding businesses that were good and sees candy. That story is told over and over again about the standing on tippy toes price that they paid, but yet the spectacular economics they earned not only from that business, but so many of the things they did subsequent. because they had been taught by the example of C's what it is that a wonderful business can do for you over time.

When you think about living a life to deserve what you, what you want and what you should get, what does that mean to you? Well, for instance, my father was also a tremendous teacher in my life and really the first and foremost teacher that I had. And there was a situation that came up the other day where someone had sort of tricked me into doing a favor for them, sort of some backdoor moves and whatnot. And I ended up doing a favor for them. And I was with a colleague at the time and we both sort of realized we've been hustled a little bit. And I said, you know, my dad used to tell me, anytime, anytime you can do a favor for somebody,

do it. Just do it. Because life is long. And you never know how those things come back over time. So I think the idea of just always trying to be helpful, always trying to add value, always trying to do favors for people, always just trying to try. trying to make them glad they interacted with you somehow or another. That's a pretty good central organizing principle. And if you do that consistently day after day, month after month, year after

year, you find that the world is kind of rooting for you. And Peter Kaufman, for instance, who was a great friend of Mungers and was the editor of Poor Charlie's Almanac, he talks about the idea that the universe will do most of the work for you if you align yourself with its general principles. So I think, you know, there's 8 billion people on planet Earth. I'm only one. If I can get the other 7.999 billion to maybe not like me, but at least not hate me. That's a recipe for profound success. You mentioned your father. I want to go back to your childhood a little bit. You said earlier you had Quaker roots. I'm curious as to how that impacted you. What lessons you take away from that today? Well, the central tenet of being a Quaker

is that all people are equal before God, and everything flows from that. So, for instance, if you wanted to tie that to a specific investment decision, and this skips over a lot of intermediate steps, I remember when CarMax was starting out, which was a great investment for us for many years, and the whole principle of CarMax was selling used cars at fixed prices. Well, being a Quaker, I had seen that movie before. the old joke about Quakers in Philadelphia, and Philadelphia was kind of the center of where the Quakers came when they came to America. The old joke around Philadelphia is that the Quakers came to America to do good, and they did

well, and they became merchants by and large. So, for instance, John Wanamaker's Department Store, which was a great department store in the department store era in Philadelphia, John Wanamaker was a Quaker, and being merchants was just a fundamental aspect of what it meant to be a, you know, one of the trades that Quakers pursued. So, for instance, Macy's department store here in New York, Mr. R.H. Macy himself, I believe, was born in Nantucket Island, and there was a Quaker community there that were merchants that specialized in outfitting the whaling expeditions. So they had the supplies and equipped those ships. Well, Nantucket Island was a small place, and Mr. R.H. Macy, I think,

had some large ambitions. So he came to New York City in the 1850s. or 60s or wherever that was. And because of his heritage and background as a Quaker, he had this dry goods business, and he was willing to sell it a fixed prices. And most merchants didn't do that at the time. And because he was willing to sell anybody, a set of sheets, a set of dishes at the same price,

he was able to advertise and put those prices in the newspaper and no other merchants would do that at the time. And R.H. Macy, the chain, went for 100 plus years of a head start that all came about because Mr. R.H. Macy as a Quaker acted in a certain way as a merchant, which derived from the principle that, you know, charge somebody a higher price just because you can. You charge everybody the same price because they are equal. What I like about retailing in one way, and this is a narrow faucet of the business writ large, but you cannot be successful unless you're win-win with your customer.

You have to win, your customer has to win, the whole ecosystem sort of has to win for you to have a chance at success. Well, there's a time dimension to that. So, for instance, you can win in the short run. Now, that does not meet my definition of winning, but you can be involved in a transaction where you win. And for instance, the cycle time is a key factor in thinking about what sort of preconditions help you operate in a win-win. world. So for instance, if you're a grocer, there is a very short cycle time. I mean, people go to the grocery store every week. So your incentive to treat people fairly and price the gallon of milk and the can of beans and the stalk of celery at a fair and equitable price and

treat people well is very high because they're going to be making lifetime decisions about whether they're going to shop at your store as a regular customer over and over and over again. Getting back to the Carmack's example, one of the things that people were not completely believing that this thing would work is that the cycle time to buy a car is way, way longer than what it is to buy a gallon a mill. So you're only going to buy a car once every five, six, seven, eight years, something like that. So the way in which you were treated, you know, the car dealers, which did not have the greatest reputation in the world, there was huge incentive for them to not let you walk out of the showroom. What will it take to get you to buy this car today? And even

if that wasn't a great deal for you, they figured it would be seven or eight years before you were involved in another transaction. So therefore, they didn't have the incentives that a grocer would to think about really the net present value of a customer over a long period of time. So different businesses have different sort of natural rhythms and cadences to them that either support the notion of win-win-win architecture or diminish. that to greater or lesser degrees. I was trying to teach my kids about this. We were in Vienna and we had some of their famous cake and we stopped at basically a tourist spot.

And the cake was, I think, like, three euros. But the bottle of water we ordered was 18. And I remember, like, when the bill came, I was talking to them about this. And I'm like, how does this happen? Like, walk me through the thinking here because it's, how do you see this? Like, how can they charge 18 euros for a bottle of water? And we sort of like deduced all the way down to the fact that they're relying on, they get the tourists in with the cheap cake.

When you eat the cake, you want the water. You pay through the nose with water. But they're not looking for repeat customers. So they're not worried about win-win. They're just worried about churn and getting new people in. And I thought it was an interesting lesson for them where it's like, well, there's certain businesses where you can sort of take advantage of your customers, if you will, because you know they're less likely to be repeat customers or they're buying.

a certain experience. Well, you've explained it better than I could. You want companies that are doing things for their customers rather than to their customers. Reading, playing, learning. Stellist lenses do more than just correct your child's vision. They slow

down the progression of myopia. So your child can continue to discover all the world has to offer through their own eyes. Light the path to a brighter future with stellar lenses for myopia control. Learn more at SLOR.com and ask your family eye care professional for SLOR Stellis lenses at your child's next visit. I like that. And funny thing is, so your kids, and I don't know how old your kids are,

but your kid who doesn't have 99 years of monger's worldly wisdom accumulated, they can go either way with that, depending on the context of the rest of the values and how old they are and how mature they are. Because one logical reaction from a 12-year-old kid might be, wow, how do I set up a business like that because I can buy a bottle of water for 50 cents and sell it for 18 bucks. That's a great business. I completely want to do that. Let's talk about Markell a little bit. Markell started in 1930. You joined in 1990. How did you end up there and talk to me a little bit about the journey from then until now. You've gone through quite a bit. The 1990s, the internet bubble, the great financial crisis, COVID. Yeah, I was trying to forget a lot of those, but yeah,

You're correct. A lot of water has flowed over the dam. So it's a long story in many ways. And again, it ties back to Munger and Buffett. It was 1984 when Carol Loomis wrote that article about Buffett in Fortune. And I read that. I was relatively fresh out of school. And I got graduated from UVA in 1983. So 1984, it wasn't out very long. And I was working in a small investment firm in Richmond called Davenport. working company of Virginia, and the scales fell from my eyes in the logic and the common sense and how much sense it all made to me. And I remember, this is how little I knew, I went into the office of the head of the department. And he was a bit of a crusty fellow. And I said, hey, Joe, have you ever heard of this guy Warren Buffet? And I mean, I literally said that because I didn't know. And he said, it's Buffett, you idiot. It threw me out of his office, but I read. And by the way, our mutual friend Morgan Housel, he told me something within the last year that made me feel much better.

He said, you should never criticize someone who mispronounces a word because that means he learned about it by reading. So I appreciate Morgan's grace in understanding word mispronunciations. So starting there. So Markell went public in 1986. And luck of the draw, I was the analyst at Davenport, who was assigned to cover Markell. So I saw this company, it was going public. It was a small Richmond-based company, sort of a regional operator, had started in 1930 and operated in the area. I'd never known anything about it.

It really didn't have much of a consumer presence. But I saw the idea of a specialty insurance operation that was dedicated to making an underwriting profit. it. And Steve Markell, who's the vice chairman and really the financial guy there, he was also interested in investing the underwriting profits long term, rather than just in cash and fixed income securities, which is predominantly what most insurance companies did at the time. So I saw that, and immediately I said, that's what Buffett did with Berkshire. So it instantly, like a light bulb going off for me, became apparent that at least there was the bones there of running the exact same play and following the same approach that Buffett had done

with Berkshire. So I became insanely curious about the company, got to know Steve, bought some stock from 86 through 1990. He became a client. He became a friend, which had developed a relationship. In 1990, Markell completed the second half of a deal, which more than doubled the size of a company. So they had bought a company that was larger than what they were. Steve had been doing a lot of things. He was pretty busy, and by that time he thought he could take on a wingman. So after my four years of persistent nagging and begging, that that seemed like a good idea to him at the time. February 14th of 1990, that year, that was when Drexel Burnham went bankrupt that day. And I can remember my partner at Davenport, Mike Beale, we said, you know, if we were ever going to

buy a junk bond, this is the day we should do it. And we came to the conclusion that the most credit worthy of the tradable junk bonds that were out there was RJR. So we knew that business and we rough penciled some things out. And we thought if there was this RJR issue that were pay and kind, zero coupon bonds. And they were set by the terms of that bond. They had to be repriced in 1994 at a yield that caused them to trade at par. they were trading for about 30 cents on the dollar at that point now we penciled some stuff out and we swagged an estimate that worst comes to worse we thought they were worth 70 cents

so they're trading at 30 and i thought it was an interesting speculation to buy this well the tax law had changed pre recently to where i think tephra was the name of the tax law if you bought a deep discount bond, personally, you had accrete interest income to your taxes and pay tax on it, even though you had no cash to do it. So most individuals wouldn't buy this risky thing because they were going to have to come out of their pocket for taxes in that particular circumstance. And you really couldn't put them in iris or things like that where you take the tax angle off the table because it was too risky for something like that. So I happen to know that Steve had been part of a group, you know, with his cousins, that in essence had done a leverage

buyout of Markell from their parents. And they borrowed money to do it. So under Tafra, you could only deduct interest expense to the extent you had interest income. So I happened to know that he was building up this tax loss carry forward of non, you know, interest expense that would only be useful to him if he had interest income. So I called him up. And I said, Steve, you're like the one person in the world that this makes sense for. And those bonds were trading at 30 cents. He was intrigued by the idea. And I think by December, they had been paid off in full.

And I think the next day I was working at Markell. That's a great way to get a job. If anybody's listening, he's open to ideas. Let's fast forward to sort of 1999, 2001-ish. What was that like on the inside? Let me step into that just a little bit because there's a lot of ground. So fortunately, when I came in 1990, and again, the playbook was, we had this insurance business that, and Steve's word, specialization and diversification were the hallmarks

of what we would do. We would do, I mean, sometimes at a cocktail party, people ask me, what insurance, what kind of insurance do you all do? And I respond, if you can think of a form of insurance that you can get easily and quickly, we probably don't do that. We do the kinds of things that people say, oh, no, or where can we get coverage for fill in the blank? And we try to be creative. We have roughly a hundred different product lines run by very thoughtful people who are always trying to figure out a way to solve a customer's problems. So we think in addition to the financial capital that we put up

to honor those promises, we have intellectual capital at work. And we should be paid for the intellectual capital as well as the financial capital. And that's really where the underwriting profitability comes from. And with those pennies of underwriting profit, we're willing to invest that money with an eternal forever mindset. So my job, day one, was basically to invest that money, those pennies of underwriting profit in a long-term way. And fortunately, from 90 through 96 or something like that, the results were spectacular. And I established credibility. by putting up very good numbers for the first five, six, seven years I was there. Now, in the late 90s, that's when I would say the Internet 1.0 came along.

And I struggled. I struggled massively. And I really had the biggest period of underperformance that I've ever had in my career. And that went on, I mean, it seemed like forever. Maybe it was two, two and a half years or something like that. And I'm an accountant by training as those businesses we were coming along. I struggled to understand how things that did not appear to be profitable could sell for such prices in the marketplace and I resisted it in many ways. Now, my friend Josh Terraceoff helped me a great deal in helping to see the cash flows that were there separate and distinct from the way Gap Accounting would present them and I managed to round that corner and pivot in an appropriate way.

But 98, 99, they were miserable years. And I can remember a couple things that I think are worth noting. And this may make it to the podcast. It may end up on the cutting room floor. I get it. But two things. One, a leadership story. So Steve's office was next to mine.

And we would talk every day, all day every day. And every month we would have a formal meeting where I would print out the portfolio. And typically the pattern was, you know, triage among the top five or ten holders. which accounted for 50% of the value of the portfolio. And we would talk about those businesses, fundamentals, sales, revenues, earnings, management changes, new products, things that would seem relative to the fundamental aspects of the profitability of a business. Well, in that period where I was so grossly underperforming, in addition to talking about

the top holdings that we owned, I would talk about the top things that were in the news that were going up the most that we didn't own. And we would talk about the same sorts of aspects, the business, the sales, the revenues, the management, the products, things of that nature. And fortunately, for 18, 24 months, every month at the end of that meeting, Steve would conclude by saying, I understand what you are doing and why you're doing it, and I understand what you are not doing and why you are not doing it. See you next month.

there are times when, as my friend Shadrow would say, in the investment business, and I think this is true in business and life in general, that you either look way smarter than you really are or way dumber than you really are. So I think one of my skills as a manager is I develop deep relationship with people and I ascertain that these are good people and they are predictive. They're very good at what they do, but they can go through periods of time where it doesn't look that way. So I try to encourage them, and I try to help them think things through, recognize if they should change their mind about something. But if not, give them the psychological safety and the comfort in the environment to keep persisting at what is likely to work out very, very well in the fullness of time. So that was one of the aspects that I wanted to mention. The other thing I can remember, again, I was trying to figure out sort of what my next steps were because it seemed that the investment, world had changed and so fundamental a way that perhaps I was a dinosaur and I needed to

be thinking about something else and I thought about going to dental school. I mean, who knows? I needed to make a living. I had a family to support. So somehow or another way, became aware of this class at Northwestern, Northwestern, well-regarded academic institution, great reputation. They deserve all of it. So there was this two-week class that I signed up to take out at Northwestern to just try to think things through. And they had a variety of their professors come through and one of the professors got up and he did a discounted cash flow model and he used the gap as the example for how you how these discounted cash flow models work and I don't know if you remember it at that time but the gap was white hot I mean it was white

hot and they had this campaign about khakis and these models that would dance and swing dancing it was just it was just the it thing so this professor was was trying to to teach us about how a discounted cash flow model works and he had laid all this stuff out and he used the gap as an example. And he had these growth rates of 15 and 20 percent going for years. And I thought to myself, I said, I understand the math. I know how to do that. But those assumptions, they're just wrong. They're insane. And I sort of pressed in on him about that. And he wouldn't give an inch and just wouldn't, wouldn't process the notion that these assumptions you're making might just be wildly wrong. And I couldn't get anywhere with

them. So literally, I walked out of the class. And there was a little lounge there where they had a coffee machine and a TV. And there was a Cubs game going on. And I just sat there and watched the Cubs for a while to try to think this through of what was happening. And about five or ten minutes later another guy stumbles out of the class and he looks at me like is that guy nuts because he'd come to the same conclusion about um there's assumptions just being fundamentally flawed and i said yes so we kind of sat down and watched the cubs came together and as it turns out that guy's named john fox he's with fenimore asset management he's been a friend of mine now for 25 years and their long-term Markill shareholders and where we met was two sort of accounting slash value guys trying to figure

out what the world was like and finding confusion, but we also found each other. That's a great story. You know, any business is undervalued if you map 20% growth indefinitely. You can make numbers sing when you assume that. I want to go back to before we continue, I want to go back to something you said about talking to Steve. And one of the things, that you brought up that I think worth noting is that he didn't want to only just understand what you were doing and why you were

doing it, but he wanted to understand what you weren't doing and why you weren't doing it. And I think a lot of that gets lost today. How do you think about that? Oh, I don't think that's just lost today. I think that's a fundamental human flaw and again, getting back to Munger and Buffett as well.

When they talk about, they're asked what mistakes you've made. They said, well, there's two kinds of mistakes. This are the mistakes of commission, the things you did that you shouldn't have, but there's mistakes of omission, things you didn't do that you should have. And those tend to be way, way, way bigger than the mistakes of commission that you make. And those two have been very intellectually honest about talking about some of their substantial mistakes of omission. And omission, you don't have a spreadsheet or not. You're not tracking the world. The world, is too big. We as humans don't think in terms of opportunity cost, what didn't I do? What didn't

I choose because of what I did? I just happened to have this weird twist that somehow or another, the idea of opportunity costs landed deeply within me. And you could make my children sort of have a gag reflex anytime you bring up the idea of opportunity costs because they kept hearing at the kitchen table when they wanted to do something, the phrase, well, if we do that, What are we not going to do? And you have to make a choice. And people just don't like that. It's not fun.

So the point about being curious about the path you are not taking so that you're thoughtful about why you're not taking it is hugely important to do because there are many times in life when, in fact, you should take that path. And how are you going to know that you should change your mind or you should alter course if you're not even going to sort of incorporate that in your daily hygiene of how you think and how you process stuff. I think that's really powerful. I also think it helps you understand people.

So you were talking about sticking with people through a period of maybe underperformance, good people, and how do you know when to draw the line there? How do you know when to be like, okay, well, I have to walk away from this situation because we can't continue this indefinitely versus it's a good person with the right process, the right judgment, just a period of underperformance, which we all go through. Have you ever heard of a singer-songwriter named Todd Snyder? Never. Well, you should look him up.

There are two albums that I would encourage you to listen to start to finish. One is Todd Snyder Live, and the second one is Todd Snyder Live Return of the Storyteller. And those two albums are probably, I don't know, 10 years apart or whatever. And some of the songs are repeated. But on the first one, the first song is a song called Greencastle Blues. And every once in a while, I hear it in my head. And it's haunting. It's haunting in some ways because there's a line in there that is a refrain. And how do you know when it's too late? How do you know when it's too late? How do you know when it's too late to learn? And there do come points where you're past the point of no return. Those words exist. That sentence exists because it means something. There are points of no return. And acknowledge the point is out there and just try to be. thoughtful and aware and make a decision that you think is reasonable, rational, thoughtful, and hope for a reasonable outcome.

If you're judging yourself by the outcome in the short run, you're going to make more mistakes than you otherwise would. You should have some sensation of the process and doing the right sort of process, which, again, is that discipline of just being thoughtful about things. That, I think, is going to be the best you're going to get. So there isn't a single point of answering that question. And I think in general, in general, you should make the error of staying with people too long, giving them a longer leash and letting them play out their hand as much as is humanly possible. Because when you live in a positive environment like this, and I think of my own parents and the unconditional love that I received as a child growing up under the fortunate circumstances that I grew up in,

That allowed me to flourish. Now, some people, there are going to be people in your life who you will offer that go positive, go first, and they will not reciprocate. But then you'll know, and the cumulative effect of just operating with that general mindset and doing it consistently over and over again, you're going to stumble upon people who will love you forever. And if you find one or two or three or seven or a hundred people like that in the course of your life, just because you operate that, way, that is so much better a life than always being suspicious and concerned and worried that somebody's going to get the better end of a deal on you or whatnot. Let it go. It doesn't matter.

Somebody gets a better end of a deal with you. Okay? They did it one time. Now, if you deal with them over and over and over again, that's your mistake, not theirs. It's interesting. I'm a highly trusting person by default with people, and I like to think of it. I trust people by default, not 50%, but like 80, 80%. I'm not going to give you my bank account information, but, and I find that it creates

velocity over time, and I save a lot of time, but not having to worry about legal contracts and every certain clause or how people might take advantage of it. And occasionally it backfires, but I don't want to change the way that I am for those very few instances where it backfires. As long as I limit my downside and it can't kill me, then it sort of works out overall. Indeed so. And for instance, I think one of the great analogies for that. is marriage. I've been married 42 years now. It's a wonderful thing. I've never really looked at

the marriage license. Yeah. That's a great way to look at it. You mentioned sort of not focusing on the outcome and focusing on the process. I want to explore that a little bit because one thing that's interesting to me is that we do tend to gravitate towards wanting an outcome. And by wanting that outcome, we actually don't focus on the process. But if we focus on the process, we might end up with 10 or 15 different outcomes that would all be good because we're not worried about the gap between where we are and where we want to go. We're just worried about what's the next logical step that we can take. I'm wondering how you operate. Well, there's nuance to that. So, for instance, there's another wonderful book called Thinking in Betts by Annie Duke. I don't know if you've

read that one. I think that's a great book. And it casts things in probabilistic terms. So, And it's all about process. And it's within the realm of playing poker, which was her well-known skill. But it also has a lot of stuff in there about insurance. So it gets a lot of traction with me. She uses the phrase resulting. So you can look at a hand that you won and you think, well, I won. So I must have played that well.

Well, not necessarily. You may or you may not have. What was your process? How did you think? What was your calculation of the odds along the way? you played that ant. And if you're playing poker and you're playing thousands upon thousands upon thousands of hands, which are under relatively constrained conditions, if your process is sound over time, you will have good outcomes. You'll mean you'll win more than you lose,

but that's driven by the fact that you have good process and you're able to do it a thousand times. Buffett famously talks about coin flips and the language of coin flips and a coin flip in your honor in your favor where the odds are in your favor. Well, that's true. it's a great example, but it's not a great example if you only flip a coin once. It's when you flip a coin a hundred times or a thousand times or a million times that the odds of whatever it is that you set out manifest themselves and just crush everything else. So you just have to play the odds again and be willing to think long term and operate. I mean, you talk about trusting. I think that's exactly right. I try to operate in the same way. You can't do that

with stakes that are too high. You need to have appropriately sized stakes and bets and decisions along the way. And they can increase over time as you develop a relationship of trust with people. But it's all nuance and process and trying not to be stupid. 100%. You're not going to go all in with somebody on day one. Well, let's go back. So the internet bubble sort of burst.

I think it was March 2001. Is that right? That is exactly right. And here's another case where sort of luck serendipity process all combined to create, as monger would say, a lalapalooza outcome. So we were involved in a transaction where, again, we bought a company that was larger than what we were. And that was Tera Nova. It caused us to move from being a U.S.-based national insurer to an international company. And we were negotiated a deal right in the midst of all of that in early 2000.

2001. I believe the deal closed on March 1. Now, March 9th, I think, was the day that the NASDAQ topped. I remember that because, among other things, March 9th is my wife's birthday. So it's a meaningful date to me. And within 20 minutes of me getting my hands on that portfolio, I had sold 99% of the equity positions because in my sense, they had drunk the Kool-Aid and had a NASDAQ laden. portfolio at a time when those prices just made no sense to me whatsoever. So on the on the day of closing, we which was March first, which was March first. So by a week that that decision saved us, I don't know, hundreds of millions of dollars. And it put us in a good financial position to work the process of turning around Taranova, which was a trouble common name. We knew that. But fortunately, we made a very good instantaneous decision, which had some skill and some luck about it. I don't claim prescience. I just claimed that I knew I didn't want to own those things that they owned. And normally, I tend to be incremental and take step by step by step. But every once

and a while, I am capable of dramatic action as well, which again gets back to the munger thoughts that are drifting through us right now. I mean, he talks about sort of in 60-70 years. of investing. There were half a dozen times in his life that he felt very compelled about a certain thing and took a huge swing at it. And that made all the difference. So that was one of his skills and one of the things he was able to do several times during the course of his career. I don't do that very often, but that was one time when I did and it worked out. That's an incredible story. And the timing there is so apt. And then you also had a lot of cash for the... That is correct. Which which, which

put me back in the good graces of Steve and the rest of the Markell Board because, you know, getting through that period of time proved itself to be the right way to go. And that actually connects to, it was 07. So I was, I was invited and asked to consider going to the board of the Washington Post coming at that time. And Don Graham, the chairman and CEO of the Post, reached out to me and we chatted and he had understood through my friend Chris Davis who was on the board and perhaps Buffett as well, who knew of Markell and knew of us, that we had navigated that period in financial history relatively well. So Don and I were chatting. And so Don then asked me as part of their consideration of me potentially being a candidate to join

that board, would I share with them some of the memos that I had written to our board, board real time during 98, 99, 2000, 2001, so five years where they could see what the logic and decision process were in real time rather than in retrospect. So I gathered some of those memos together and sent them off. And I had never been more nervous about being graded on an English exam than I had in my whole life because here I'm sending this packet of letters that I'd written over those years to Don Graham, to Warren Buffett, to Ron Olson, to Barry Diller, to Melinda Gates. I mean, the all-star nature of that board was just stunning to me, and it came back that

they were indeed interested. So that was tied to the steps and the process and the action I had taken through a multiple year period, which led to me going on that board and meeting those people and developing relationships and the ongoing sort of just consequences and waves that keep rolling on the beach from from things that I did 10, 15, 20, 25 years ago, I mean, they still reverberate to this day. I think that's a really good way to look at things because like if you operate with integrity and you operate in a win-win way and you go positive and you go first, you create a snowball and even though you can't see the results immediately, they do come. And sometimes it takes 10 or 15 years

for that reverberation to sort of come to fruition. And by the way, that's the title of Alice Schroeder's book about Buffett, Snowball. And with exactly that concept. And obviously, you just wanted a snowball with some wet snow and a long hill. How important are those memos for you to clarify your thinking process and clarify your understanding? They're extraordinarily important. And our annual letter that I've written, you know, Steve was the one who wrote those letters from 86 through, I don't know, 2000 to four or five something like that and I was this editor for a while and then I took the

responsibility for writing them as I have for the last 15 20 years I think by writing I need to write it down and I almost feel like a pianist at a keyboard where and I can't write by hand anymore I've lost the skill of doing that on a yellow pad like I used to but to sit at the at the keyboard and right is really how I form my thoughts. I want to come back to Markell and just continue on this path to the present day. Let's fast forward to six months before what is known as the Great Financial Crisis. What are the, what are your memories of sort of the conversations you're having inside of Markell? What you're thinking? Did you anticipate this happening? Yeah, walk me through that. Well, I mentioned my partner, Mike Eaton, Mike has a great saying. He says, you know what it feels

like when you're making a mistake? Feels great. If it didn't feel good, you wouldn't be doing it. So when I think about 06 or 7 or times that led up to the great financial crisis, I was making mistakes. I was absolutely doing that. And I can remember, for instance, we were not large shareholders of Citigorp, but we did own some. And maybe our cost. and it was 50 bucks, and it was seven times earnings and yielding 5% or something like that. The numbers seemed rather compelling. And there's always a turnaround story at City that if you believe this time is the time it's really going to all work, it's always selling it a compelling valuation.

So we own some city. And as the crisis began to develop, I think, at 26, I sold the entire position. And I can just remember feeling horrible about that. But I also remember the feeling of we're in this storm, and I just don't know the dimensions of this storm. And this storm can get worse. So as painful as it is to me to take this loss, which was manageable and inside the context of a portfolio. But just I hate losing, and that was clearly a loss, I decided to sell it. Now, that proved to be a pretty darn good decision because it went a long.

lot lower before it stopped going down so until like one yeah exactly so 20 26 was a painful sale but it was it was the right decision so that that is an example of part of the you know memory of your face being ripped off in the financial crisis now at the same time there were some positives that that I felt and these were emotional aspect so for instance being in the insurance business as compared to being in the banking business is a meaningfully better position to be in because you can't have a run on the bank in the insurance business in the way that you know if your deposit or say I want my money you have to give it to them and you have to give it to them on pretty short notice it doesn't matter what bank you

it doesn't matter exactly right in the insurance business you know we've sold an insurance policy against an auto accident or a house fire or life being lost so unless you you have those triggering events you generally speaking are pretty limited and say I want my money i.e. the premiums back. You can't just do that because you've lost confidence. So an insurance business is both typically much less levered. It has much more equity capital relative to the size of the total balance sheet than would be the case in banking. And it is not subject to the same run on the bank risk. So I felt very good about being in the insurance business. And then I felt confident in the cash flows that we had, which were the way in which we could navigate through the storm.

we don't tend to make good decisions when we're emotional. And going through a crisis or a panic, we all tend to be fairly emotional. Do you have rules around selling or how do you deal with your emotions in these moments? Well, generally, I'm a pretty methodical person, both in the buying and the selling. So it's fairly dramatic when I would make big decisions rather than a series of small incremental decisions. So in general, I think I'm somewhat protected by the history and the pattern of making small incremental decisions towards a better spot than what I believe I'm in right now. In terms of the big decisions, well, don't make too many of them. So, yeah, I can talk about a couple instances of making some big decisions, some of which have worked out, some of which have not worked out so well. But in general, being an incrementalist, I think is pretty helpful.

Secondly, take a walk, take some time. Don't feel like you need to do everything immediately, slow down. It's almost like watching those Bruce Lee movies where the action seems to slow as he's making the steps and things get slow motion in your mind that that's helpful i don't think there are good rules i think there are processes that and habits and disciplines that you follow consistently over years and those will serve you well in times of need what are the lessons you took away from the great financial crisis that you took away for yourself but you think other people miss or forgotten well the number one piece is is is

the dimensions of leverage and we all use some leverage of one sort or another in our lives and leverage used positively but it's the lever it's it's a was it Archimedes that had the give me a long enough lever and a fulcrum and I can move the world I'm butchering that quote but the sense of the power of a lever that's a that's a fundamental aspect of civilization but too much leverage and being on the wrong end of a lever can wipe you out so to try to have awareness of what levels of leverage you're operating with in your life and doing the very, very best you can to keep them constrained and within the bounds of where you can be wrong

and still answer the bell for the next round of the fight and persisting in being durable. Again, one of the reasons we're talking about Charlie Munger today is because he lived 99 years. and many of the things that he talked about and the disciplines he followed had a long enough time to play out that we can see he was obviously right he was obviously brilliant well there were a lot of people who encountered charlie munger at age 37 or 52 or 29 or 60 who didn't just write up a check for all the money they had why because at that moment in time it was not as obvious as

as it is today, that the stuff he was saying was right. So being able to last through difficult episodes and still be in the game is apically important. And that's one of the things a long, successful life will show you. Let's talk about Dad, because I think that's an interesting area to go on a little rabbit hole here. And I want to talk about your thoughts on Dad, how to unwind it. You learned a lesson from, I think it was Shelby Davis around that.

Would you share that with this? Well, it was in the early days of Markell Ventures. So Markell obviously started out as an insurance company. It had always been willing to invest in equity securities and be long term. But the next logical step, when you're investing in equity securities and you're doing it from the perspective of what is the underlying business is involved, instead of just buying a partial interest in that business through the purchase of, publicly traded shares, how about we buy a majority of it or all of it? And there were people who were rightly concerned about what it is we knew and what skills we had when we were buying controlling interest in companies that weren't in the insurance business. So Shelby Davis

was a wonderful, and is a wonderful teacher and mentor and helped me in many ways along the way. and I can remember in the early days having a conversation with about the Markell Venture's business with him. And he very quickly and succinctly put his finger right on it. He says, you know, if you want to make sure you're not buying a business run by a crook, buy one that doesn't use leverage. And so I said, tell me about this. He says, well, think about it. If you're, if you're a hundred percent equity financed, you are not going to steal money from that business because it's your own money. Crooks don't want to steal their own money. They want to steal somebody else's money. So when you have a structure that has a lot of leverage to it, that is

not a statement that that person is a crook, but it is a statement that conditions exist in which a crook would operate. Whereas if you have a business that's largely equity financed and it's the person's own capital involved, you have greatly reduced the conditions and the circumstances and the circumstances that it would allow a person who is not of integrity to take advantage of that situation. So it's, it's not just the finances, it's the character indication and the, and the till that you get into somebody's internal wiring from the fact that they operate with no debt or very, very low leverage compared to somebody who operates with a lot of leverage. You've looked at tens of thousands of companies over the years, all their financial statements,

Does that become an addiction that people don't walk away from? Yeah, I think it does. And again, there's an adrenaline rush. I mean, addictions happen because there's a moment of positive reinforcement. I mean, you won the bet. Your horse won. You won your football team won. You hit the slot, whatever.

So there's a dopamine reinforcement and hit that you get from winning, and it's a disproportionate size. It's an outsized return relative to the equity capital that you, that you laid out there. So, yeah, that sounds like a fundamentally important component of addictive type substances. And I think people get hooked on the adrenaline of that. I mean, the phrase deal junkies. And I can think of companies that are run by CEOs that just always seem to be doing the next deal or that's what gets them going and motivates them. And it's important to have some of that drive, but it needs to be balanced. And again, in the right dosage.

So what differentiates somebody from, like a Mark Leonard from somebody else who does a lot of deals? And how do you think about that in terms of debt, leverage, fragility? Well, you know, Mark Leonard is a great example. Someone who's incredibly thoughtful who's laid out a plant. And you have decades of evidence that he's executed upon it. So that is a guy who has earned the confidence that the marketplace places in him. And also he's in a kind of clastic enough gentleman that you get the sensation that he's really not driven by the approval of others quite so much. He is a self-motivated, independent, autonomous thinker.

And you don't just have to suspect that it's going to be the case because you're looking at a 14-year-old kid. You're looking at somebody who has done it for decades. And again, to your point about having looked at a lot of businesses and talk to a lot of people, that in and of itself becomes a framework. reference for how you make the judgment about the next person that you meet. Do you ever drink wine? Yes. Do you like the Parker wine ratings? You know, you go in a wine shop and you see something 89, 92, whatever.

Well, it's my understanding, and I'm sure you should probably fact check me on this because it's a great story. And I'd like to think it's true, but I do not know that people personally, so I can't verify it. But it's my understanding that Robert Parker was an attorney. and he just liked wine and his friends were impressed with the fact that he seemed to be accumulating this knowledge about wine and was thoughtful. So he started the rating system basically as a means of communicating with his friends and compared this wine to that wine and like this one a little better than that one and assign the points rating and certain phrases and language that came to be used as the currency for how you discuss wine. And it's a frame of reference kind of exercise.

So that's the point about meeting a lot of people and looking at a lot of businesses is you develop this lifelong inventory of frames of reference and points of comparison to judge the next thing that you're looking at. And again, Munger, the lattice work of models and all these multidisciplinary things such that anything you come across, you should have some mental construct in your mind by which to judge the next thing you come across. Can you take the other side of the debt argument? When does it make a lot of sense?

When should a company go all in? When should debt be used? Well, I'll tell you a story about this. And this probably goes back 15 years or so again. And I can remember one day coming in the office and my normal routine is drink a cup of coffee and read a set of newspapers, one of which is the Wall Street Journal. And there was this article in the Wall Street Journal

about the Walt Disney company that had just issued a hundred-year debt, and I think it was at five-and-five-eighths. And I saw that, and I said, oh, man, I'll bet that they're refinancing something that was a hundred-year debt at five-and-seven-eight's that had a five-year call. And I just instantaneously had that thought. And as I dug into it, that was almost exactly what they were doing. So if you're Walt Disney and you can issue a hundred-year debt at those kinds of rates, use all the debt that they will give you because really while the label is debt, that's fixed cost equity. So the labels don't always describe exactly what's going on. So next step is I went in to our chief financial officer at the time. And I said, you need to call our bankers and see if we can issue

anything like this. And he sort of scoffed at me and whatnot. And I said, no, no, you really need to chase this down. So he did. And he called our bankers and our banker said, well, you know, Walt Disney is a consumer name. It's very well-known. And Markell, nobody's ever heard of Markell. Half the time they pronounce it Markel. So you guys can't issue something like that. So I sort of walked away and little pouty as I can be. And at that time, there was a company called Eskimo Pie, which makes the chocolate-covered desserts. And it had been owned by Reynolds Metals, which was the aluminum company that was headquartered in Richmond. Reynolds had gotten a hold of that company because Eskimo Pies are packed in a foil wrapper.

And at one point in time, they couldn't pay their bill. And it ended up as part of Reynolds. It was not really a natural part of rentals. So they spun it out. And it was this public company that had a market cap of maybe $20 million to it. So I went back to our CFO and I said, here's what we should do. We should buy Eskimo Pie and change the name of Markell to Eskimo Pie. And then we can call people up and say, hey, you want to Eskimo Pie?

Eskimo Pie bond? Who could say no to wanting an Eskimo Pie? Now, needless to say, that was one of those ideas that I walk around the hall with that did not get executed upon. But to the point about debt, and we've seen issuances, I mean, the last five or ten years where we've lived through this unbelievable episode of extraordinarily low interest rates, putting 30, 50, 100-year debt on the books at those kinds of rates, like my children. They have 30-year mortgages in the twos. That's a good piece of debt to have. So that makes a lot of sense.

There's a lot of companies that didn't do that there. They didn't take a long duration at what would historically be exceptionally low rates. The U.S. government also didn't do the same thing. They didn't issue a lot of long duration debt. They issued a lot of short-term duration debt. How do you think about sort of debt and time? The answer to your question writ large of people who did not hit the bid of the ability to issue long-term fixed-rate debt, there was a trade-off where they were looking at even lower short-term costs and they just operated under the assumption that you'd always be able to refinance the loan at a lower rate when it rolled over. And for a whole generation, that has been true.

So the idea, and I've been way early on this, 10 years ago, I thought rates were starting to get too low and would have pushed out our maturities, whatnot. Well, tactically, that would have been labeled as a mistake. Now, it might well come to be seen that that was just too early. And the DMZ between too early and wrong is a gray, murky area. So we'll see. But I think that the environment we've just lived through of essentially zero percent rates, that's just weird. There's no fundamental justification for that. And I think we'll look back on it as just a very unusual episode, but we'll be looking back on it.

We will not be living through it again for a long time. I often think short-term optimal is rarely, long-term optimal, but you have to opt out and be willing to look like an idiot to play a long-term game in a short-term world. How do we learn or how do we teach people to think long-term in a way that makes sense? Like, how would you go about teaching somebody to think? Well, one of the ways that you do that is you say extreme things and reductio at absurdum. He reduced things to an absurd level. So for instance, Munger, I believe one of the times, he says, you want two great weeks in your life, start taking heroin. Now, they have two great weeks, but you'll ruin your life. But some people

do. And some people literally do that. And some people in a sort of meta way do that. So you're constantly faced with that choice of taking a short-term gain at the expense of the long-term, or trading, it's deferred gratification. It's the marshmallow test. These are not complicated topics. They are a matter of disciplined, thoughtfulness, common sense, long-term perspective. Now, that being said, you know, it's easy for me just to say these kinds of things because my life is good.

I'm gainfully employed. I'm happily married. I was raised in nuclear family. I mean, just an advantage, great education, advantage after advantage. advantage after advantage after advantage. And I can remember at one point, my oldest daughter is a lawyer, and she was essentially practicing as a public defender kind of practice. And she had done that for a number of years, seven or eight years.

And it was time to make a change and do something else because she was a very empathetic person, very caring and very involved in very difficult circumstances day after day after day. And a human being can only take so much of that. So it was her last day. And I decided to celebrate by taking her out to lunch. And so we go out to lunch and we're a very lovely place and looking out over some beautiful Green Hills in Richmond. And I asked her about her last case. And she told me, and she said, well, this guy went into the Waffle House and he ordered a meal. And he had the meal. And when it came time to pay for it, he paid it with monopoly money. And I thought, you know, was the guy stupid or a jerk or trying to play junk. And she says, Daddy, he was poor. He was poor. And he was

hungry. And she says, my clients are Zen masters of the right now. There is no past. There is no future. He was hungry. He knew if he went into a waffle house and spoke the words of a meal, they would bring it to him. And the consequences of what happened when it came time to pay for that meal were irrelevant to him because he was hungry. That stopped to be cold. And again, opened up a new area of things one should have empathy for and empathy about for people who are in circumstances that are less lovely than my own. But I have been given the gifts of being able to afford to think long term. So it would be irresponsible of me not to. But I don't want to cast judgment on those who are in a position where they don't have that same luxury that I have.

It strikes me as one of the differences between people who consistently get better results than other people is that they're almost never in a position where circumstances are thinking for them and they're able to master their circumstances. They're always in a position where they have good options. They're always in a position where almost any choice they make is a net positive, whereas the inverse of that, when you're your circumstances force your decision, you're forced to sell your house because you can't afford the interest rates or you're forced into doing something. All your options are bad. You put Warren Buffett in that situation. He's not going to make a great decision. The difference is certain people tend to avoid those situations through luck and through design. I'm wondering how you think about positioning and how you design it within Markell so that you always have

optionality to the upside and rarely to the downside. You're making a spectacular point here. So by every single daily decision, I'm always trying to avoid exactly what you spoke of where you're in such a limited set of options that the circumstances make the decision for you. I hate that and trying to do every single thing I can to avoid that. So what that means is low leverage. And what that means is not being at a point where you're faced with a very difficult decision and you really don't have many options or hold cards to go to. So everything is designed to not have to be in that circumstance, both for Markell and personally. I think that's a hyper underrated, underappreciated, and almost never talked about aspects. Yes, it's also because it's that

opportunity cost. It's the thing you're not doing. So one of my friends talked to about value investors always get the last laugh, but they miss a lot of laughs in the interim. So when the party's rocket and rolling and you're sort of looking at your watch and saying, you know, we better get out of here before the consequences start to show up, you're leaving the party at a suboptimal time because the optimal time to do it would be, you know, one second before the police show up. My wife is an engineer and I have a lot of friends who are engineer and engineering mindset. And the engineering mindset of optimization is a great thing up to a certain point. There's the point of satisfaction rather than optimization. And I am a

satisfier, not an optimizer. I'm not smart enough or disciplined enough or calculating enough to really be a good optimizer. So I try to move from satisfaction to satisfaction to satisfaction to satisfaction and to last long enough where that compounding effect of always being on the field, always being in the game, has created this wonderful compound effect because, again, as Munger said, any number no matter how big multiply by zero is zero. But it is so tempting to be at the moment where you're making bigger and bigger numbers and you're minimizing the risk of zeroing out because, that's not what's happening right now. What is happening right now is you're making that number

super big and that's super fun. Who wouldn't want to do that? Well, the person who wouldn't want to do that is that person who's at the party and instead of completely falling into the joy of the party is looking at their watch and thinking, you know, we might want to make a different decision right now. And again, Munger's discipline of thinking backwards, inverting, always inverting, always working with the end in mind. That's just a fundamental component of the way I'm wired. I think one of the hardest aspects of that is in order to do that, you almost have to look like an idiot in the short term to be successful in the long term. And that becomes hard. And three aspects immediately come to mind. Financially, you have to be willing or able to withstand that

emotionally. Psychologically, you have to be willing to withstand doing something that not everybody else is doing and have them maybe point at you and laugh at you. And environmentally, you have to be in a situation where you have stability and it's not going to jeopardize that. It's exactly right. I find immense joy in being on the team of people that I'm with at Markell. And it really feels like a team sport to me. And among the things I've read and really studied and tried to internalize like everything that John wouldn't ever wrote, the UCLA coach. I'm currently infatuated with Nebraska volleyball, and I went to a Nebraska volleyball game a couple of weeks ago.

And when you see a game like that unfold, and you see the team aspect of the play, the positioning, the constant communication while the ball is in the air, the Libero, who is five foot two among all these six footers, because her job is to dive to the floor, to get that ball up to her team. To just see a team on display like that fascinates me. And I love that aspect of sports.

And I really feel that within the walls of Markell with my teammates who are so skilled at the positions they're in. And I get to be the head coach is not exactly on point. And I'm not the one hitting that ball. But I do get to be the coach of that team. And that's just a very joyful thing. And I think one of the reasons that matters so much to me is that as a kid, I was never on a team. I mean, I grew up on a farm, 100 acres, rural area. It just logistically was

not the sort of thing where I could play team sports. So that was a gaping hole in my youth that somehow as a full-grown adult, I get to have that sensation that I didn't get to have as a kid. And I love it. And that team aspect and the ability of a team to do things, just a very joyful thing. And that helps you endure. the idea of, you know, being the kid who's picked last or not on the team, the social isolation and distancing that it takes to have that long-term view and stand apart from what the crowd might be saying, perhaps some of that comes from these youthful experiences that give me a frame of reference to know, I can endure this, and I love that, and both of them

are temporary. Sometimes you're on your own. Sometimes you're with their team. Be aware of it and be able to operate in either environment. I think it's easier to stand and do something different within a team because you still, you're doing something different with your tribe and then you're not alone anymore. It is harder when you're alone. And, you know, if you're a reverent like munger, it, you know, seemingly seems easy to him. But Charlie was a very social person. Oh, totally, yeah.

And I was, you know, had the great gift of being able to have some dinners with him. the way. And for instance, in my house right now, if you walk in, there will be a bottle of Santa Margarita Pinot Grigio wine. And there will always be a bottle of that in my house because the first time I got to have dinner with him, it was with my friend Chris Davis and myself and Charlie. And we ate at a restaurant and we sit down and the waiter comes over asking us if we want something to drink. And of course, Charlie says, Yes. And he says, just bring us a bottle of the cheapest white wine you have. It'll be fine. And it was a nice enough restaurant that you do the base rate of whatever kind of wine they had. It would be fine. And it was a bottle of that Santa Margarita, Pinocrigio. So I always have that as a marker in a testament and mass. So despite the legendary, iconoclassic nature of munger, believe me, the man liked people. He liked being with people. He liked eating and drinking and laughing and telling stories and telling jokes. So he drew sustenance from his fellow human being, just like the rest of us do.

I want to get to present day here and then go on to some other topics. So fast forward from the great financial crisis to January 2020. Walk me through the next six months. January 2020 was when things were just starting to unfold. And you saw, all this news of things that were happening in China, but not Richmond, Virginia. And slowly, the encroachment of COVID came closer and closer, such that by the time March came around, though I was actually scheduled to go on a trip to Vietnam, which would have left the U.S. in late February and come back in early March and kept sort of of going back and forth, and we would go, not go, and finally decided to scrub and not go,

and the group trip got canceled and everything. But that was a game time decision, and that wasn't until the end of February, and things getting shut down. I think it was March 13th, where I think that was a Friday, and that's in Virginia when things kind of shut down. Early in the day, in March night, I got a call, and it was from. someone who I would label appropriately as a senior government official and he wanted to have dinner with me and that was the kind of call if that person calls you and wants to have dinner you say yes

so so I said yes and we arranged in particular meeting places is March 9th I'll remember this for the rest of my life and I got there first it was a restaurant and he comes in and he has this hand extended to shake my hand so March 9th a senior government official who was in a position to know a lot of stuff that I didn't know that would receive briefings and things, walks into a restaurant and shakes my hand. That was the last hand I shook for probably two years. And a number of things.

One, if that guy on March 9th was willing to shake my hands, that means that nobody knows anything. The amount of stuff that no one really can be capable of knowing is immense. So don't take anything too seriously when it's told to you by people who are supposedly authoritative because they don't know. And you need to have some degree of filter skepticism about the level of knowledge that somebody actually has when they're asserting something. By the end of that week, things were shut down. You weren't supposed to go out. And it was just a miserable time.

Like Charlie, I too am a social person. I like being with people and the isolation that was enforced through that time has immense social costs. And I don't want to second guess the decisions that people made in good faith and to the best of their ability. But I also think in the sense of opportunity costs and mistakes of omission, we have not admitted to ourselves what mistakes we made through the period of COVID, educational gaps, social development, people's mental health. that suffered because of isolation. So all that stuff was going on. Financially, we get to the end of March. It's the end of our first quarter.

We have our normal review processes. One of the biggest hits that we took in our insurance business at that particular time was event cancellation insurance. So the underwriter who would run our event cancellation book is doing things like Wimbledon in England, the Tokyo Olympics, a wine festival in Napa. music festival in Tennessee, a fiddler's convention in Kentucky. I mean, weddings all over. It was a well-diversified book of business, but the losses on it were complete and total. So it didn't matter. You used an underwriter, thought you were doing a good job because you were diversified, and how could all these risks correlate to one thing? Well, we found out how they could all correlate to one thing, a worldwide global pandemic. So we had big losses in that particular book

business that we recognized in that quarter, as well as many other things. And we reported a 118, that quarter, which is the worst quarter that I think has ever been reported in the history of the Markell organization. And we were operating amidst conditions of uncertainty. So it was not a fun time. And as a consequence of that 118 that we put up, I did take about 20% of our equity portfolio chips off the table and sold some positions. Just because, again, My number one job is to make sure we are always there to answer the bell for the next round of the fight. So I reduced some of our equity exposure as a consequence of what I saw taking place on our insurance business at that particular time. In retrospect, that was not optimally timed.

And there are some things that I wish I hadn't sold as we continue to go down the road. But at the same time, I did fortify our balance sheet and operated from a position of safety. So it wasn't fun, but it was the right thing to do. And confronted with the same facts and circumstances in real time again, I would do the exact same thing. And if you want to see a movie that would sort of illustrate, and I'm not claiming this amount of glory or involvement, but that Tom Hanks movie Sully where the pilot lands the plane in LaGuardia. And he was second guest in the hearings, is why didn't you go to Tieter? bro? Well, the decisions he had to make in real time with no possibility of turning back,

they were outstanding. They were unbelievable. They can always be second-guessed, but you really shouldn't do that. So it just was a period that was no fun. I hope you don't second-guess yourself. I mean, if we go back to what we knew at the time, right, like it's so important that we don't apply today's knowledge to what we knew at that time, I remember, you know, taking a lot of chips off the table too because I'm like, I just don't know what's going to happen. I remember going to the bank and getting access to cash. I remember stocking up on food.

I remember doing a whole bunch of things that I actually stocked up on food in February, which my kids were like, what are you doing? Why is our dining room table? I'm like, you never know what's going to happen, right? This is like, you think of opportunity costs. I spend a couple hundred bucks now. I get a lot of rice and beans. And, you know, if the world shuts down, we can eat for a while.

I don't know what's going to happen. And because I don't know, I want to position myself to survive multiple possible futures. You want to satisfy rather than optimize. Yeah, totally. And it was a good lesson for them because they thought it was crazy. And then the world shuts down. And then to your point about thinking independently, I think there's a huge aspect of that. And I do think people made the best intention decisions.

But the one thing that bothers me from somebody who me violated the law on a regular basis during this in Canada, because I had a bubble of people that was more than two households. And, you know, we had a teacher involved and we had all these other things involved. And, you know, I had neighbors threatened to call the cops on me. And we've never looked back and actually said, hey, you know, our bad, we had the best of intentions. you know, maybe it didn't work out the way we anticipated. Here's what we would do differently next time. And I think that that has caused a lack of trust. So if this ever happened again, I think there would, and it might even be more serious next time.

And the problem will be because you don't look at your mistakes honestly and objectively, that nobody's going to believe or they're going to hesitate to believe you next time. And that lack of trust is the most concerning thing for me as a citizen in the world, is if people can't trust the authorities, quote, unquote, and you still have to exercise independent judgment and independent thinking. But if you can't have a baseline of trust in institutions, it becomes really hard to operate in the world. Well, if you don't have a baseline of trust in institutions,

what that means is you have no institutions. Yeah. You have no institutional authority or legitimacy. And that is not a world you want to live in. How do you think about risk? I think Peter Bernstein defined risk is more things can happen than do happen. And I think that's a great definition of risk. So the thing is, you should think about that all the time.

So just this past week, I was in Florida, and I was traveling with two colleagues. And it was bizarre. In South Florida is its own world and ecosystem. And we were in a rental car. And we were stopped at a particular spot. We were about to park the car. and this other car comes up and literally rubs the side of our car and hits us and it's a slow-sounding crunch as this guy in this big oversized vehicle just sort of crunched us and kept on going.

So I'm in the back seat and one of my colleagues is at the wheel and he's about to get out and sort of confront the guy who just in a slow motion crushed us. Well, I said, let it go. let it go. What is the upside of dealing with? This is a rental car. If it costs money to fix it, we have it. We're going to be okay. If that guy has a gun, this is not going to end well. And it's not worth the damage to the bumper that that guy just inflicted. So we had three people in the car who would process it differently. But that was my immediate reaction. So there's an example of how I think about risk. In that situation, I was looking at the certain cost of what it was going to cost to get that

car fixed versus the uncertainty of who knows who's in that car in front of us and why he behaved in a completely bizarre manner. What other bizarre behaviors is he capable of? Or you can anticipate. Exactly. So there's an example of real life risk, and we've laughed about it since, but that's just kind of embedded within me. I'd love for you to go deeper about risk and maybe offer a few more stories or, you,

a few more things that have really shaped your view on it? Well, for instance, we live in a world of cyber risk. And among the things that we would do at Markell to deal with cyber risks, we're trying to be disciplined. We have appropriate cyber professionals who are trying to do their very best to keep us safe and protect us. But also, you know, we have 20 different businesses in addition to the insurance business. All the businesses within the Markell group operate authorize.

autonomously and their IT systems are autonomous and by not unifying them or not linking them, you've created some level of safety, some level of risk mitigation by virtue of the fact that you've had these things operate autonomously. And that would be a part of my thinking as to why autonomy is a good idea is because you create some fragility. when you centralize things. So there's a lot of things we centralize, but some things we don't. And one of the factors we think about is,

does this increase or decrease risk to centralize it or leave it independently operated? If every business unit operates autonomously, how do you compensate the CEOs of those units so that they're rowing for one, Markell? Well, the basic architecture involved in, everybody's compensation, and glee to my own, is multi-year. So, for instance, I'm personally compensated over a five-year rolling average for any incentive

compensation. And while the specifics will be different for the CEOs of the different businesses, none of them are compensated heavily on any one-year's results. So if you extend time horizons, you get directionally correct information about what's really going on. And what you're really trying to do is foster the mindset. of an owner, an ownership mentality in people running these businesses. And again, back to my own example, I've been in Markell 33 years now. Well, any given year, my paycheck is calculated on

the last five years. But it's sort of irrelevant to me in the sense that I've always been at Markell. I always planned to be at Markell. So I was not a, I don't have Markle blood. I didn't marry a Markell. But I think of myself as a member of the Markell family and a steward of the organization because it is defined by professional career. And so I want incentive systems that, in essence, mirror and foster that sort of mindset as much as possible. Some people love that and they're comfortable with it. And that's naturally how they want to operate. And some people chaf and are not happy with it. And generally speaking, those people tend to not be long-term people at Markell, whereas those who sort of get it and understand it. And

it's consistent with the way they would behave if they were anywhere and they were running their own business. They do fine at Markell, and they're happy with that kind of mentality and way of doing things. Are they compensated on their own individual unit, and how are they tied to Markell? Is that compensation tied to Markell shares or? It's a bit of a hybrid. So, for instance, myself would be Markell as a whole, which is appropriate. I'm the CEO of the whole thing. So it all matters with different people individually.

The number that year might indeed be tied almost exclusively to their business unit. But to the extent they start to accumulate wealth in the form of Markell's shares, then they become more and more tied to the fortunes of the whole group over time. When you make decisions, there's a quantitative and qualitative aspect to them. I'm wondering what qualitative aspects do you tend to find the most difficult or the mistakes that you tend to make over and over again that are hard to catch? I think Buffett told a story once about a time, but the person who's going to really fool him and be able to swindle him out of some money is going to be a guy, you know, driving a used car, wearing khaki pads, being very modest and humble in his bearing in ways. but at the same time, just be stealing his wallet without Buffett noticing. I would be subject to the same sort of social influence.

So my habits tend to be relatively frugal and modest and not flashy. So somebody who's flashy and not modest and not frugal, that sets off some red flags that caused me to be a little more vigilant and hyper than it otherwise would be. somebody trying to fool me would engage in the kind of behaviors that I feel more comfortable with and maybe my guard would be down because these markers tell me that that's fine when a point of fact it's not and that's also when the people around you can see and alert you to a blind spot that I might have to be sensitive about that so far the record's been pretty good we've we've

not had much of a problem in that regard, but that would be what I would worry about. One lesson you learned from your dad was you can never make a good deal with a bad person. I'm wondering if there's any times where that's really hit home for you. When I've made a deal with a bad person. Can you give me an example of that? Well, I mean, some of these are a little too painful to talk about, but it's important to be able to make mistakes. That's important to be able to size the mistakes such that.

that when you learn them, they don't, they're non-fatal mistakes and the mistakes that you get better and wiser and stronger and faster on account of. But you can't foresee everything and forestall it. I think you should trust your judgment. So, for instance, to the extent that you went through some dating process before you got married, that was really a process of getting to know somebody to see if their values overlap with yours enough that you really thought you could get along together for decades. That's what dating is all about. And in business, so much of what we do is, in effect, a dating process.

You're doing business with somebody. You're interacting with them. You go to the movies. You go to a restaurant. You go to a ballgame. All those kinds of things. It's not so much because you wanted that meal at the restaurant. You wanted to see that movie.

You wanted to see that ballgame. It's so that you could discern whether this was a person that you really could work together with in all kinds of. circumstances over long periods of time. And that's what our business is. It's cultivating relationships with customers, trying to do things for them to make their life better. And if we made their life better, they tend to pay us fairly. And we get to be creative. We get to feel like we added value. We get to learn stuff. We get to have fun. And we get to build these relationships that just make life fun. And to the extent of work, you keep doing more of it. And when you get

snookered, you stop. Are there any other lessons that your dad tried to instill in you that sort of stick out as ones that you try to keep it in top of mind today or teach your children? My father was a fundamentally kind man. He was just nice. He was nice to people. He always treated people with dignity and respect, no matter what their circumstances or a position in life was. We lived in a small town. He was a CPA. He did people's tax returns. He owned a liquor store. So we would see the people you would see in a liquor store on a day-to-day basis. So he did encounter all walks of life. And I observed him treat anybody he dealt with basically the same way.

And that was a laugh, a smile, a hearty handshake, trying to help somebody if he could. I really don't know how to put a finer point on it than that. And so I'm doing his whole life. you're a fan of biographies I'm wondering which ones stand out to you that you've read over the years well for instance i like u.s grant i think he's one of the most underrated presidents we've ever had his background was as a quartermaster so as he came into his role his spot as a captain and a major and a colonel was not firing bullets it was in logistics and making sure that the soldiers who were were on the front lines, had food in their bellies, had blankets to protect them when it got called, had uniforms to wear, and had the armaments. So that idea of logistics and support and supply goes beyond the tangible items of supply. It's a mindset of otherness that I think Grant embodied. Grant was also fighting for the good guys for a noble cause. And the idea that

you are using your skills and your gifts for something that is good, those two force multiply with itself. And again, he wrote his biography. At the time, there was not a presidential pension. And unfortunately, his daughter did not marry well. She married one of the great swindlers of that era. And he was bankrupt. I mean, he had no money. And he knew he got sick and the cancer was developing, and you can almost read that book and feel the race against time that he was personally involved with. Basically, because that book, with the help of Mark Twain, who was a friend of his and a contemporary, provided the income that sustained his wife and family after his death. So I was going to pick one biography to read first. I would read that one,

but over and over and over again, I mean, if you come into my office, you'll see a wall of books. probably half of them are biographies. One that comes to mind from an earlier point of the conversation is Admiral Nimitz. And if you think about Admiral Nimitz in World War II operating in Hawaii, at that particular time, you know, he would, the plans would be made and there would be an intense planning exercise and an attempt to optimize the circumstances and situation that the Navy was in. But then the ships went out. and in order to remain in stealth mode, there was no radio communication. So basically, Nimitz might be back in Hawaii for two weeks, two weeks before he had any feedback whatsoever of how these plans were working out and reading about him and reading about the fact that he just walked and walked and walked and swam and just physically tried to process this period of epic life and death. existential uncertainty with walking and playing bridge and swimming and all kinds of

things. That's just an interesting example. And again, we could spend days in my office looking at book after book after book. And I love having the physical copies of the book because when I walk into my office, the spines of those books catch my eye and they remind me of what it is that I read. And I love reading. I have a Kindle. I use it all the time. It's like traveling with the Library of Congress. So I like that. But I also respect the work that. authors do. And again, the Munger tribute, Munger talked about, you know, buying a biography for 25 bucks is the best investment you can make. Because for 25 bucks, you're getting about three man years of a person's life that went into writing that book. So it was a, as a tip to the authors

who did that, normally if I like a book, I'll buy the Kindle and the physical copy to tip them a few bucks for the work that they did. And if I'm sitting in home or my office, I'll read the physical copy. If I'm riding on an airplane or traveling, I'll read the Kindle and I'll go back and forth just so I always have it at my fingertips. When you mentioned grant and logistics, one thing that struck me is the focus on basics and we get lost with that in the world. There's almost like a natural entropy to, we have simplicity, and then entropy takes it to complexity. And we have to spend a whole bunch of money fighting that complexity to bring it back to simplicity. I'm wondering how you think about the relationship between simplicity and complexity

and how you bring it back to simplicity at such a big organization with so many employees and so many systems and so many. Well, I think there are a couple of tools and techniques. So one you referenced earlier, Mark Leonard, who's a great business leader, he talks about the concept of base rates all the time. What's the base rate here? So to always go back to what the underlying base rate of something is and explaining or reconciling why it is you think this thing is going to be different than what the base rate,

that is a very important discipline. Another important discipline we would have at Markell is this idea of autonomy and that the businesses are run in autonomous fashion. Well, my wife, it was the CEO of one of those businesses until her retirement, it was a relatively small business unit. And she said, there's no place to hide. So within that unit, it would be unlikely that people would go on too much of a flight of fancy and get overly complex because there's daily feedback in a small enough unit with a small enough number of people sitting around one table. It's Jeff Bezos's two pizza rule, and it wants his teams to be of a size that two pizzas ought to satisfy everybody.

So even within the 20-some thousand employees that we would have at Markell, generally speaking, almost every single decision is made by a small group of people who have accountability, to one another, who have the responsibility to make the decision and the authority to make the decision and are operating in such a way that they get feedback from their peers, they're part of long-term relationships, all of those things work together to create a system. It's like Lego blocks where you look at this great Lego structure. Well, that huge Lego structure that you see was built one little tiny block at a time. time and those blocks have integrity.

So that's the same sort of model that I dream for for Markell and by and large has worked pretty well for a long period of time. You talk about small groups of people making decisions. Do groups make decisions at Markell or do people make decisions and they're operating within a group? I think that's a very nuanced point. And in fact, I do use the phrase, now that I'm the sole CEO. So it's good to have one throat to choke.

So, yes, people make decisions and there is an individual that will be accountable and identified with the decision. But any individual who would make the decision without using the resources that's available to them of their friends, their peers, their colleagues, the data, that's stupid. So let's try not to be stupid. We're going to make mistakes, but let's not make stupid mistakes. And it's not, as a former chairman, Alan Kirchner used to say, let's not keep making the same stupid mistake. So while we have people who are responsible for any given thing, the embedded network of relationships that exist and groups that exist, it's very helpful for people to make those decisions and feel comfortable and feel supported when they are wrong because the people who were also around the table who might not have had exact personal responsibility.

for the decision, they know they were part of the process. And as such, they tend to be forgiving, supportive, helpful, and resilient in facing the consequences. And what do we need to do to make it better? A play on Munger's quote, but I sort of came up with this phrase to encapsulate it for me, which is avoiding stupidity is easier than seeking brilliance. Exactly right. Well, we've talked a little bit about opportunity cost. I'm wondering, are there questions you ask yourself about it, how do you go about thinking about opportunity cost? How would you teach somebody to think about opportunity cost? You know, I guess the first example that comes to mind is just the role of being a parent and how I tried to teach my children about that. And again,

very simple concepts. And just at the dinner table when ideas were proposed or plans were being drawn up or requests were being issued, the question is that if we do that, what are we not doing? So that question seems rather timeless to me. So if somebody says, all right, we're going to hold this stock, my colleagues will say, well, you like this thing over here, doesn't that mean if we're holding this, that we're not buying that? And discussion, I mean, that's an accurate statement. So we talk about it. And sometimes I say, you know, you're right about that. And this is so much more compelling than that, that we ought to indeed make that shift and make that change.

Sometimes it's a lot gray or a lot more nuanced and you don't know. But that question always of what are we not doing because we're doing this, I don't care whether you're talking to a four-year-old, a 40-year-old, or a 90-year-old. That's a relevant question. So I think the real learning comes from asking that base level question and participating fully in the conversation with thoughtful, reasonable people about what the answers are. And how do you incorporate things that you can't see?

So, like, not this or that, but, like, if you're thinking about opportunity costs, and I know you think about this much deeper, so I'd love to get into the weeds here. But if you're thinking about opportunity cost is, like, X or Y, well, that's one sort of lens into opportunity cost. Another is, like, well, there might be a new letter that comes up in a year, and I need to be in a position that I can take advantage of that. Right. Yeah, the framing of that, X or Y. is too limited. It's really X or not X. So that's Y, Z, M, 7, 3. It's like a comedian says, why are all plans lettered? And everybody says they have a plan B. How about a plan two,

plan three, so in addition to the letters, they're the numbers involved. So it's not just X, it's all not X. And I joke, I mean, I love Venn diagrams as a way of illustrating things and articulating things. And if you think about Markell, Markle group writ large, Well, there's one Venn diagram that would include all things insurance. So we have an insurance business and insurance related businesses that would fit in that bubble of the Venn diagram. And then we would have a bubble that would say non-insurance. And I challenge people, tell me something that exists in the world that is not in one of those two bubbles in the Venn diagram. So that's actually a helpful mental construct to have.

There was one CEO who I encountered one time and he referred to his company. as a not yet company. So they did all these things, but when somebody would say, do you do such and such, he would not say no. He would say, well, not yet. Tell me about it. Should I? And I love that mindset.

So in many ways, I copied that, learn that. So in the construct of an insurance business or a non-insurance business, when somebody proposes something to us, I go, well, I think it ought to be able to fit in one of those two bubbles. Let's talk about it. Let's think about it. You've called the interest rates a curfew. Can you describe that for me? Well, I struggled during the era of ultra-low interest rates to try to just understanding, wrap my mind around it. So, for instance, when Susan and I graduated from Virginia college and we started in the working world and we bought a house, I think our first mortgage was at something like 14 or 15%. And I can promise you, every discretionary pay.

that we had went to paying down that mortgage. I mean, that was, that was just a crushing force in our life that we, we oriented ourselves around getting out of that particular debt for the mortgage that we took on to buy our first house. And if you think about 14 or 15% interest rates like existed in the early 80s, I joke, that, that'd be like a 6 p.m. curfew. So if you're a kid, you come up from school, you eat dinner, and there's 6 p.m. curfew, nothing bad is going to happen.

I mean, you're done. And as interest rates come down, you can sort of think of that as curfew getting later and later. So if the curfew goes, you know, from 14 down to 12, maybe that's a 7 p.m. curfew. So you wolf down a bite of dinner and maybe you can go outside and play for a little bit before you need to get back in at 7 o'clock. But still, not too much. And as interest rates keep coming down lower and lower, the curfew is getting later and later. And by the time the curfew gets to midnight or past midnight, that is effectively no current. a few. And as one comedian once joked, he thought they should turn off ATM machines after

midnight because no possible good comes from getting cash out of an ATM machine after midnight. And I think that's a good point. And the idea of zero percent interest rates or low interest rates, that meant there was no such thing as a bad idea. And any possible idea that you had had no pushback on it from needing to service the debt. So the capital allocation decisions that we have made as a society in the last five years. I think we're made in the context of no gravity, no curfew, no, no counterexample, no sense of opportunity cost. What do you give? Nothing. Do it. Go. So everything got funded, every idea, no matter what. And that created circumstances as an example. And I don't want to be too specific. I'm not an

expert on this, but I was thinking about this the other day when I was shaving, and I shaved with a Gillette razor. And I knew a guy who was a little more into the world of venture capital and that end of the spectrum than I was. And there were several shaving companies that came along and tried to displace Gillette. And I think Dollar Shave Club was one of those. And I think they ended up getting bought by Unilever for a big sum of money. And I don't think Dollar Shave Club ever intrinsically made much money itself, but Unilever felt so threatened by them that they spent a bunch of money to buy it. In the fullness of time, I don't think that probably was the best decision for Unilever, but a lot of money got allocated and sifted and sorted that way. And if you think

about that story of companies that never were able to intrinsically support themselves and pay the bills out of existing cash flow, but were reliant on the capital market. it's to fund them, and then the behavior of somebody who ought to have known better. I mean, Unilever did not act in an optimal way. And again, I'm a satisfier, not an optimizer. But as I look at that, I think if they had the chance to make that decision all over again, that they probably wouldn't. So that's just one tiny little story.

But you could tell it a million times in a million different ways over the last five or ten years. And some of that's great. And going back to Ulysses as Grant and Mark Twain, if you look at the period of the Gilden Age and what happened with railroads and the characters, shall we say, that were involved in the funding of railroads. So many of those stories are the same things you see happening in the financial markets of the last couple of years. But that's not totally a bad thing.

Because, for instance, after the railroad financiers came and went, what we were left with as a society was the railroads, which made things better. So technological progress seems to have some odd marriage between engineers and technical people and innovators and entrepreneurs and wild promotional financiers. And that that marriage between the two yields technological progress, but usually at great costs to a lot of people. people and great wealth beating for some people that may or may not be a good thing. But I don't know how that happens without those wild extremes. And if you think about America writ large versus many other places in the world, we let that, we encourage it as part of our DNA, part of the culture where that happens. It doesn't happen so much in other parts of the world.

And we have been the net beneficiaries as a society from the innovation that comes about from the fact that we operate with a pretty wild west mentality of that sort of stuff. So it's just interesting to observe. One difference in the past 30 years is that we seem to bail everybody out now, whereas we used to let people fail people fail. And there used to be a real downside and skin in the game, if you will. I know people even now in Canada with mortgages, and they're just like, oh, the government's going to step in and intervene because nobody can afford their houses. And I feel like that's a very dangerous path to sort of think and walk. And I'm wondering how you think about that in terms of our approach.

I think I would think about it in similar ways as you. That would seem to be a situation that is not durable. What do you think of stock option accounting? I don't think it's very good. And in fact, as sometimes some people will ask me, and typically students or younger people, what should they study? What should they learn to be a better investor or a better business person? And among the things, and this is my training. I'm a CPA, and I was an accountant by training.

I say, well, I think you take the first year of accounting, the one-on-one courses. I think you should take the second year of accounting, which is cost accounting, a managerial accounting, to where that notion of opportunity. cost and fully allocating costs get loaded in. Beyond that point in the world we find ourselves today, it might be somewhat counterproductive to keep going too much into accounting theory because you tend to get lost in the details rather than understand the economic substance underneath what accounting is trying to tell you. There's an old saying the map is not the territory. So no matter how good your map is, it is only limited in its ability to actually describe the territory that you're talking about. Now, you need maps, but don't over-rely

on maps and don't think that maps contain the entire truth. They contain 70% of the truth, 60%? I don't know, a good function of it, but not all of it. So just always be able to think about economically what it means. So for instance, one of the reasons that I did not participate in dotcom 1.0 is that is when option accounting was at its worst. Now, has improved somewhat and the practices of options have shifted more towards restricted stock and things like that where the accounting is better and more straightforward and more aligned with economic reality. So I would always economically adjust when I saw big options to think about what the actual

costs would be and used it in the con, an option is basically an interest-free loan. So I took an interest-free loan and I bought that stock. and you used the current market rates of interest to account for that nominal sum of money that, in essence, is being lent behind an option. That's kind of how I would true up and try to figure out what the actual cost of it would be. But second thing, going back to Shelby Davis's comment, if I saw a company that was using a lot of option stuff, I would just put my pencil down and say, I just don't like that. So it's in the too hard pile, and I'm not going to try to calculate that to the fourth decimal point.

I just don't want to be part of it. That caused some errors of omission. There are some companies that I wish I had bought, even though they went beyond my personal preferences and tolerances for what I would have hoped would have been the practices that they would have followed. But I learned some of those lessons, and I'm sure I'll continue to make some mistakes like that because I'm sort of imposing my own moral judgment when I draw that line. But I have to. I need to define what's acceptable to me and what is it. And I'm sure I'll get it wrong sometimes. I'll get it wrong a lot of times.

So just try to be humble and recognize where you got it wrong and something is able to power through something, a particular micro practice that I may not love. You mentioned cost accounting. One of the interesting things to me is something like oil seems to be priced based on historical cost and not present cost. How do you think of things like that? I'm not a great natural resources investor that's not really been in my circle of competence or something that I have a lot of expertise with. So I don't think about it a lot. Now, what I do think about it is in the context of, so for instance, and Buffett talks about

this example all the time, in oil wells, you know, you think about that as being an inflation protected kind of asset, but not really, because once all the oil is gone out of that particular or well in order for the company to continue to exist, you're going to need to make capital allocation decisions and capital expenditures, which set you up to find and pump the next well. And accounting is all oriented towards historical cost of what it costs you to drill that last well, not what it's going to cost you to drill the next well. That has always been a fundamental challenge to me, and I don't know the answer. I know the accounting is not helpful. So therefore, it's just not been an area that I spent a lot of time investing in.

And as counter example, and in fact, this is one of the charts I keep in my office, is I have a price chart of a barrel of oil compared to the single day admission at Disney World since it opened in 1974. And you know what? The price of a single day admission at Disney World has compounded at a faster rate than that of a barrel of oil. And I think the accounting is better. I mean, there are fixed costs of the hotel. and the monorails and all that kind of stuff, they continuously need to be refreshed for Disney World to remain irrelevant property.

But that accounting is pretty good. It's reasonable. And I can get my head around it. And it seems to me, if I'm looking to protect myself from inflation, I would rather own shares of Disney than an oil company when I see those kinds of patterns. The other one I track is the price of a pint of Guinness. And that goes back to 1750.

and the price of Diageo shares, which are the owner of, and, you know, we're owners of both of those companies. And one of the reasons is I think that they have fundamentally good businesses that add value that consumers love and trust and are whatever the costs to operate Disney World to produce a pint of Guinness, whatever they are, whatever currency it's denominated in, I think that's something consumers will pay those costs and some margin of profit. for the companies, such that despite whatever happens in the realm of inflation, that's what I call an inflation-protected asset. Munger calls EBITDA.

What did he say? Bullshit earnings. Yeah, every time you see the word, EBITA, just substitute bullshit earnings. I'm wondering if you can walk me through that. When you see EBITA, how do you think about it? How do you break it down? What goes through your mind? It's one of those things that sort of like fiction.

There might be some degree of difference between what, munger the smart guy thought and what me the less smart guy thinks. So Ibada is a phrase and it is a term of language that a lot of people use. And there was a there was a Russian ambassador to the U.S. named Alexei Dobrenan. And he was I think from from Kennedy through Nixon or maybe even Ford or beyond. I mean a long time. So that guy was the Russian ambassador. to the U.S. for decades, and he was fully Russian. He was born in Russia, raised there, educated there, but he'd been in America so long that he was very good at American idioms and the American culture such that he was spectacular in his role as an ambassador because he was able to

understand and comprehend both cultures, which had a lot of differences. So Ibadah is almost an ambassadorial world. Charlie Munger is correct in the pure accounting sense. that tells you, I mean, that is a map of a territory that is a 60% map, not a 90% map. It is a map, and it does tell you something about the territory. Now, if you're talking about oil companies or steel mills or heavy capital intensive businesses, it's not a good map because the D that you're subtracting out to sort of talk about the earnings power, Not only is that D real and shouldn't be subtracted out, if you're really thinking about it economically, it should be two-day or three-D or four-day because the next well, the next mill is going to cost you more than what you're depreciating against. And the worst thing about that is if you're a manager of a business like that and you're using EBITDA, you're fooling yourself and you're underpricing your product.

And you might be in a position where you might know that, but that's what all the competitors do. so you're forced into that situation. Those are situations I don't want to be in. If you're using an old example of EBITDA and you're talking about something like a TV station or a radio station or a newspaper to go back into history just to make the examples easy, those are businesses that did not require much capital expenditure relative to the business they add. So while the A, the amortization might be a big number because it costs you a lot to buy it, you can safely add that back because you're not going to have to reacquire that radio station that

you already have. You've paid for it. So the accounting convention requires you to expense some amortization. And by the way, those accounting conventions change from time to time as to how amortization is calculated and treated. But I think you get the gist of it is you need to be able to understand what it really means and take it from a 60% map to a 90% map. And the reason you need to do that is for Markell, where we are active buyers of businesses, sellers of businesses have been conditioned to use that phrase. So if you come in and try to academically explain the limitations or what adjustments you need to make, they're selling that business as somebody else. And sometimes you should be happy about that because you don't want the

business. But sometimes they have a really good business. And so your job is not to teach them how to think differently about their thing. Your job is to understand what economic reality is and make a rational decision is, would this be a good decision for Markell or not? So you need to be comfortable and operate like DeBrenan did in two separate and distinct cultures and distill what you're really talking about. And it's neither good or bad. It's just a translation exercise. That's a great way to explain that. What's the worst part of your job? haven't found it yet I feel like

this is what I was put on earth to do it's fun I enjoy it and again like we were talking about being at the keyboard in writing and you feel the joy I mean I feel like remember the movie Chariots of Fire and Eric Little the runner and he was a person of deep faith and the Olympics got

scheduled such that his race was on Sunday and his sister who shared his faith and his spiritual disciplines of the idea of the Sabbath tried to tell him you know don't don't run that's a violation. And I can't remember the exact line, but Eric Little responded. He says, you know, God, but God made me fast, and I feel his joy within me when I run.

So I have some glimpse and essence of that, and that I think this is what I was put on earth to do. And I enjoy it, and I've been relatively good at it. So I'm going to keep doing it until I can't run anymore. Relatively kid, I think you have one of the best track records in history. I like how modest you are there. You rarely sell stocks. Why is that? Getting back to that notion of opportunity cost, I think the case to sell something and

buy something else should be compelling. So the tie goes to the runner that's there already. Secondly, there's tax efficiency in that for us. In that, assume that we have something that we bought, and generally speaking, it is kind of worked out, you have a gain there, which is unrealized. And unrealized means untaxed. So we have the tax liability accounted for on their balance sheet. But in essence, that creates a loan from the government for the tax portion of that unrealized gain. So if you sell something that has a big gain to it, you are not reinvesting 100 cents on the dollar.

You're reinvesting 80 or 70 or 60. And so the next idea, relative to what you already have a gain in, must be super compelling in order to reinvest 60 cent dollars from 100 cent dollars of staying with the position you already have. That's one of them. The second algorithm at work to use one of the terms of art and language that everybody flaunts these days, the great algorithm in life is do more of what's working. So about the first share of Berkshire in 1980. I can't remember what the last time I bought more of it was, but within the last year or two.

So I've consistently bought that stock for years, done the same with Markell personally. I bought my first shares on the IPO in 86. I bought more when I joined in 1990. I've bought consistently along the way at higher and higher prices, but that's doing more of what works. And in general, that's proven to be a pretty effective thing to do over time. why do you think it is that it's so hard to do that more of what works that it's it's simple but not simplistic it's simple but it's hard and one of the things that's hard about it is that as an individual you have to let go of your own ego to be willing to accept what the

universe is handed to you you can't make that happen you have to let that happen and people who are gifted and smart and intelligent and high energy and want to do things It is not their natural inclination to be able to embrace and accept things that are done on your behalf rather than by your active work. It's part of it. The other part of it is it doesn't look like it works every day. There will be periods where, you know, people will be, you're the batter. And again, Buffett uses the example. Ted Williams, the hitter.

Now he's only going to swing at those pitches that are in the precise part of the, the strike zone that he has determined are favorable places for him to swing that bat and the ability to just sit there with the bat on your hand and have a strike call on you from time to time. And as Buff says, in the investment world, there are no called strikes. You get to look at pitch after pitch after pitch without having to swing. That is boring for people. It's not stimulating enough. It's not fun enough. Well, for me, It is. Just different. I love the idea of patience. And I do think that we get bored, but we know what works. But what we want to do is we know how to achieve the outcome we want. But what we try to do is achieve it faster. Like we know for most individual investors, if you save money every month and you put it into an index fund and you wait a really, really, really long time, you will be financially independent and incredibly wealthy later in life. we that's as close to a formula as you're going to get for guaranteed investment success and yet the number of people that follow that formula is incredibly low in part because they know it works but they they want to speed up the natural outcome and I think of this as a lack of patience often changes the outcome how do you develop patients how do you think about that

I guess it's part of that childhood background of not being the fastest or the strongest or the swiftest or pick first for the teams and stuff. So I just got used to just being steady and subtle and appreciating that in the fullness of time, it would work out. So again, and getting back to that luxurious position of all the conditions you laid out of being willing to stand alone, to being in the environment where that's acceptable. And I can't remember your third contract, but those sorts of things.

I have been gifted with those circumstances, and I've made personal choices which have reinforced that. So it all work. And I recognize not everybody has those same gifts and environmental circumstances that I've been faced with, but these are the ones that have been available to me. And I've just tried to be rational and thoughtful. and take advantage of the gifts that were handed to you. I want to end with a version of the question we almost started out with,

but different, which is, what is success for you? Continuing to be able to do the things that I do. I've been happily married for 42 years, three kids who are adults and standing on their own, a couple of grandkids now. So the idea that this life and being part of an organization, like for Markell, when I started in Markell, we had 300, some people. We now have over 20,000. And that's 20,000 people multiply that by the households that are involved. Because of the organization, we have a place where 20,000 people can find

sustenance for their daily needs and take care of themselves and their family. They can learn and be creative. And because of what they do in serving customers, I mean, it's hundreds of maybe it's millions of people when you really connect the dots of what we have been able to build and construct and how all of that exists because we're doing something for somebody else and they're happy we're doing it and want to do more of it with us it just seems like a really good system that i enjoy being one of the architects of and being part of to continue to keep that going forward and you know as i sit in business meetings and talk with the people who are running of these businesses, and I see the opportunities that are flowing in front of them, and I

see the way in which the architecture of Markell has provided them with this base of both financial, intellectual, social, emotional foundation, such that they're able to make the most of the circumstances they have. And I don't mean that narrowly financially. I mean that they're able to help other people. And it's just fun. There's no better way to end this. Thank you for an amazing conversation. Thank you. Thanks for listening and learning with us.

For a complete list of episodes, show notes, transcripts, and more, go to fs. or just Google the knowledge project. The Farnham Street blog is also where you can learn more about my new book, Clear Thinking, turning ordinary moments into extraordinary results. It's a transformative guide that hands you the tools to master your fate, sharpen your decision-making, and set yourself up for unparalleled success. Learn more at fs.blog slash clear. Until next time.

Thank you.