Baby Berkshire Growing Up Right
Piece by tiny piece, Thomas Gayner is building the next Berkshire Hathaway Inc.
He is the chief investment officer, and one of three presidents, of a company that you may not have heard about, Markel Corp, based in Glen Allen, Va.
Like Berkshire, Markel runs a profitable insurance business--even when it's on the hook for calamities such as Hurricane Sandy. It uses these profits to buy and hold steadily appreciating, cash-generating businesses.
The specialty insurer boasts an investment portfolio that has been beating the Standard & Poor's 500-stock index for the past 20 years. Its stock has climbed from a low of about $225 a share during the depths of the financial crisis to more than $520 a share today. It is still very much a small company whose market capitalization has quietly eclipsed $5 billion.
Unlike many buyout firms, Markel takes over companies without loading their balance sheets with debt. It tries to keep management teams in place. It avoids layoffs and desperate cost-cutting sprees. It views these sorts of measures as telling signs.
"In general, that means something bad has happened," Gayner said, "and we don't root for bad things."
Gayner, 51 years old, grew up on a 100-acre farm in rural New Jersey. He speaks plainly and says folksy, awe-shucks sorts of things like his hero Warren Buffett.
"The wealthiest person I ever knew was my dad," Gayner said in a telephone interview. "Not because he had a lot of money, but because he had enough. If the car broke down, he had enough money to buy a new car. But he didn't buy a new car just to buy a new car."
Gayner shuns high levels of debt even with interest rates at historically low levels. The 2008 financial crisis, he says, is reason enough why.
"Even at low rates, if you borrow the money you still have to pay it back," he said. "And who knows what the future will hold...no matter what happens, you try to make sure you can live to fight another day."
When the economy collapsed in 2008 some people claimed capitalism was the problem. But capitalism was not the problem. It was some of the people in it--people who racked up huge debts and left everyone else holding the bag. They borrowed until they couldn't.
This is how nations, economies, businesses and individuals have often destroyed themselves throughout history. And now some companies are doing it again, sometimes borrowing billions just to do stock deals.
Gayner, by contrast, uses a financial term I've not heard in a fleeting financial world, "the permanence of capital." He does not have an exit strategy. He does not flip businesses like foreclosed homes. He does not risk the livelihoods of others by trying to make a spread on unsustainable levels of debt.
He pays cash. He looks for companies that are the biggest players in the smallest of industries. These tend to have the most loyal customers--keeping smaller competitors in check--and they don't attract crushing competition from giant corporate players.
Like Berkshire's portfolio, many of the companies Markel holds may sound boring: bakery equipment makers, a dorm-room furniture manufacturer, a company that provides wood flooring for truck trailers, a manufactured home company, some niche health-care enterprises, and then there's the dredging company.
In 2009, Markel acquired a majority interest in Baltimore-based Ellicott Dredges, which was founded in 1885 and built the floating machines that dug out the Panama Canal. Another buyer might have noticed Myrna LaBarre, the retirement-aged lifer in the corner, and fired her.
Last month, President Barack Obama visited Elliott's headquarters and acknowledged LaBarre in his speech.
"When somebody asked Myrna what lessons she learned after 50 years working at the same company, she said, "Be honest, be helpful, accept your mistakes and improve upon them, be good to people, keep a good sense of humor, have the best work ethic possible, and handle the good times and get over the bad'," the president said. "That's a pretty good recipe for success right there."
Gayner couldn't put it any better: "What Myrna LaBarre said is a wonderful statement of the market style, values, and culture that is of inestimable importance to us."
A reputation like this attracts owners of companies to Markel when it comes time for them to sell, knowing their life's work won't be sliced and diced like corporate cheese.
"This is the way we're going to do things," Gayner said, "and it's working out just fine."
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at email@example.com or tellittoal.com)