Markel Annual Meeting Notes 2008

[Posted by TMFMattyA on the Motley Fool's Berkshire Hathaway discussion board]

Last Tuesday, Buck Hartzell (TMFBuck) and I drove down to Richmond to attend Markel's 2008 Annual Meeting of Shareholders. Below are some of the key takeaways from the meeting, along with our full notes from the proceedings.

Key Takeaways:

(1) Chief Investment Officer Thomas Gayner called the current environment the best he's seen in his 18 years at Markel for buying best-of-breed companies at a discount. Pretty strong words from him there.

(2) Steve Markel thinks Markel should be valued at 2x Book Value. At the current book value (as of 3/31) of $263 Book value, that puts shares at $526.

(3) The culture at Markel is extremely strong. The employee owners (we call them that because they actually buy shares on the open market) are bought in to what Markel is doing. That is an incredible advantage for an insurer, or any business.

(4) Thomas Gayner thanked the underwriting side of the business when he first got up, saying he understands how hard it is to have such discipline and generate the money (float) that his team gets to invest. Their top investing priority is not to lose it.

(5) Thomas Gayner also said that bad times will always come and go. There have been many times in the past when people have predicted the worst (food and energy crises, runaway inflation, economic depression). It usually doesn't happen. :-)

Below are our full notes from the meeting, including the shareholder Q&A and some fantastic quotes from Thomas Gayner:

Full Notes

Warren Buffett's News Conference in Switzerland

To watch the video:

CNBC Part 1
CNBC Part 2
CNBC Part 3

Leucadia National - Annual Meeting – May 13, 2008

IC = Ian Cumming
JS = Joe Steinberg

How do you protect against political risk in Argentina (referring to recent export taxes)?
IC: They’ve had a successful run in Argentina. A long time ago, we privatized the national insurance company, successfully got out before the dip. It’s never ending. It’s not politically correct, but the old joke is that Argentina is a country with wonderful natural resources, the problem is that it is full of Argentines. We don’t have a great answer, just pray. We paid a cheap enough price, think we will do just fine.

JS: There are two outcomes. The export taxes go away over time or it all blows up and the country slides off into the ocean.

Origins of Fortescue investment? How quickly will that ramp up? What do you think about China investing in Fortescue?

The deal came from Jefferies. We noodled on it, waited for awhile, then came back to look at it seriously. We worked on it for awhile. We have an old miner who works for us, guy used to run Kennecott Copper, we went over there and walked the site and took iron ore samples and it tested like they said it would.

Andrew Forrest is a difficult guy, hyperactive, visionary, great at what we does.
We laughed at our calculations when we did them, but we’re now at those numbers.

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Think Mental Models

The "Think Mental Models" website is an awesome website. Please take a look when you have time.

Thanks to Arpit Ranka for this wonderful link.

Think Mental Models: http://thinkmentalmodels.com/Welcome.html

This website, inspired by the work of Charles Munger, provides over 100 checklists that can be brought consciously to mind to aid the thinking process.

Each model is described by at least one distinguished user. Examples include Warren Buffett, Richard Feynman, Robert Rubin and Peter Drucker, among others.

2008 Wesco Shareholder Meeting: Detailed Notes

Notes courtesy of Peter Boodell; thank you!

(As is standard, no recording equipment was used to reproduce these notes. My high school typing teacher gets all the credit. As a result, these notes are recollections only – not quotes, and should not be relied upon. –PB)

CM: Testing, can you hear in back? Mr Denham has an announcement.

Denham: We ask you not to use your video recorders, thanks.

CM: Welcome to the 49th annual meeting of shareholders of Wesco Corp. Please register to vote at entrance. Anyone wishing to speak, state name, wait for microphone. List of shareholders, 96% of outstanding proxies received. Election of directors? All in favor? [Aye]. Motion is carried.

Six nominees are elected. There will be a long Q&A preceded by Socratic solitaire conducted by the Chairman. Meeting is adjourned.

We now begin Q&A, starting with a long game of Socratic solitaire. During questions, do not ask what we are buying or selling. Any other question is fair game, but we don't agree to answer them.

Because many of you have come from such a long distance, I will talk before I take your questions. I will address two topics, general investment climate [and learnings from Berkshire Hathaway]. We normally avoid [discussing the general investment climate] like the plague. Most assets are priced to a level where it is hard to get excited. It is hard to get 4% yield on a nice apartment, and it doesn't include replacing the carpets. Bonds of strong corporations are 4% yield. Corporate equities are paying 2% pa, growing 4% per year. Such a world isn't the one that made all of you able to come to the meeting. Last generation has been in hog heaven – some bumps, but it had easiest time getting ahead. In the eighteen years that preceded hog heaven, the purchasing power of Yale's endowment went down 60%. They were getting real investment return of 0%, negative. It is not at all impossible that brilliant investors like Yale get bad results in the future.

People are used to laying money aside and investing in standard fashion, and become quite comfortable. It is easy to forget that this isn't guaranteed. Many have recognized this, but for those running pensions it is difficult [to adjust down assumptions] —like the agony of raising taxes or not looking good as CEO of a company. Some of them wonder if they have signed up for something too hard when running a defined pension plan. That crowd doesn't want to go to a 4-5% assumption, because the pain of the money needed to correct the plan is large. Bonds pay 4%, so they go to alternative investments with profit sharing. They solve the problem by giving 'reasonable return' and sell hedge funds and venture capital fund, mid-stage, late stage, private equity, etc etc etc. They do complex trading strategies, private equity in Africa. They buy timber. [audio system malfunctions] Evidently that machine didn't like the remark. People go into alternatives, and this has worked very well so far. A lot of university endowments have done it – and that is game we are in. If natural return is 5%, getting it to 9% is very unlikely to work well long term. It's going to be difficult for people to have high real returns from deferring consumption. The reason my generation did so well was kind of a fluke, and won't necessarily continue. There will be lots of chicanery in future. Many claim alpha – but really they are just taking earthquake risk. At end of year, when there is no earthquake, they take the money. This is a dishonorable way to invest. It is always easier to get felicity by reducing expectations instead of seeking extreme results.

We have plenty of scandals coming. Lots of rot has gotten into system. It has caused unpleasantness. What is next? I suggest the derivative trading books of the world are next. The accounting allowed in derivative books has been god awful. The morals and intelligence has been god awful. 'I'll be gone and you'll be gone' is phrase they use. What is buried in those books is dangerous, with clearance risks with optimistic assumptions that the accountants allowed. I was at Salomon when interest rate swap accounting was changed. They had a matched book. They were making $7mil, 25m over 18m. Both sides wanted to mark trades profitably. They couldn't retain derivative traders if they didn't have bad accounting. There is a lot of Gresham's law here, where the bad practice drives out the good.

If you run a good bank, and testosterone bank around corner pressures you, there are tremendous pressures to conform. Everyone starts replicating. If every university puts 2% into timber, that can go on a long time. But it is self-fulfilling. When it comes to the unwind, when they all want to get out. A lot of things rely on momentum. Valuations make everyone look good for a while.

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Justin Fuller: Woodstock for Capitalists 2008 Blog

Saturday, May 3rd, 2008

3:05 p.m. An Insightful Day
I hope that you enjoyed today's discussion as much as I did, and I encourage you to contact me with any additional questions or insights you may have.

3:00 p.m. Hopes for Berkshire
A shareholder asked Mr. Buffett what he hopes for Berkshire is that the culture stays strong and that it remains a home for businesses that were built by families over time. He also hopes that the company will continue on as it is now by being a home for great businesses. I'll note that culture is one of the most valuable parts of any business, but the most difficult to quantify. In Berkshire's case, Mr. Buffett views sharpening the Berkshire culture as his chief objective, and in my view this culture will give his successor(s) an advantage in continuing to build the company for decades to come.

2:55 p.m. Pharma Stocks
Mr. Buffett said that he thinks pharma stocks as a group will do well, but given that it is very difficult to value what is in the pipelines of these companies, he thinks investors would be best served by buying a basket of pharma stocks. I'll note that Berkshire's equity portfolio has positions in J&J, Sanofi-Aventis, as well as GlaxoSmithKline.

2:50 p.m. Envy vs. Gluttony
Mr. Buffett said that envy is the worst of the sins because if you become envious you feel worse, while the other person is the same--or even feels better. He said, tongue-in-cheek, that gluttony on the other hand has upside.

2:35 p.m. Dividends for Berkshire?
A shareholder asked Mr. Buffett about the potential for dividends at Berkshire, and he said that as long as he can continue to create more than $1 of value with every $1 of retained earnings, Berkshire will not pay dividends. Given that Mr. Buffet has been putting a lot of capital to work lately with the Marmon Group, Mars/Wrigley, additional equity investments, and, more recently, new fixed-income investments, I think there are heaps of potential for Berkshire to still create wealth by retaining all of its earnings.

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Wesco Meeting 2008

Q: Amount of derivatives now, something like $30 trillion?
A: When BRK unwound Gen Re's derivatives book, it was shown as positive but the money disappeared when we tried to reach for it. Net result was a loss. Accounts on both sides of transaction show profit, but that can't be. Will end badly. Repeated point of not being able to buy insurance on someone unless you have an insurable interest.

Q: Clarify comment about BRK earning more in an inflationary environment?
A: If a business has a competitive advantage, constant margins imply that increasing prices will translate to more profits. CM would much prefer no inflation to earning more in this fashion, however.

Q (from Tilson): No questions about the Q1 earnings drop at the BRK meeting?
A: Yes, significant - like Sherlock Holmes pointing out the dog didn't bark when it should have. Maybe it's all part of the "seamless web of trust" we've been talking about.

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My photos: Shai Dardashti's 2008 AGM

Below is the link to my uploaded photos at Shai Dardashti's 2008 AGM at DoubleTree Hotel.

Shai Dardashti's 2008 AGM photos

My photos: Berkshire AGM 2008

Below is the link to my uploaded photos at the Berkshire Hathaway 2008 AGM.

Berkshire 2008 AGM photos

Fox Business: Exclusive Interview With Warren Buffett