Markel Analysis PE of 7.

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ppnewbie
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Markel Analysis PE of 7.

Post by ppnewbie » Fri Dec 03, 2021 11:26 am

As someone who basically never sells the VP side of the portfolio, I try to buy things that I feel are high quality, durable, a good price, stable, etc, etc…

TLDR

What do folks think of Markel? I believe the PE is hovering around 7. The management has been around for a long time, I’m a fan of Tom Gayner, they compound earnings vs distribute them, it has much more market cap space to grow vs BRK. Incidentally BRK looks cheap at the moment as well.

Anyway I’m curious to know peoples thoughts.
D1984
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Re: Markel Analysis PE of 7.

Post by D1984 » Sun Dec 05, 2021 2:49 am

ppnewbie wrote:
Fri Dec 03, 2021 11:26 am
As someone who basically never sells the VP side of the portfolio, I try to buy things that I feel are high quality, durable, a good price, stable, etc, etc…

TLDR

What do folks think of Markel? I believe the PE is hovering around 7. The management has been around for a long time, I’m a fan of Tom Gayner, they compound earnings vs distribute them, it has much more market cap space to grow vs BRK. Incidentally BRK looks cheap at the moment as well.

Anyway I’m curious to know peoples thoughts.
I own a small amount of Markel myself (bought in late March and very early April 2020) in one of my Roth IRAs.

Over the long term I believe Markel should return around 10.9% to maybe 14% per annum in CAGR as that is about how much I expect Markel's BV (book value) to increase per year on average over the long term. Considering that both Bank of America and JPMorgan Chase are forecasting negative real returns on the S&P 500 TR and on US LCG over the next 7-10 years I don't think Markel is a bad bet over this same time frame at all.

Markel is indeed kind of a "mini-Berkshire" in that it does a lot of what Berkshire does too (i.e. uses its insurance float as basically an interest-free loan to buy high quality stocks and bonds). Notably, Markel has on average since 1986 earned around a 3.5% positive return per year on its insurance underwriting operations; this is more than even Berkshire has done IIRC and far more than most other insurers/reinsurers have done (many insurers are happy if they can merely break even on their actual insurance underwriting operations and make all/almost all their profit from investing the float).

Markel is currently somewhat cheap by PE or PFCF or PB standards; its book value since Dec 2015 has gone from $562 to $1026 and yet its price during that period has only gone from $888 to $1208.

The one thing you have to watch out for with a stock like Markel (or for that matter Berkshire) is to be prepared and accepting that its actual market value (i.e. share price) growth will seriously lag (or seriously lead) both book value growth and "broad US market (i.e. TSM or S&P 500)" growth at times....sometimes for many years at a time. Berkshire's share price famously did this from late 1971 to year-end 1975 before gaining almost 130% in 1976 and then averaging 45.6% a year over the next five years after that. By mid-1975 to early 1976 some of Berkshire's shareholders were almost screaming at Buffett to try and get the share price moving by writing more insurance but he (and his underwriting team) famously refused to write into a soft insurance market where they felt that they would lose money on the actual insurance policy; they weren't willing to try and "make it up on the earnings on the float" (in retrospect had they done exactly this--wrote insurance that they would've likely lost a small amount of money on simply to get more float in order to invest with--in early 1975 it would've worked out very well.....in early 1975 you could've thrown darts at the NY Times stock page and picked winners....but since Buffett didn't have a time machine and/or also lacked a crystal ball neither he nor anyone else could know this would happen and as such he chose to be conservative and not try to make up underwriting losses with earnings on the float). A similar thing happened from the summer of 1998 to around February or March of 2000; Berkshire stock over this time period had turned $10K into around $5.6K while a similar investment in the S&P 500 had turned that same $10K into just under $13K and a similar investment in in the tech-heavy NASDAQ-100 had turned into over $32K; people were fuming that Buffett was an out-of-touch doddering old fogey who didn't understand the "New Economy" and that actual earnings and profitability didn't matter any more and that Berkshire needed to hurry up and start buying tech stocks. We all know what happened next. The S&P 500 had almost three down years in a row, the NASDAQ-100 lost some 80% of its value when the tech bubble popped, most of the "New Economy" dot-com darlings with plenty of "eyeballs" and "clicks" and buzz and excitement and million-dollar Superbowl commercials (but, ya know, no actual earnings or profits or quaint old-fashioned things like that ) went bankrupt....and Berkshire? Well, Berkshire stock went up almost 65% over this same time period as its lagging share price finally caught up with its actual book value.

The same sort of thing has happened to Markel stock from January 1989 to April 1991 (and even though it creamed the S&P 500 over the next two and half years all that did was basically took it back to even with said S&P 500 by mid or late 1993), from November 1997 to February 2000, from the beginning of 2007 to about three weeks of the way through July 2011, and most recently from the start of December 2015 to more or less the end of November 2021. Markel's underlying book value grew nicely during all of these (despite the 1990-91 recession, the slow recovery during 1992-93, the dotcom crash and 9/11 and 2001 recession, the 2008-09 GFC, the threatened 2011 US debt default, the 2015-26 slight economic slowdown, and COVID and the brief but sharp 2020 recession) but the share price--having led actual book value growth in these cases over the previous few years or so by a large margin--took that long to "catch up" with book value by growing at a slower pace than underlying book value did (and generally at a much slower pace than an S&P 500 TR ETF's share price did over the same time period).

If you can stand something like the above and are willing to hold as long as the underlying book value keeps growing nicely then Markel isn't a bad long-term play at all IMO.

Also, on the positive side since it pays no dividend it is fine to hold in taxable accounts; on top of this, the oftentimes gap between Markel's BV and share price that resolves by one leading/lagging the other by a lot makes this an ideal rebalancing type of asset; I'd such something like cash (or STTs), gold, or a tech heavy stock fund (think QQQ, QLD, TQQQ, ARKK, FNGS, CPODX, or the like) to use as countervailing rebalancing assets since these assets have a fairly low correlation to Markel's share price.
ppnewbie
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Re: Markel Analysis PE of 7.

Post by ppnewbie » Sun Dec 05, 2021 4:08 pm

Thanks so much for the thorough response. This is very helpful. And tending towards being a ‘never sell’ investor in my VP, I’m buying MKL.
Kbg
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Re: Markel Analysis PE of 7.

Post by Kbg » Mon Dec 06, 2021 11:45 am

+1.

Good write up.
ppnewbie
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Re: Markel Analysis PE of 7.

Post by ppnewbie » Tue Dec 28, 2021 10:28 pm

Any thoughts on BRKA at its current bargain price? Also to your previous comment, I am more than happy to hold for a very long time. Lagging stock prices don’t bother me at all if I know the company is humming along nicely. I have very long time horizons in my VP and rarely sell stocks I have purchased for my VP.
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