No. of Recommendations: 22
Generally the market assigns valuation multiples for any company with perhaps more weighting towards recent performance than projected performance.
Year, price to book value ratio, book value per share for Markel:
2011, 1.1, $316
2018, 1.8, $670
2024, 1.4, $1,062
We of course want to buy Markel when the price to book value ratio is as low as possible, ideally towards the bottom of its typical trading range.
Markel traded at 1.1 x book in late 2010 and early 2011. I bought it in huge amounts back then the IV10/price* ratio was around 4.2! back then - and wrote about the opportunity at TMF on the Markel boards, and also on the Manlobbi's Descent board around 2016 when I exited with the price to book inflated.
Let's break the informationa above in how has changed over the time, to make more sense of it:
2011, 1.1, $316
-- Price book of 1.1! Cheap! For such a high quality firm. Over the next 7 years book value per share from here grows 11% per year (670/316)^(1/7). This 1.1 multiple is weird, given that book value has been growing on trend at around 15%, but the market is pretty depressed these days anyway..
2018, 1.8, $670
-- Okay, MKL has been growing nicely - so the market is assigning a high price to book of 1.8. Essentially the market is just projecting the 11%+ to continue.
-- But what happens is that the book value growth has some setbacks, growing 8% over the next 6 years from 2018 to 2024.
2024, 1.4, $1,062
-- The market is now projecting a growth of around 8% as normal, so assigning a lower price to book of 1.4.
So what we have seen over the last 6 years is both a lacklustre - but not too bad - book value per share growth of 8%, *and* a gradually falling multiple from 1.8 down to 1.4. Collectively this has caused a poor stock price performance.
The present price/book ratio of 1.4 really isn't particularly expensive anymore, so that is good - and the recent 8% rate of book value per share growth isn't exciting but also *isn't too bad..* especially even the historical extent of growth and the culture being pretty much the same.
This does illustrate how important entry price is though, even when holding firms over quote a few years (including around 10 years which many still view as fairly long-term). Over a 10 years period, starting price really matters, and even over a 20 year holding period it can make a big difference. Microsoft has done incredibly well as a firm since 2000 but buying it in March 2000 (a return of 9% pa), compared to March 1995 (a return of 17%) or March 2009 (a return of 23% pa).
The Manlobbi Method assigns an IV10/price score to companies which indicates not only when to buy, but also when to exchange them with something better. Buy and forget is a good strategy, and for most it is probably better than second guessing what you are holding - however Markel's rise in the price/book was gave a very visible view at the valuation and the time to buy insurance firms is when the they are trading closer to book value, not 80% higher as Markel was doing so in 2016-2018.
Now that Markel is trading at 1.4 x book, you can bet on it being somewhere close to that 10 years away, so your realised return will be about the growth in the book value per share. The last 15 years they have managed about 9% growth, and before that they held onto growth around 15%. Their focus on speciality insurance has the advantage over other insurance of providng systemic risk independence across policy. Gaynor has been a good stock picker, and stocks have had an updraft from US stocks generally doing well and now at historical heights - so Markel's book is now boosted up from this also, making their 8% recent 6 years performance in the book value per share growth even a little more lacklustre.
I wouldn't be buying Markel today unless it was trading substantially lower than its average trading multiple of book value per share (about 1.3x), given its rate of value generation.
- Manlobbi
* IV10 is the intrinsic value as viewed by the market 10 years into the future (and if the firm pays dividends, as MKL doesn't, as I just add this back in as cash with a 7% return). So the IV10/price is the ratio of price today compared to *how the market is likely to view the company* ten years into the future. Trade very infrequently, but search for new firms to buy the highest IV10/price, whilst freeing up cash by selling firms that have had their multiples 'mature' in your portfolio. This is basically the Manlobbi Method.
No. of Recommendations: 6
Tom Gayner is deemphasizing book value as a measure of business value. Maybe a higher PB is merited as they make more acquisitions.
This is true when comparing 2011 (before Markel Ventures took hold) to 2022, but not so important when comparing 2016 to today. Even comparing now to 2011, Markel Ventures when I was searching them last around 2017 only comprised about 10% of their business, so if that part of this business warranted say a 2 x book value multiple then it would only increase the book value per share multiple of the whole Markel business by about 0.1.
Insurers were nearly uniformly cheap around 2011 - many trading near or even under book. Part of this was not just the market being generally selling at low multiples at this time, but Insurance also having been in a 'soft' market since about 2004 - so after 7 years in 2011 people have lost patience and treat it as a permanent condition. Ben Graham was particularly keen to identify when firms had temporarily poor conditions, and observed that the market treated the temporary as the permanent - so you can just buy at that time without any catalyst, and then apply extreme patience to wait it out - even if that means 7+ years. Markel was a particularly high quality one, along with Berkeley Corporation, both commanding IV10/price ratios north of 4 and I scooped those two up as my largest holdings.
- Manlobbi
No. of Recommendations: 2
Insurers were nearly uniformly cheap around 2011 - many trading near or even under book. Part of this was not just the market being generally selling at low multiples at this time, but Insurance also having been in a 'soft' market since about 2004 - so after 7 years in 2011 people have lost patience and treat it as a permanent condition. Ben Graham was particularly keen to identify when firms had temporarily poor conditions, and observed that the market treated the temporary as the permanent - so you can just buy at that time without any catalyst, and then apply extreme patience to wait it out - even if that means 7+ years. Markel was a particularly high quality one, along with Berkeley Corporation, both commanding IV10/price ratios north of 4 and I scooped those two up as my largest holdings.
I'm close to losing patience with Markel but have been holding out hope that Gayner will return the company to higher growth.
Manlobbi, do you see any areas of the market these days that are similar to insurance in 2011?
Thanks,
Andy
