My #1 “Buy and Hold Forever” Stock
Summary
TLDRIn this video, the speaker discusses the rarity and potential of 'long-term compounder' companies for investors seeking substantial long-term returns. These companies, characterized by a strong economic moat, the ability to reinvest capital at high rates of return, a resilient business model, and strong management, are few and far between. The speaker highlights Markel as an example of such a company, explaining its unique business model, including specialty insurance, equity portfolio, and Markel Ventures. They also discuss the company's historical performance, management strategy, and why it's considered a buy and hold forever stock, suggesting it as a top investment choice for those looking for long-term growth.
Takeaways
- 🌟 Long-term compounders, or 'buy and hold forever' stocks, are rare companies that can provide significant returns over decades.
- 🏆 The key to identifying long-term compounders is a durable competitive advantage, often referred to as an economic moat.
- 💹 Companies with a strong moat, like Costco, can gradually expand their valuation multiples as their competitive position strengthens.
- 💼 The ability to reinvest capital at high rates of return over the long term is crucial for long-term compounders, as seen with Constellation Software.
- 🌐 A resilient business model that can withstand economic downturns is essential for long-term success, as exemplified by McDonald's.
- 💼 Strong management teams are critical for capital allocation and are a significant factor in a company's potential to become a long-term compounder.
- 🏦 Markel is highlighted as a prime example of a long-term compounder, with a unique business model that includes insurance, an equity portfolio, and Markel Ventures.
- 📈 Markel's equity portfolio has historically outperformed the S&P 500, averaging 14.6% annual returns over the prior 5 years.
- 🔍 The price-to-book value metric is considered a good indicator for evaluating Markel, with an average of 1.3x over the years.
- 📉 Despite underperforming the market over the past decade, Markel has shown resilience and recent outperformance, suggesting potential for future gains.
Q & A
What is a 'long-term compounder' in the context of investing?
-A 'long-term compounder' refers to a unique type of company that offers investors the potential for significant long-term returns, often over decades. These companies are rare and are considered 'buy and hold forever' types of stocks due to their ability to consistently grow and compound value over an extended period.
Why might an investor choose to invest in a long-term compounder over index investing?
-An investor might choose to invest in a long-term compounder over index investing because these specific companies have a set of qualities that could potentially lead to better returns than a broad market index over the long term. These qualities include a durable competitive advantage, the ability to reinvest capital at high rates of return, a resilient business model, and strong management.
What is the importance of a 'moat' for a company to be considered a long-term compounder?
-A 'moat' or durable competitive advantage is crucial for a company to be considered a long-term compounder because it's what can keep a company in business for the long term. It acts as a barrier to entry for competitors and allows the company to maintain its profitability and market position over time.
How does Costco's gradually expanding PE ratio illustrate the strength of its moat?
-Costco's gradually expanding PE ratio over the last 10 years illustrates the strength of its moat as it indicates that the company's competitive advantage is growing. This is evidenced by an increasing membership base, which provides Costco with more customers and stronger negotiating leverage with suppliers, allowing it to secure better prices and reinvest in its business.
What does the ability to reinvest or redeploy capital at high rates of return signify for a long-term compounder?
-The ability to reinvest or redeploy capital at high rates of return for a long time is a key quality of a long-term compounder. It signifies that the company can continue to grow and generate high returns on its investments, which is essential for sustained long-term growth and value creation.
Can you provide an example of a company that has demonstrated the ability to reinvest capital at high rates of return?
-Constellation Software is an example of a company that has demonstrated the ability to reinvest capital at high rates of return. They have consistently bought midsize software companies serving niche markets for almost 30 years, maintaining a successful business model that allows for continuous capital reinvestment.
Why is a resilient or recession-resistant business model important for a long-term compounder?
-A resilient or recession-resistant business model is important for a long-term compounder because it helps ensure the company's survival and growth even during economic downturns. This quality allows the company to continue reinvesting and redeploying capital, which is crucial for achieving long-term compounding gains.
How does McDonald's business model exemplify resilience and recession resistance?
-McDonald's business model exemplifies resilience and recession resistance through its primarily franchise-based structure, which provides a steady stream of revenue from franchise fees and royalties. Additionally, owning the land where the buildings are located and leasing it back to franchisees reduces exposure to consumer spending changes. Its international expansion and adaptability to local tastes also contribute to its resilience.
What are the four qualities that the speaker believes long-term compounders must have?
-The four qualities that the speaker believes long-term compounders must have are: 1) a moat or durable competitive advantage, 2) the opportunity to reinvest or redeploy capital at high rates of return for a long time, 3) a resilient or recession-resistant business model, and 4) a strong management team.
Why does the speaker consider Markel to be their number one buy and hold forever company?
-The speaker considers Markel to be their number one buy and hold forever company because it exhibits the qualities of a long-term compounder: it has a strong economic moat through its management, opportunities to reinvest capital at high rates of return through its equity portfolio and Markel Ventures, a generally resilient business model despite being exposed to insurance-specific risks, and a strong management team that aligns with shareholder interests.
What is the significance of Markel's share buybacks and how do they reflect the company's confidence in its intrinsic value?
-Markel's share buybacks are significant as they indicate the company's belief that its share price is below its intrinsic value. This practice is consistent with the company's strategy and is a signal to investors that the company views its shares as undervalued at the current market price.
Outlines
💹 The Long-Term Compounder: Investing in Companies for the Decades
The speaker introduces the concept of 'long-term compounders,' which are rare companies that offer investors exceptional returns over an extended period, such as 10 to 30 years. These companies are characterized by having a durable competitive advantage, often referred to as a 'moat.' The speaker explains that while capitalism fosters innovation and disruption, leading to the replacement of incumbent businesses, there are certain companies that can withstand these changes due to their unique qualities. The speaker also discusses the importance of a company's ability to reinvest capital at high rates of return and the significance of a resilient business model that can withstand economic fluctuations. The example of Costco is used to illustrate how a strong moat can lead to an expanding valuation multiple over time.
🏆 Key Qualities of Long-Term Compounders
The speaker outlines four key qualities that make a company a good long-term investment: a durable competitive advantage, the ability to reinvest capital at high rates of return, a resilient business model, and strong management. The speaker uses the example of Constellation Software to illustrate a company that has consistently reinvested capital at high rates of return over nearly 30 years. The discussion also touches on the importance of a company's management team, which is crucial for capital allocation decisions and aligning with shareholder interests. The speaker then introduces Markel as a prime example of a company that embodies these qualities, referring to it as their top 'buy and hold forever' investment.
🔍 In-Depth Analysis of Markel's Business Model and Strategy
The speaker provides a detailed analysis of Markel's business model, which includes three main components: insurance, an equity portfolio, and Markel Ventures. The insurance segment is characterized by a specialty focus and a strong underwriting record, as evidenced by a low combined ratio. Markel's equity portfolio is unique for an insurance company, with a significant allocation to equities, including a diverse selection of well-established companies. The speaker also discusses Markel Ventures, the company's private equity arm, which has shown substantial growth and contributes significantly to Markel's overall value. The analysis highlights how Markel's diversified approach and strategic investments position it as a strong long-term compounder.
📈 Markel's Performance and Investment Potential
The speaker concludes by discussing Markel's historical performance and its potential as an investment. Despite underperforming the market over the past decade, the speaker argues that Markel's recent performance, especially in comparison to the S&P 500, suggests a resilient business model. The speaker also notes that Markel's beta is below one, indicating lower risk-adjusted returns, and that the company's management aligns with shareholder interests through share buybacks and a focus on book value growth. The speaker believes that Markel's current market valuation presents a good opportunity for investment, based on its price-to-book value metric and the potential for future growth through its ventures portfolio.
Mindmap
Keywords
💡Long-term compounder
💡Moat
💡Reinvestment opportunities
💡Recession resistant
💡Management team
💡Marquel
💡Combined ratio
💡Equity portfolio
💡Marquel Ventures
💡Price to book value
Highlights
Discusses the rarity and potential of long-term compounder companies for investors seeking long-term returns.
Emphasizes the importance of a durable competitive advantage, or 'moat', for a company's long-term success.
Analyzes Costco's PE ratio expansion as an example of a strengthening moat.
Stresses the need for companies to have opportunities to reinvest capital at high rates of return.
Cites Constellation Software as an example of a company with a consistent strategy for reinvestment.
Explains the significance of a resilient business model, using McDonald's as a case study.
Argues that strong management teams are crucial for long-term compounder companies.
Introduces Markel as a prime example of a long-term compounder with a unique business model.
Details Markel's three business aspects: Insurance, Equity portfolio, and Markel Ventures.
Discusses Markel's consistent underwriting proficiency as shown by their combined ratio.
Highlights Markel's Equity portfolio's outperformance compared to the S&P 500.
Explains Markel Ventures' significant growth and its potential impact on the company's value.
Assesses Markel's alignment with the four qualities of long-term compounders.
Suggests using the price-to-book value metric to determine a fair investment price for Markel.
Addresses concerns about Markel's share price performance and its risk-adjusted returns.
Shares personal investment in Markel and the rationale behind the decision.
Transcripts
hey what's up everybody so today I want
to talk about a specific type of company
that is very rare but offers investors
the best source for long-term returns
and when I say long-term I'm talking 10
20 even 30 or more years and that is the
long-term compounder or otherwise known
as the buy and hold forever type of
stock this is a unique breed of
companies and there's very few companies
out there and even for myself I'll be
honest most of the companies that I am
personally investing in are not
necessarily companies that I would hold
forever they are companies that I think
are undervalued right now for their own
set of unique reasons but they're not
necessarily companies I'd be comfortable
holding for 10 20 30 years because
something could happen to these
companies in the far future that's far
beyond anyone's ability to foresee that
could actually threaten these business
models capitalism is a brutal world and
the nature of the game is that new
companies new business models and new
technologies will all be created in the
future that replace the incumbents and
raise the productivity of the economy
overall and by extension raise the
living standards of citizens this is why
indexes like the S&P 500 have performed
so well for over a century now and it's
why the conventional wisdom when it
comes to investing is just buy the index
and forget about it now personally I'm
all for index investing even more so
than investing into individual companies
but that being said I do think there are
specific companies out there that have a
very particular set of qualities that do
make them a long-term compounder type of
investment and over the long term that
could lead to better returns than just
being invested in a index the most
important quality it needs to have in my
opinion is there needs to be a moat or
some kind of durable competitive
advantage and the reason is is that this
is really the only thing that can keep a
company in business for the long term
and economic modes can take many
different forms and sometimes they
aren't always obvious but as they become
stronger you usually see a company's
valuation multiple gradually expand for
example if we look at Costco's PE ratio
over the last 10 plus years we can see
pretty clearly that it has gradually
expanded because the Moe keeps getting
stronger their membership base gets
bigger which means they have more
customers and more negotiating leverage
with their suppliers to secure the best
prices and they can also keep
redeploying Capital into opening new
stores and this ties into the second
quality that I believe long-term
Compounders must have which is needs to
have the opportunity to reinvest or
redeploy Capital at high rates of return
for a very long time there's quite a lot
of companies out there that can earn
high Returns on capital for brief
periods of time for example there's
cyclical industries that go through
stages where they hit cyclical highs
like oil and gas steel fertilizer
companies or just any companies that
rely on high commodity prices there's
also companies that can earn high
Returns on capital for several decades
but eventually see those returns fizzle
out due to competition
catching up but ultimately what we're
looking for is does the company have
opportunities out there to keep
deploying capital and a great example of
this is constellation software which we
all now know is a long-term compounder
because of the returns that they have
historically given but they've had the
exact same strategy of buying midsize
software companies that serve Niche
markets for almost 30 years now they've
basically never changed their business
model since they were founded so for
them as long as there's other software
companies out there that are being
started that they and then eventually
purchase there will always be
opportunities to reinvest Capital at
high rates of return now the third
quality is that it needs to have a
resilient or recession resistant
business model now this doesn't
necessarily mean that it has to operate
in a recession resistant industry it's
more about how the business is set up
and a great example of this is
McDonald's fundamentally they are a
restaurant and restaurants are exposed
to changes in consumer spending levels
consumer tastes but as we all know
McDonald's is primarily a franchise
which means they collect a steady stream
of Revenue through franchise fees and
royalties and they also own the land
where the buildings are located and leas
it back to the franchisees so they're
not as exposed to changes in consumer
spending levels and since they figured
out how to expand internationally and
adapt their menu to local tastes they
can keep on expanding which for them is
how they reinvest and redeploy capital
by opening new locations all across the
world which not many restaurants or even
retailers have been able to do and this
is important because the number one rule
of investing is don't lose money and the
number two rule is don't forget number
one and if you are invested in cyclical
companies they will go through periods
of cyclical lows where the returns are
low and they don't make very much money
which makes long-term compounding type
of gains much harder to achieve and then
the fourth and final quality is that it
needs to have a strong management team
and I think this is pretty
self-explanatory the ability for a
company to become a long-term compounder
depends on their ability to allocate
capital and it's the management team
that makes those decisions so you need
to ensure that the management team's
incentives are aligned with yours as a
shareholder so the company I'm talking
about that is my number one buy and hold
forever company is Marquel now marel I'm
sure at least some of you have heard of
before they're often referred to as a
mini Burkshire hathway because they do
apply similar principles as they do but
they are actually different in certain
key aspects for one they're much smaller
than Burkshire hathway Burkshire hathway
is now a trillion dollar company with
over 270 billion in cash and short-term
Investments which is a lot of capital to
deploy they've basically beaten the game
of investing and are now just doing
little Side Quests for example news
recently broke that they had opened a
position in Ulta beauty and this was a
$260 million position but this is only
about .1% of their total portfolio so
sure it's a vote of confidence for Ulta
investors but really this won't move the
needle for them and this is the problem
they face now there's just only so many
good Investments out there and they're
just too big now to keep benefiting from
them but Marquel doesn't have this
problem right they're only a 20 billion
company so there's still plenty of
Investments they can make that will move
the knel for them and similar to
Berkshire hathway Marquel only initiates
share BuyBacks when they believe the
share price is below the intrinsic value
and recently they've been buying back a
lot of shares through the first 6 months
of 24 they bought back $260 Million
worth of shares which is up from 1887
million in 2023 which has reduced their
share count by almost 500,000 shares
over the past year but it's not just the
size of marel that makes them unique
it's also the business model so for some
quick background on Marquel they have
three distinct aspects of their business
which are Insurance the equity portfolio
and Marquel Ventures so insurance is
specialty insurance or hard to assess
type of risks like environmental risks
cyber security risks event cancellation
insurance and even some strange ones
like body part Insurance where say if
you're a professional athlete or maybe a
dancer and you rely on a certain body
part for your career yes you can get
insurance on that and marel does offer
that the best metric that you can use to
assess Insurance operations for any sort
of Property and Casualty Ure is the
combined ratio so this metric measures
how good they are at underwriting or or
basically deciding who to extend
insurance coverage to the combined ratio
is made up of the loss ratio and the
expense ratio and the loss ratio relates
to payouts made by the insurance company
for claims and the expense ratio is
their direct cost associated with
providing that coverage so admin costs
employee pay Etc so for example if you
have a combined ratio of 95% then you
can basically interpret that as for
every $1 in premiums they receive
Marquel is spending 95 cents on on
paying out insurance claims and on
premium related expenses so here's what
their combined ratio has looked like
historically over the past 10 years it's
averaged about 95% with just one year
where it went over 100% which was in
2017 and this metric directly ties into
the profit that they report for their
insurance segment so a lower combined
ratio means higher Insurance profit this
is one of the reasons why maral's
profits overall fluctuate so much year
toe which I think adds to the difficulty
in actually assessing the value of this
business now markel's Equity portfolio
is quite unique from other insurance
companies normally what insurance
companies do is they invest their float
the float being the money they've
collected in premiums for their
customers but are not yet obligated to
pay out as claims they invest the float
into very lowrisk Investments like
treasuries mortgage back Securities
corporate bonds and then maybe a small
amount in equities like three or 5% of
their total portfolio but markel's
portfolio is roughly 40% in equities
with much less in bonds but a similar
amount in government treasuries overall
which does present some additional risk
to marel but if we look at what equities
they hold we see a lot of very mody
companies right so companies like
Berkshire hathway which is their largest
holding big tech companies like Google
Amazon Microsoft Apple and even
companies like Home Depot that you could
argue has a moe as they are the largest
Home Improvement retailer in the world
but as we can see very diverse selection
of companies in fact they own 85 out of
the 507 companies that currently make up
the S&P 500 and those 85 companies
represent about 35% of the S&P 500's
total market cap and the performance of
their Equity portfolio has historically
been very strong as we can see here by
the end of 2023 they averaged
14.6% annual returns over the prior 5
years while the S&P 500 returned just
over 11% over that same period and
Marquel has detailed at a very high
level what their process is for
selecting Investments whether it's a
public company or a private company and
they use a four-step process which is
number one companies with consistently
High Returns on Capital that don't use
much debt to achieve that number two is
strong management teams number three is
the business has to have reinvestment
opportunities and number four it has to
be valued at what they think is a fair
price and then lastly the most most
interesting aspect of their business is
marel Ventures so this is basically
their private Equity business that they
run within marel and over the years
marel Ventures has grown considerably it
went from 39 million in operating income
in 2014 to 437 million in 2023 so if we
apply say a 10x multiple to Value just
this specific part of Marquel we get
about 4.3 billion in Enterprise Value
just from Marquel V V and if we assume
that marel Ventures keeps growing
earnings at say 15% a year which is
lower than what it's historically been
then about within 12 years time we could
get to a point where the value of marel
Ventures alone surpasses what their
current market cap is of about 20
billion so ultimately what you have with
marel is a company that is buying back
shares when the price makes sense to do
so you have a consistently profitable
Insurance operation a equity portfolio
that has historically outperformed the
S&P 500
and a marel ventures business which is
growing very fast so now let's go back
to those four qualities that I talked
about earlier for long-term Compounders
and see how marel Stacks up so do they
have an economic Moe yes they do and the
Moe is their management who's shown that
they can consistently earn Market
beating returns in public equities and
also through owning businesses in
Marquel Ventures and personally I think
a strong management team is one of the
best Moes you can have because it's very
obvious that no other company has it a
management team is something that you
know for sure is going to be unique to
each company number two doesn't have
opportunities to reinvest Capital at
high rates of return for a very long
time yes they do because of their Equity
portfolio and because of Markel Ventures
they can essentially just keep buying
companies as long as they can find
companies that meet their investment
criteria number three does it have a
resilient and recession resistant
business model generally speaking it
does because they own such a diversified
range of businesses but they are still
exposed to Insurance specific risks from
things like natural disasters which can
cause losses like we saw in 2017 and
number four does it have a strong
management team yes I believe that it
does so with all that in mind what would
be a fair price to invest in Marquel at
well in my opinion the price tobook
value metric is a good one to use in
fact Marquel management is even
compensated based on the growth in Book
value per share over 5year period so
it's clear that they believe that book
value is an important metric to use to
assess this company and as we can see
The Price to Book value metric has been
very consistent over the years with an
average about 1.3x so generally when
it's in the 1.2 to 1.1 range that's when
it's a good time to open a position in
Marquel because historically speaking
that is when the business is cheap now
something that I think keeps investors
away from investing in Marquel is how
the share price has performed over the
past DEC decade it's actually
underperformed the market with about 9%
annual returns over the past 10 years
whereas the S&P 500 has done about 15%
annually over that same time frame now
one important consideration is that
maral's beta is below one it's currently
at about 0.7 0.8 range so if you believe
that beta is an indication of riskiness
for stocks then marquel's risk adjusted
returns would actually be more like 12
12 1 12% per year which still does
underperform the S&P 500 but also
consider that since the start of 2022
until the present day the market overall
has offered about 8% annual returns
mainly because of the massive decline in
the year 2022 which is about 18% decline
for that year whereas marel in that same
time frame has done just over 10% a year
so in more recent years even after AI
has supercharged the index to alltime
highs with so many other companies
struggling Marquel has still
outperformed the S&P 500 which goes back
to the point I made earlier about having
a resilient business model and also
consider that if the marel ventures
portfolio continues to compound at a
high rate of return like it has
historically eventually this will make
up a larger and larger share of the
business to the point where it's a much
more significant driver of future
returns and in Q2 of 2024 Markel
Ventures reported 177 million in
operating income and actually overtook
the insurance segment which generated
134 million ion so those are the reasons
why I am personally invested in this
company and why I have no plans on
selling this investment anytime soon so
I hope you guys did find this video
insightful and useful if you did then
please leave a like and let me know what
you think in the comment section below
and I'll see you guys in the next video
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