My #1 “Buy and Hold Forever” Stock

Summary

In 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

00:00

💹 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.

05:01

🏆 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.

10:02

🔍 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.

15:03

📈 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.

Keywords

💡Long-term compounder

A 'long-term compounder' refers to a type of company that is capable of generating consistent growth over an extended period, often measured in decades. In the video, the speaker emphasizes the rarity of such companies and their potential to provide superior returns for investors who are willing to hold onto their stocks for the long term. The concept is central to the video's theme of identifying companies that are suitable for 'buy and hold forever' investment strategies.

💡Moat

A 'moat' in business terminology refers to a sustainable competitive advantage that protects a company from competition. In the context of the video, the speaker mentions that a moat is a crucial quality for a long-term compounder, as it ensures the company's ability to maintain its market position and profitability over time. The video uses Costco as an example, where its expanding moat is attributed to its growing membership base and stronger negotiating power with suppliers.

💡Reinvestment opportunities

Reinvestment opportunities refer to a company's ability to deploy its capital effectively to generate high returns over time. The video highlights this as a key characteristic of long-term compounders, suggesting that companies with such opportunities can continue to grow and compound their investments. Constellation Software is given as an example, with its strategy of buying midsize software companies serving niche markets over nearly 30 years.

💡Recession resistant

A 'recession resistant' business model is one that can withstand economic downturns and maintain its performance. In the video, the speaker argues that long-term compounders should have such a model, which is not necessarily tied to a specific industry but rather to the business's structure and strategy. McDonald's is used as an example, with its franchise model and international expansion allowing it to be less affected by changes in consumer spending.

💡Management team

A strong management team is essential for a company's success, particularly for a long-term compounder. The video underscores the importance of a management team that can effectively allocate capital and whose incentives are aligned with those of the shareholders. The speaker believes that a strong management is a significant moat for a company, as it is a unique and non-replicable asset.

💡Marquel

Marquel, referred to in the video, is a company that the speaker considers a prime example of a long-term compounder. It is described as having a unique business model with three distinct aspects: insurance, an equity portfolio, and Marquel Ventures. The video discusses how Marquel's management, investment strategies, and diverse business operations make it a strong candidate for long-term investment.

💡Combined ratio

The 'combined ratio' is a metric used in the insurance industry to measure an insurer's profitability. It is calculated by adding the loss ratio and the expense ratio. In the video, the speaker uses Marquel's combined ratio to illustrate the company's efficiency in underwriting and managing insurance claims. A lower combined ratio indicates better profitability, which is a point of discussion when evaluating Marquel's insurance operations.

💡Equity portfolio

An 'equity portfolio' consists of the stocks that a company or individual holds as investments. In the context of the video, Marquel's equity portfolio is highlighted as a significant part of its business, with a focus on high-performing, established companies. The video notes that Marquel's equity portfolio has historically outperformed the S&P 500, showcasing the company's investment acumen.

💡Marquel Ventures

Marquel Ventures is Marquel's private equity arm, which is discussed in the video as a significant growth driver for the company. The speaker points out the substantial increase in operating income from Marquel Ventures over the years, suggesting that it could eventually surpass the company's current market cap. This part of Marquel's business is seen as a key factor in its potential to continue compounding value for investors.

💡Price to book value

The 'price to book value' ratio is a valuation metric used to compare a company's market value to its book value. In the video, the speaker suggests using this ratio to determine a fair price for investing in Marquel. The average price to book value for Marquel is mentioned as 1.3x, with the speaker indicating that values in the 1.2 to 1.1 range represent a good buying opportunity, based on historical data.

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