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Discussion at Markel

I sent this to Saber Capital clients last week, and I wanted to post it here on the site as well.

Last month, I had the great privilege to visit Markel and speak with Tom Gayner and a few of his colleagues at Markel in Richmond, Virginia. Markel has always been a company that I’ve greatly respected, in large part thanks to the leadership of Tom Gayner, who has done an outstanding job stewarding the culture that the Markel family established and maintained over many decades. I wrote about my thoughts on Markel as an investment idea a few years ago, which you can review if you’re interested in reading more about the business.

At our meeting, I gave a brief presentation to the Markel guys about my thoughts on a few of the stocks we own, including Google and Facebook, which are my two most recent investments.

This presentation was not designed to be a comprehensive discussion of these firms, but rather just an overarching view of some of the common denominators I have found in a few of these high-quality technology companies. Part of the presentation uses some slides from a talk I did on Tencent last year (see that original Tencent presentation here).

I’ll have more to say about those two companies in Saber Capital’s next investor letter (to get on our mailing list, you can sign up on our site). But suffice it to say that I think Facebook and Google, despite their size, offer some of the most compelling risk/reward opportunities in the stock market currently. It’s somewhat stunning that FB and GOOG trade around a 5% free cash flow yield, which is roughly in line with the broader market averages. This is despite virtually infinite returns on tangible capital, monopolistic strongholds on their respective industries, large addressable markets, and huge growth – FB recently traded at around 20 times what it will earn this year, despite growing its sales at 49% and its profits at 63% last year. Google has a similar valuation, after accounting for its $100 billion (and counting) cash pile, and is growing its top and bottom lines at over 20% currently. The typical large, blue-chip stock in the S&P 500 trades at a similar valuation or higher, despite growth rates that are often in the single digit range (not to mention competitive positions that, in my opinion, are much weaker). 

Obviously, growth rates will slow down, but I think it’s very likely that these two companies will continue to grow at above average rates for a long time to come. They still occupy only a small portion of the advertising market, but they offer the best value proposition for advertisers. They also both have compelling “call options” on other assets that haven’t yet been monetized.

There are some headwinds to be sure, and there are regulations (such as Europe’s GDPR) that will have an impact on their data-collection practices and their advertising business models, but I am very confident that these firms will be doing more business in five years than they are today. The nature of their network effects and the incredible value they provide to their users and their advertising customers gives me confidence that their moats will continue to widen.

What is Your Edge?

There isn’t much to say about Google and Facebook that already hasn’t been said. I often get the question that goes something like this: “What is your edge in Google?”, or “What do you know that the market doesn’t?” But I think this is the wrong question for investors to ask themselves, at least when it comes to mega-caps. There is no information edge to be found there. Yet Apple’s stock is almost 100% higher than it was just 24 months ago. How does a $450 billion fluctuation in quoted value occur on the most widely-followed company in the world, in just two years?

It’s a question I’ve spent a lot of time thinking about, and I wrote about the concept of edge in this article a while back

Along these same lines, I wrote in my recent letter to Saber Capital investors some comments on Bill Belichick’s famous saying: “Do Your Job“. Our job as investors is not to be the most original. It’s not to have the most compelling investment write-up, or the most unique ideas. Our job is to try and compound each dollar of capital at the highest possible rate with a minimum of risk. For me, this means looking for the most obvious bargains in the stock market. 

Sometimes, the best bargains (in terms of risk/reward) really are hiding in plain sight. As I mentioned in a recent note, I think some investors have a condition that in one small way reminds me of the Genovese bystander effect, where everyone witnessed the crime but no one called the police because they all thought someone else would. Lots of investors don’t own these widely-followed stocks because they assume everyone else does and they assume they are fairly priced and there is no edge.

Regarding informational edge on these large companies, that is absolutely true. But when it comes to human behavior and thinking differently about a certain set of widely acknowledged facts, there can be an edge. Optimism, pessimism, patience, fear and greed, and other human behavioral patterns exist across geographies, industry groups, and market caps. And this is part of the reason why even large-cap stock prices fluctuate so much in the stock market.  

As I’ve said before, I have no preference for large caps over small caps. I look at everything that I think I can understand. Smaller stocks certainly offer more opportunities in general, but I’m certainly not opposed to investing in large companies when they are cheap. I do believe that the market under-appreciates certain companies that have really strong moats because often times this durability allows for the company’s runway to last longer than many expect.

Apple and Tencent are examples of how even the largest companies in the world can be significantly mispriced from time to time, and I believe Google and Facebook are also in this camp at the current time.

Again, I’ll have more to say on these companies over time, but I wanted to post this presentation that outlines a few common denominators of great companies that I’ve been thinking about. I simplified some sections to make it more succinct, and the valuation numbers are updated as of about two weeks ago. 

Thanks for reading! If you’re interested in learning more about investing with Saber Capital, or would like to discuss anything regarding this topic or anything else, feel free to reach out to me (contact info below).

Download (PDF, 938KB)

John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

To read more of John’s writings or to get on Saber Capital’s email distribution list, please visit the Letters and Commentary page on Saber’s website. John can be reached at 

6 thoughts on “Discussion at Markel

  1. Hi John,

    Your article reminded me of a WSJ article about Chuck Akre, which explained that Chuck has the words “The Bottom Line of All Investing is Rate of Return” painted on the walls of his office. A constant reminder to “do his job” as Bill might put it.

    Anyway, my question is on concentration. If I remember correctly, you run a fairly concentrated portfolio in terms of number of securities. Now looking at your recent investments (Tencent,, Facebook, Google) it seems you could have as much as half to a third of your portfolio in tech/internet companies. When you’re constructing a portfolio, in addition to evaluating each security on its own merits, do you give any consideration to industry exposure or other portfolio-level considerations? I’m interested to get your perspective, as apart from position sizing, I’ve always tended to ignore (or forget about) portfolio-level considerations, for better or worse.

    Thank you.

  2. Dear John, thanks for the post. Very interesting. I couldn’t find though the USD 60 billion that you said Tencent has in net cash and investments. From the balance sheet (Annual Report, 2017) I see 16 billion RMB in net cash (aprox USD 2.5 billion), plus 127 billion RMB (available for sale financial assets, USD 20 billion) plus 113 billion RMB (investments in associates, USD 18 billion) plus RMB 23 billion (Investments in redeemable instruments of associates, USD 3.68 billion) plus RMB 7.8 billion (investments in joint ventures). Total aprox USD 43 billion.
    Thanks! Regards


    1. Hi Hernan,

      A portion of the securities are held at cost on the balance sheet, but have a collective market value that is much higher than cost. The footnotes disclose the exact figures.

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