Aggregation of Marginal Gain Over Long Period of Time
It makes no small difference, then, whether we form habits of one kind or another from our very youth; It makes a very great difference, or rather all the difference. — Aristotle
I think that people underestimate-until they get older- underestimate just how important habits are, and how difficult they are to change when you are forty-five years old and how important it is that you form the right ones when you’re young — Warren Buffett.
This is the story of Tom Gayner (Tom Gayner is the Executive Vice President and Chief Investment Officer Of Markel Corp and President, Markel Gayner Asset Management, Inc., the investment subsidiary Of Markel Corp since December of 1990. The asset under management is about $2 billion.)
In 1990, Tom Gayner weighed 190lbs. Nobody would have mistaken him for an Olympic gold medalist volleyball player. Still, he says, his weight was ‘within the realm of reasonable.’ That year at the age of twenty- eight he took the job of running the investment portfolio at Markel Corporation, an insurance firm based in Richmond, Virginia. Investing is a sedentary sport that primarily entails sitting around, reading, and spending a lot of time in front of the computer. Gayner was built exquisitely built for this. His idea for ideal Friday nights was to sit on the couch with his grandmother and watch Wall Street week.
As Gayner grew older, his talent for sitting and thinking had consequences. His weight gradually drifted above 200lbs. Determined to drift no more, he proclaimed to his friends and colleagues to lose one pound over year for the next ten years. That may sound absurdly unambitious at the time. Still, some studies suggested that an average American male gains one to two pounds per year between early adulthood and middle-age years.
Gayner, a master of compounding money, understood how small advantages and disadvantages — add up over a long time. So he set about changing the unhealthy habits of a lifetime.
“As a kid, I had a diet of a campground racoon,” he says. He reckons that he ate over two hundred doughnuts a year. Some dieters would have renounced such sinful pleasure entirely, committing to the joyless (for a while) existence of a doughnut free life before (almost inevitably) falling off the wagon. Not Gayner. He cheerfully confessed he’ll still eat doughnuts but about twenty doughnuts per year instead of the two hundred.
Overall, he has done an admirable job of sticking to his healthy habits. Nutritionally, as in other ears of life, Gayner’s strategy is to be directionally correct, not perfect. ‘In general, he says, ‘I am a satisfied, not an optimizer.’
What’s distinctive is the indomitable consistency of his discipline. Most people get fired up for a few days or weeks before they flame out. I own a kettlebell and a skipping rope, none of which I have used more than three times since the purchase. The primary purpose of their existence is to make me feel guilty. Yet Gayner keeps plugging away, never perfect but always directionally correct. The key he says that he is “radically moderate” about everything he does. If I make extreme changes, they are not sustainable. But moderate incremental changes — they’re sustainable.
All of this points to an important conclusion that applies to both investing and life. Resounding victories tend to result from small, incremental advances and improvements sustained over long periods.
‘If you want the secret to success, it is just to make each day a little bit better than the day before, says Gayner. “There are different ways you can go about doing that, but that’s the story… Making progress over and over again is the critical part.”
Gayner has applied the philosophy to investing. Many investors lurch from one short term bet/strategy to the next, much like yo-yo dieters jumping from one diet program to another without entrenching a sustainable solution. Gayner, the patron saint of steady progress, adheres to a stock-picking strategy built on four principles that haven’t changed in thirty years, just like his weight (190lbs).
These four principles work like a guardrail
They help him point in the right direction and help to avoid being stupid.
- The business has to be profitable with a good return on capital and not have too much leverage.
- The management team must have an equal level of talent and integrity.
- The company should have ample opportunity to reinvest its profits at a handsome rate of return.
- The stock must be available at a reasonable price.
Gayner’s portfolio is built to last, not to outperform. It would’ve been much more lucrative if he’d loaded up on FANG. But his investment decision, much like his approach to diet and exercise, are not intended to be optimal. Instead, he is attempting to be consistently and sustainably sensible. He has consistently beaten the S&P500 as he produced returns of 12.5% over S&P’s 11.4%. At that rate, $1m invested in Gayner’s portfolio would have grown to $34.2m versus $25.5m if that $1m was invested in the S&P 500.
It is an impressive demonstration of how valuable it is to maintain even a modest edge over a long period of time.
Gayner’s record shows that you don’t need to be extreme to achieve exceptional long-term results. On the contrary, Gayner says that people frequently get into trouble by going to the extreme to gain a more significant edge over the market.
Check out other stories: The Jolly Investor
Richer, Wiser, Happier (Highly recommend reading)