Mastering the Art of Pre-Suasion

“The elementary part of psychology—the psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important.” 

— Charlie Munger in a speech to the USC Business School in 1994.

Charlie Munger has long been a strong advocate of viewing the world through a multi-disciplinary mindset.  Many readers are familiar with Poor Charlie’s Almanack which is the best way to get acquainted with Mr. Munger’s life and philosophy.  On a number of occasions, Mr. Munger has recommended that those who wish to become more familiar with psychology should read the work of Robert Cialdini.  Dr. Cialdini is best known for Influence:  The Psychology of Persuasion, a landmark book that has become standard reading for marketing professionals in recent decades.  Mr. Munger has been known to give copies of this book to friends and relatives and felt so strongly about the value the book has brought to the world that he gave Dr. Cialdini a gift of one Berkshire Class A share in appreciation.

The attraction of Influence for Charlie Munger was not primarily related to applying the techniques in a marketing setting.  Instead, Mr. Munger valued the book because it provided deep insights into the psychology of human misjudgment.  One of the very first articles to ever appear on The Rational Walk applied a few of Dr. Cialdini’s insights to the mystery of how Bernard Madoff was somehow able to use his weapons of influence to steal money from so many intelligent people for many decades.

Pre-SuasionIn Dr. Cialdini’s new book, Pre-Suasion:  A Revolutionary Way to Influence and Persuade, a key insight is provided that could change how marketing professionals approach persuasion.  Dr. Cialdini reveals that the major factor that separates extraordinary persuaders from average ones involves the key moment before a message is delivered.  By setting up a “privileged moment” prior to delivering a message, a persuader can materially increase the odds of a positive outcome.  What is a “privileged moment”?  Dr. Cialdini describes an approach called channeled attention that does not require the persuader to actually alter a person’s beliefs but only to alter what is prominent in a person’s mind at the time they are making a decision.  This is a major departure from the traditional view that it is necessary to change a person’s beliefs by persuading them regarding the merits of a proposal.  Instead, one must only pre-suade through channeled attention.

Human beings typically assume that whatever we are focusing on at a given moment deserves heightened attention.  Dr. Cialdini contends that the human mind can only really hold one thing in conscious awareness at any given point in time and that the cost of that heightened attention is a momentary loss of focused attention on everything else.  One striking example in the book involves a study of consumers who were in the market for a new sofa and were reviewing choices online.  Prior to viewing the sofas, individuals were either shown a background of fluffy white clouds or images of pennies.  Controlling for other factors, the individuals who were subliminally led to focus on clouds placed a higher priority on comfort while those who saw the pennies were more concerned with price.

The implications of this basic thesis are both fascinating and terrifying.  The individuals involved in the sofa study refused to believe that the background images of clouds or pennies had any influence whatsoever but their behavior said otherwise.  Essentially, persuaders – whether they are salespeople, politicians, or journalists – have the power to dramatically influence the actions of their targets merely by directing people’s attention toward what they want them to think about.  These techniques have also been used by police interrogators to persuade individuals to confess to crimes that they did not commit typically leading to convictions even when the individuals later renounce the false confession.

Assuming we buy into the primary thesis of “pre-suasion” via focused attention and channeling, the question naturally flows to the nuts and bolts of how one might command attention and direct it toward the desired objective.  Once the attention has been directed to the right place, it must be held there for long enough to produce the desired decision.  Dr. Cialdini provides a number of guidelines and potential roadmaps to follow.  As one reads through these concepts, it is tempting to think of these techniques as ones that would only work on “other people” – we cannot believe that we are subject to such persuasive techniques but, of course, almost all of us are!

What does this have to do with investing?  Well, perhaps it has a great deal to do with it when we look at our research process objectively.  Although Dr. Cialdini does not discuss the influence CEOs have on shareholders, surely the same principles of pre-suasion apply.  CEOs can focus our attention to certain facts and figures or even use subliminal suggestions in presentations to get us to focus on certain metrics while overlooking others.  For this reason, it seems prudent to immunize ourselves against this risk by avoiding any contact with management prior to an objective review of documents that are more fact based.

Although investors will vary in their research process, ideas typically flow from many initial sources – newspapers, magazines, blogs, newsletters, and more.  What is the first step one should take when investigating further?  Should we dive into the 10-K directly or perhaps review the latest quarterly conference call and slide deck?  Which would be less of a mental challenge?  Well, obviously it would be a lot easier to listen to the conference call while flipping through a slide deck.  However, by doing so, we are allowing management to pre-suade us!  The material that is presented, the order in which it is presented, and even the subtle hints in the presenter’s language can all have an influence on us whether we accept it or not.

How about skipping the presentations but diving right into an annual report?  That’s probably not a great idea if management provides a glossy annual report with a lot of marketing material in it.  It seems much more prudent to focus on the 10-K.  Obviously, even a 10-K can pre-suade us in various ways based on how the company is described and the areas that are emphasized, but we probably stand a better chance of remaining objective if we are in a text based format without visual imagery to exert any influence.  Then, by documenting what we, as investors, view to be the critical factors, it will be possible to resist potential attempts at redirecting our attention when we later review the conference calls, presentations, and glossy annual reports.

The applicability of Dr. Cialdini’s insights are endless and span multiple disciplines.  This is no doubt why Mr. Munger has given away so many copies of Influence over the years and felt strongly enough to give Dr. Cialdini one Berkshire Class A share to thank him.  There is some evidence that the influence has gone in both directions.  Dr. Cialdini thanks Mr. Munger for reviewing the manuscript prior to publication and there are several pages describing how Warren Buffett uses the concept of unity as a persuasive tool that has contributed to the unique loyalty Berkshire shareholders feel toward management.

Readers may wonder whether they should read Influence before Pre-Suasion.  It seems like doing so will increase comprehension of the topics discussed in the new book although each book can stand alone in terms of providing value.  It should be noted that both books come with extensive end notes.  In Pre-Suasion in particular, it is important to read the end notes along with the text.  In some cases, quite a bit would be lost without consulting the notes.

Click on these links to purchase a copy of Influence:  The Psychology of Persuasion and Pre-Suasion:  A Revolutionary Way to Influence and Persuade. Dr. Cialdini refers to Daniel Kahneman’s book, Thinking, Fast and Slow, which is an excellent resource for those who are interested in a more extensive tour of the mind.

Disclosure:  The Rational Walk LLC was not provided with a review copy of Pre-Suasion and purchased a copy of the book.

The Virtue of Being Merely Average

Are you merely average?

MediocreIf you are reading this article, chances are that you will instinctively recoil when asked this question.  People do not like to think of themselves as merely average and this is even more true for individuals who have selected careers in business.  We live in a hyper-competitive world where professional identity and self esteem depends on having above average insights and achieving superior results. The cognitive bias known as illusory superiority is behind the tendency of individuals to overestimate their ranking relative to peers.  This phenomenon has been shown to be true in ordinary activities like driving and it certainly seems to extend to investing.

Active investing requires the recognition of certain fundamental realities.  The world is full of intelligent people who have access to the same information at the same time, and this has only been accentuated by the internet.  Additionally, there are plenty of people who might have special insights due to longtime involvement in an industry or familiarity with key decision makers at a company.  This doesn’t necessarily imply illegal inside information although it would be naive to think that one isn’t competing against people with access to such information and willingness to act on it.  If we are going to rationally choose to be active investors, we must believe that we have some type of edge over other market participants.  Merely reading SEC filings and newspapers is not enough to provide such an edge.

The Rise of Passive Investing

The Wall Street Journal is running a series this week exploring the rise of passive investing.  Passive investing has been a viable option for the past four decades ever since Jack Bogle created the first index fund accessible to ordinary investors.  The idea of indexing is to match the performance of the broad stock market (or whatever sector is being indexed) rather than to make any attempt whatsoever to pick winners and avoid losers.  This could be done at much lower cost even in the 1970s and the advantage of passive indexing has only grown more pronounced over the years as assets under management increased dramatically allowing for progressively lower management fees.  The Vanguard Group, which became the dominant player in indexing under Mr. Bogle’s leadership, has been joined by many other firms eager to capitalize on this trend.  Indexing has become the default choice in many company retirement plans.  As the following graph from The Wall Street Journal illustrates, indexing has outperformed the vast majority of active fund managers.

Indexing Advantage

Index funds incur low fees and index fund managers have no psychological impulses to deal with.  They simply own all stocks in a given index in an effort to be average.  Obviously, some actively managed funds have demonstrated that they can outperform but outperformance during a period in the past does not necessarily allow us to predict whether such returns will continue into the future.

But none of this applies to most of us, right?  As value investors following the principles of Benjamin Graham, Warren Buffett, and Charlie Munger, aren’t we immune to the folly that makes the majority of active managers fail?  Unfortunately, this is not necessarily the case.  For one thing, the number of “value investors” competing for ideas is hardly small.  Mr. Buffett’s record and the simplicity that seems to underpin his success leads many people to seek to emulate the approach.  Few will come anywhere close to succeeding both because the actual process is not simple and because the temperament required to succeed is rare.

As we argued last year, individual investors have many important advantages over professional investors.  In particular, with no outside constituency to manage, individuals can exploit timeframe arbitrage to their advantage provided that they themselves have the temperament required to do so.  However, it is worth questioning whether the typical individual investor should attempt to outperform even if he or she has the skills and temperament required to do so.

Settle For Average?

From a purely mathematical standpoint, it takes a relatively large portfolio and/or a significant degree of outperformance to logically induce an individual investor to seek to outperform an index fund.  Let’s consider a simple example.  A 50 year old marketing executive has a $1 million 401(k) account accumulated through diligent payroll deductions and compounded investment returns over a period of 20 years.  The money has been invested in a selection of the mutual funds offered by his employer and individual security selections were not permitted.  Let’s say that this investor leaves his company for a better opportunity within the field of marketing and rolls the 401(k) into a self directed IRA.  He will not need to draw any funds from this account until reaching the age of 70.  Should he actively manage that $1 million portfolio or index it?

Obviously the answer to this question is not simple.  Does this individual have a special circle of competence in one or more areas that could provide a discernible edge over other market participants?  Does he have adequate time to devote to research and the inclination to spend his time on research outside of his normal day job?  Does he have the appropriate psychological temperament to view his investments as long term commitments or will he start to actively trade at precisely the wrong time?  If all goes well, what is the margin of outperformance that he expects to achieve?

For one thing, it is probably not possible to answer many of these questions unless the individual has an existing track record outside his $1 million self directed IRA.  If he does not, he almost certainly should index. However, let’s assume that the investor has managed a smaller account successfully over the past decade and has achieved returns 1.5 percent greater than the S&P 500 index.  Let’s further assume that he read Poor Charlie’s Almanack in 2006, started attending Berkshire Hathaway annual meetings, and has ever since made an effort to expand his circle of competence through a multi-disciplinary framework.  He enjoys reading and is eager to spend around 500 hours per year on intellectual pursuits including the selection of investments for his portfolio.

The Temptation

Our investor appears to be a candidate for active investing but is it worthwhile?  Let us assume that the S&P 500 will average 6 percent total returns over the next two decades given the fact that valuations are hardly at bargain levels today.  If an investor expects a 1.5 percent outperformance, then that would imply returns of 7.5 percent.  Keep in mind that this small margin is actually a very significant difference that few professionals can hope to achieve even working on a full time basis.  However, our investor feels confident that he can achieve this margin by devoting 500 hours per year to the endeavor.

Based on these assumptions, and with the obviously incorrect assumption that returns will be smooth, the expected result would look something like this:

Active vs. Passive

If you look at the expected account value in the early years, the difference is fairly small but eventually compounding does its magic and the end result of active management, given our oversimplified assumptions, will be about $1 million over what is delivered by the index fund.  Looking at the difference in early years shows that the effort expended in achieving the outperformance might be questionable:  In year one, for example, the 1.5 percent margin of outperformance results in a dollar difference of only $15,000 in exchange for 500 hours of effort which works out to $30 per hour, far below the value our investor attaches to his time, both in his day job and for leisure.  However, a sustained effort will eventually lead to a material difference in the final account value.

Simple Assumptions Are NOT Reality

The rather naive assumptions and smooth curve of outperformance shown above is far from reality.  Instead of a smooth curve, the natural volatility of the stock market will result in a much more variable picture from year to year.  The chart below shows exactly the same endpoint for the active and passive strategies but with a more plausible variation of annual returns:

Active vs Passive Realistic

So our hypothetical investor begins by falling short of the index for four years before pulling ahead until year fourteen when his investments are suddenly viewed unfavorably by Mr. Market.  Diligence and a steady temperament pays off in the subsequent years, however, and we end up with the same $1 million margin over the index at the end of the twenty year period.

How many investors, in reality, would stick with this more realistic scenario for the first four years?  How many would still stick with it after posting cumulative underperformance after fourteen years?  Would most people begin to question whether their circle of competence is real when faced with a brutal verdict from Mr. Market so many years into the process?

Ultimately, investors need to assess their ability to outperform, the level of effort required if one chooses to make the attempt, and the very real psychological pressures that could cause the effort to be abandoned during difficult times.  Anyone who cannot confidently claim to have the ability based on an actual track record should index.  Anyone who does not want to put in the level of effort required should index.  And unless one has been through difficult times in the past and acted with a steady hand, it is probably best to index.

We end up with something of a chicken vs. egg conundrum:  How can anyone know whether they have the ability to succeed without trying?  And how can we know how we will truly react to adversity without putting ourselves in situations that test our resolve?  The answer is that we cannot know the answers to these questions without putting ourselves out there in some way and making the attempt.  If there is a desire to engage in the process, which many investors truly enjoy, it seems prudent to enter the competition with a meaningful enough amount of money to test one’s ability and psychological tendencies, but to start out by indexing the rest.  It isn’t possible to test ourselves using a “paper account”.  We have to have actual “skin in the game” to see how we will react to the many psychological pressures that conspire to make even those with above average aptitude achieve only average results.

Ultimately, there is no shame in being merely “average” when it comes to investing but there would be cause for regret if one posts consistently inferior returns due to an overly optimistic self-assessment of skill or psychological makeup.

A Closer Look at Markel Ventures

Markel Ventures is a wholly owned subsidiary of Markel Corporation focusing on acquiring companies outside the insurance industry.  Starting with the $14 million acquisition of AMF Bakery Systems in 2005, Markel Ventures has grown into an operation that generated over $1 billion in revenue in 2015 which accounted for nearly 20 percent of Markel’s total revenue.  Although the vast majority of Markel Corporation’s value remains tied to its insurance subsidiaries, Markel Ventures has grown to be a more important part of the overall business.

We have covered Markel on a number of occasions in recent months starting with an overview of the company shortly after shares reached $800 in June 2015.  Although the Markel Ventures operation was discussed, the valuation estimate did not explicitly assign any value to the non-insurance subsidiaries, putting forth the following argument:

We choose to mostly disregard Ventures when assessing Markel’s current value and view the operations as providing additional upside potential in the future – perhaps significant upside potential.  In other words, it might be best to demand Markel Ventures for “free”, meaning that one could demand sufficient value from the insurance and investment operations to justify the price paid for the stock without giving consideration to the additional value potential of Ventures.

Shares have recently been climbing toward the $1,000 level which can be partially attributed to the company’s strong insurance results and book value growth in recent quarters.  However, the expansion of the company’s price-to-book ratio implies that market participants are starting to place more value on Markel as a “mini-Berkshire”.  Insisting on valuing Markel based on the insurance operations alone makes the current price appear to be increasingly stretched.  While changing valuation models in response to a run-up in a stock price is potentially hazardous, so is ignoring an important segment of a company and coming to the wrong conclusion regarding whether the shares continue to offer a reasonable value.  It is clearly past due to take a more serious look at the history and current composition of Markel Ventures.

History of Acquisitions

Although Markel Ventures began operations in 2005, the company took a conservative approach in terms of how quickly to build up its portfolio of non-insurance operations.  After the AMF Bakery Systems acquisition in 2005, the company waited until 2008 to add a second business and did not commit significant capital until the economy was in the midst of the severe economic downturn following the financial crisis of 2008.  Markel Ventures was first discussed in the company’s 2009 letter to shareholders.  Management argued that the criteria for acquisitions was essentially the same as the criteria for stock market investments:

Strategically we believe the ongoing development of Markel Ventures will create value for Markel. All of these companies fit our longstanding investment discipline. As is the case in what we seek in our portfolio of publicly traded businesses, these businesses are profitable, with good returns on capital, they are run by management teams with equal measures of talent and integrity, they will use their profits to either grow their existing business or return the cash to Markel and we acquired them at fair prices.

Ventures was expected to provide opportunities for reinvestment of capital within individual units or elsewhere within Markel.  Additionally, management found it attractive to have a source of earnings and cash flow independent from the insurance business which can provide additional flexibility to deploy cash at the holding company level without undue regulatory scrutiny during stock market downturns.

During the early years, Markel provided very limited data regarding the non-insurance subsidiaries.  Although significantly more detail has been provided over the past several years, some estimations were still required when coming up with a picture of the overall acquisition history.  The data in the following exhibit should be considered a good faith estimate rather than a precise accounting of the acquisition history of Markel Ventures (click on the image for full size):

MKL Ventures History

The bakery businesses have been consolidated into the Markel Food Group and links for the websites of the other subsidiaries can be found on Markel’s website.  Many of the businesses are quite interesting to read about but to keep this article to a reasonable length, we will refer the reader to Markel’s website for further information and proceed to a relatively high level look at the overall Markel Ventures operation based on consolidated information found in Markel’s financial statements.

Balance Sheet

Since 2012, Markel has provided a balance sheet for the Markel Ventures operations.  This is obviously useful for any evaluation of the unit’s overall economic performance and it also serves as a check on the imprecise accounting of the Ventures acquisitions presented above.  The following exhibit shows the balance sheet data for Markel Ventures for the past four years:

Ventures Balance Sheets

It is important to note that the balance sheets for Markel Ventures are fully consolidated into the balance sheets of Markel Corporation, with certain intra-company items eliminated in consolidation.  Although Markel Ventures utilizes debt, we should note that at December 31, 2015, $216.9 million of the $322.4 million of debt was due to other subsidiaries of Markel Corporation and eliminated in consolidation.  Markel Corporation has predominantly funded Markel Ventures using equity, thereby redeploying funds that it generated through the insurance operations over the years.

The non-controlling interests on the balance sheet arise from the fact that Markel Ventures often acquires a majority stake in a company that falls short of complete ownership.  In many cases, the remaining shares of the company are acquired subsequent to the initial transaction at prices that vary with the post-acquisition performance of the unit.  We can see that total capital employed of approximately $900 million is roughly in line with our estimate of the cash Markel Ventures has deployed over the past decade.  Earnings of ventures subsidiaries that are retained within the Markel Ventures organization would increase equity over time.  However, the balance sheets we have access to do not provide enough granularity to isolate changes in equity due to earnings retention versus new investment.

Operating Results

Over the past five years, revenue from Markel Ventures operations has increased rapidly due to the number of new acquisitions that have been made.  The company separates Markel Ventures revenue into manufacturing and non-manufacturing segments.  The exhibit below displays income statement data for the past five years:

Markel Ventures Income Statements

At a surface level, these results are not exactly inspiring to look at.  The overall operating margin has been in the mid-single digits over the past couple of years and net income has been modest relative to the investments made in Markel Ventures to date.  However, for a number of reasons, reported net income is not a particularly good measure of how the businesses have performed to date.  The reader should be very skeptical of this claim since specious “adjustments” to earnings have proliferated like wildfire in recent years.  EBITDA, Adjusted EBITDA, and even more creative measures are usually designed to obfuscate rather than enlighten.

Markel management does provide EBITDA information for Markel Ventures with the rationale explained in detail on pages six to eight of  the 2010 letter to shareholders.  Readers are encouraged to review this information and come to their own conclusions regarding the usefulness of EBITDA when it comes to evaluating Markel Ventures.  From our perspective, the primary use of EBITDA is to evaluate the performance of the business relative to capital employed in a manner that is independent of capital structure and tax policy.  The exhibit below shows the EBITDA information reported by Markel over the past seven years:

Markel Ventures EBITDA

The use of EBITDA, although warranted with the caveats explained by Markel’s management, seems a rather crude measure particularly because depreciation is a very real expense that must be taken into account.  Certain Markel Ventures subsidiaries are more capital intensive than others but we can see that depreciation has become a rather meaningful line item.

We prefer to look at Markel Ventures by starting with the net income line item and then making adjustments that seem appropriate in an effort to understand the true economic earnings of the group of businesses.  There are three major adjustments we have made:

  • Diamond Healthcare Goodwill Impairments.  Over the past two years, there have been goodwill impairments taken to write down the value of Diamond Healthcare.  Although these charges indicate that management may have made errors when deciding how much to pay for Diamond to begin with, they are non-cash charges that obscure the current earnings power of the group as a whole.
  • Cottrell Earn-Out Adjustment.  In 2015, there was a significant charge recorded to account for an increase in the expectation of “earn-outs” to be paid to the former owners of Cottrell.  At the time the Cottrell acquisition was made in 2014, a portion of the amount to be paid to the owners was based on the performance of the business in 2014 and 2015 subsequent to the close of the acquisition.  Markel’s management made an estimate of the amount of this “earn-out” based on their expectation of how Cottrell would perform.  It turned out that Cottrell performed better than anticipated.  As a result, the additional amount owed to the former owners was charged as an “expense” in 2015.  This charge is better looked at as an increase in the purchase price of Cottrell and should logically be attributed to a capital account rather than an expense account.
  • Amortization.  Accounting rules require management to amortize intangible assets over a period of time by recording charges against earnings.  In the 2010 letter to shareholders, management argues that this is not a real economic cost because the value of intangibles should actually be increasing over time rather than shrinking, assuming that intelligent acquisitions were being made and properly managed.  This viewpoint has merit but, in the interests of conservatism, we consider 20 percent of amortization charges to be “real” and 80 percent to be “non-economic”.  Warren Buffett has estimated the non-economic percentage of Berkshire Hathaway’s manufacturing, service, and retail amortization charge to be 80 percent.  While the mix of businesses are obviously different, using the 80 percent approach rather than assuming all amortization is non-economic seems like a conservative adjustment to make.

The exhibit below shows our estimate of “economic earnings” for Markel Ventures based on making the adjustments discussed above and accounting for tax effects.  Note that the tax effect line item may be overstated if amortization and/or goodwill impairments are not deductible for income tax purposes.  However, sufficient information does not appear to exist to make this determination so the adjustment is made in the interests of conservatism.

Markel Ventures Economic Earnings

If the estimate of economic earnings is in the ballpark and recent trends continue, it looks like the ventures operations, in aggregate, are earning around 10 percent on equity.  Obviously, this adjusted figure is far different from the return on equity one would calculate based on reported net income.  However, the adjustments seem quite defensible based on the arguments presented above.

Markel recently reported results for the first quarter of 2016.  Markel Ventures EBITDA was $41.1 million, up from $33.6 million in the first quarter of 2015.  Net income to shareholders was $14.1 million, up from $10.5 million.  Management reported that the increases were primarily due to higher earnings at certain manufacturing operations as well as due to the CapTech acquisition in December 2015.


The valuation approach presented in June 2015 explicitly did not account for any value associated with the Markel Ventures operations.  As noted earlier, the assumption was that any value that existed in the ventures operation would be an additional “margin of safety” for investors or could be viewed as a bonus.

Although the vast majority of Markel’s intrinsic value still resides in the insurance business, Markel Ventures has been growing to the point where it should be explicitly considered in the valuation process.  There are a number of approaches that could be used to incorporate Markel Ventures.  The methodology we have chosen, which clearly is not the only “valid” approach, is to segment the insurance and ventures operations as if they were two separate companies.  We estimate the value of each unit and then come up with a sum of the parts to arrive at the total valuation for Markel Corporation.

The valuation of the insurance business is essentially identical to the approach presented in June 2015, except that we have deducted equity attributable to the ventures operations from the estimate of insurance equity.  We assume that Markel posts a 100 percent combined ratio over the next five years and deploys its investments at various rates of return.  We then come up with a terminal price-to-book value for the insurance business only to estimate the market’s assessment of the business in five years.  This valuation is then discounted to estimate today’s present value of the insurance subsidiaries.

The Markel Ventures valuation model simply estimates 2016 “economic earnings” and applies an earnings multiple ranging from 16 to 20 to arrive at an estimate of current intrinsic value.  One can debate both the estimate of economic earnings and the multiple selected but a good “reality check” is that the estimated valuation falls within a plausible range given the cash that Markel has invested into these businesses over the past decade.

The exhibit below presents the valuation exercise for Markel Corporation as described above:

Markel Valuation

The overall valuation of Markel Corporation is simply the sum of the parts divided by shares outstanding at March 31, 2016.  Taking the base case estimate, we arrive at a valuation of $909 per share, with $825 per share attributed to insurance operations and $84 per share attributed to Markel Ventures.  Although this baseline estimate is materially higher than what we would estimate if Markel Ventures were totally ignored, it is still substantially below where Markel has traded recently.

Markel has a very strong track record, as we have pointed out in past articles, and the current share price might very well prove to be justified based on future events.  Nevertheless, it is always prudent to estimate the value of a business based on sound principles that are not subject to changes designed to “justify” a recent price advance.  At the same time, valuation methodologies cannot remain so fixed as to fail to respond to material changes in the underlying business. Markel Ventures has clearly reached the point where shareholders must estimate its value in some manner.  The method above is one of many ways to do so.

Disclosure:  Individuals associated with The Rational Walk LLC own shares of Markel Corporation.