Over the past several decades, Warren Buffett and Charlie Munger have built Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) into the world's most successful financial holding company by adhering to a distinct, three-tiered approach. That approach involves fostering insurance operations (including Geico and General Re), investments (both fixed income and publicly traded stocks), and a diversified group of acquired businesses (including Dairy Queen, Burlington Northern Santa Fe, Duracell, and dozens of others).
Berkshire has delivered mind-boggling returns for early investors in the process -- to the tune of 3,787,464% between 1964 and 2022, to be exact, not including its roughly 11% gain so far in 2023 as of this writing.
Even Buffett admits, however, that it will be significantly harder for Berkshire to deliver outsized gains going forward, especially as it works to build on its already enormous $750+ billion market capitalization.
Lucky for you, there are several so-called "mini-Berkshire Hathaways" that are publicly traded and follow the same formula for success. I believe these two, in particular, stand out from the rest...
A leading specialty insurer
Markel Group (MKL -0.67%) is a global specialty insurer -- think difficult-to-insure things like weddings, horse farms, and yachts. Bolstered largely by its $3.1 billion acquisition of Alterra in 2013, Markel is a large player in global reinsurance. The company is led by renowned value investor and CEO Tom Gayner, who affectionately refers to Markel's insurance, investments, and Markel Ventures group of acquired businesses as the "three engines" driving growth.
Markel's insurance operations are conservatively managed and consistently profitable, generating more than $8 billion in revenue with a combined ratio in the low 90s percent range last year. Additionally, Gayner has built an enviable investment portfolio that not only generates returns on the fixed-income side as interest rates rise, but also benefits from Gayner's long-term-oriented stock-picking prowess. That latter is represented in a $7.8 billion equity portfolio standing on cumulative unrealized gains of $4.9 billion.
Incidentally, the single largest holding in Markel's equity portfolio is Berkshire Hathaway, representing nearly 12% of its total at the end of Q1 2023, with the rest comprised mostly of other high-quality large-cap stocks.
Meanwhile, Markel Ventures holds several businesses, including car-transport trailer maker Cottrell, Ellicott Dredges, ornamental plant chain Costa Farms, designer handbag maker Brahmin, and several other solid companies that specialize in everything from bakery equipment and trailer interiors to building and fire protection products.
These might sound boring, but they're also very strong and lucrative businesses. To be considered for acquisition under the Markel Ventures moniker, management looks for companies that:
- are profitable with good returns on capital and hold "not too much debt,"
- are run by talented management teams and a culture of integrity,
- have reinvestment opportunities and practice consistent discipline in capital allocation, and
- can be bought at a reasonable valuation.
Markel has already proven its ability to effectively implement the Berkshire model, with shares climbing more than 16,000% from its IPO price of $8.33 in 1986. It's also one of my longest-held personal positions, as I bought my first shares back in 2009 in the $300 range (today they trade just under $1,400).
Keep in mind, though, that Class A shares of Berkshire Hathaway trade at a whopping $520,470 today. And with a market capitalization of "just" $18.5 billion, Markel is still only 1/40th the size of Berkshire today. Trading at a reasonable price to book value of 1.4 -- roughly in line with its five-year average -- I think this is a fair price to pay for such a high-quality business with virtually unlimited scalability.
A tale of two cities
While Markel is more similar to Berkshire a couple of decades after Buffett took the helm, Boston Omaha (BOC -1.73%) is most comparable to Berkshire in its infancy. So named for the hometowns of its co-CEOs, Adam Peterson and Alex Buffett Rosek, Boston Omaha boasts a market cap of just under $600 million today.
Alex's middle name is no coincidence. As Warren Buffett's great nephew, he made headlines for the familial connection around the time of Boston Omaha's IPO in 2017. It should be no surprise that Rosek, who proposed to his wife at the 2009 Berkshire shareholder meeting in front of thousands of investors with his uncle Warren's help, would go on to start his own company following Berkshire's proven model.
As management describes it, Boston Omaha has four primary businesses today:
- Broadband, comprised of several acquired fiber internet businesses with over 40,000 fiber customers,
- Billboards, with over 7,400 billboard faces through its Link Media outdoor advertising subsidiary,
- Bonds, with surety insurance offered in all 50 states through its General Indemnity Group subsidiary, and
- Boston Omaha Asset Management, or BOAM, through which it holds minority investments in several banking, home building, aviation infrastructure, and commercial real estate services businesses.
Here again, many of these businesses might sound dull. But they come with attractive unit economics, boundless reinvestment opportunities, and long-term scalability.
Boston Omaha does maintain a small equity portfolio as well, valued at roughly $9 million at the end of Q1 2023. But apart from the disclosure that they invest primarily in large-cap stocks, we still don't know its exact composition. This is because the portfolio's total assets under management remain under the $100 million threshold set by the SEC that triggers the requirement to file quarterly 13F forms.
It's also comparatively difficult to nail down an exact intrinsic value for Boston Omaha. Normally, book value per share serves as a reasonable approximation for changes in the metric. In these earliest stages of multiple acquisitions and deploying hundreds of millions of dollars in capital to scale, management has noted that accounting requirements specific to Boston Omaha's various businesses -- from reporting on unrealized gains and losses on earnings to lease accounting, depreciation/amortization schedules (specifically on the billboard side), and cash consolidations related to a SPAC merger it helped shepherd through to completion -- "have succeeded in distorting approximating changes in book value to changes in intrinsic value."
In any case, while Boston Omaha will undoubtedly evolve in the coming years given the nature of financial holding companies, Rosek and Peterson continue to stick to the "focused objective" they detailed in their first letter to shareholders in 2015: "[G]rowing intrinsic value per share at an attractive rate, while seeking to maintain an uncompromising financial position."
If Boston Omaha can continue delivering on that goal, I think long-term investors who open or add to their positions at these levels will be more than pleased with their decision down the road.
