Led by legendary investor Warren Buffett, Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) is known for its long-term investing strategy. Many of its larger positions have remained in its portfolio for decades.
Given the company's usual patience, it was surprising to see it buy $620 million of Markel (MKL -0.67%) stock in early 2022, only for the entire stake to be liquidated last quarter.
Clearly something changed after Berkshire originally took its position, but given a recent pullback in Markel stock, there's reason to believe that Buffett and Berkshire could be back soon. This may be your chance to buy Markel stock before that happens.
Markel is a miniature Berkshire
When Buffett took control of Berkshire Hathaway in 1965, the company was a tiny textile manufacturer with troubled finances. Today, the company is worth nearly $900 billion.
As you may already know, Berkshire didn't remain a textile manufacturer for long. In 1967, Berkshire purchased National Indemnity Company, the first of many insurance businesses that would be added to its growing portfolio of holding companies.
Buffett used these insurance businesses in a clever way. Insurance premiums are paid upfront and returned to policyholders only when a claim is filed. In the meantime, the insurer keeps the premium, which is akin to a free loan. Buffett invested these funds in a variety of companies that owned iconic brands, such as American Express and Coca-Cola.
With a history stretching back to 1930, Markel began as an insurance company, but it wasn't until the 1980s that the company pursued a strategy similar to Berkshire's. That is, Markel began allocating its insurance premiums to an investment portfolio designed around long-term capital appreciation.
With very similar business models, Markel and Berkshire have been joined at the hip since the 1990s. This similarity is likely the reason Berkshire initially acquired a position in Markel. It is also likely the reason it sold its entire position last quarter.
Why Berkshire likely bought and then sold Markel stock
In recent decades, Buffett has been a big fan of share repurchases. In 2020, Berkshire repurchased $24.7 billion of its own stock. In 2021, that figure increased to $27.1 billion. The company continued to buy back stock in 2022, but with much less money, only $7.9 billion. Share repurchases in 2023 remained depressed despite Berkshire amassing a record $157 billion cash balance.
Why did Berkshire slow down its share repurchase program? Likely for the same reasons it sold Markel stock.
All you need to do is track each company's price-to-book valuation multiple. It is this valuation multiple that Buffett has publicly referenced in the past to justify previous share buyback programs. When the multiple gets low, he likes to buy back more Berkshire stock. When it gets high, share repurchases slow down.
With this in mind, it's not hard to see what happened with Berkshire's Markel position. In early 2022, when Berkshire first purchased Markel shares, they traded at roughly 1.2 times book value, a sizable discount to Berkshire's valuation at the time. In buying Markel stock, Berkshire was essentially purchasing a miniature version of itself at a discount.
Last quarter, Markel shares traded roughly in line with Berkshire stock, at a valuation of around 1.4 times book value. It is at that valuation that Berkshire usually slows down its share repurchases, and it likely made sense for the company to wind down its Markel position now that the valuation gap had closed.
BRK.B Price to Book Value data by YCharts.
It's important to remember that we usually learn of Berkshire's portfolio changes only after they occur. That means the company liquidated its Markel position several months ago, likely at higher prices. Since 2024 began, Markel's stock price has moved sharply lower.
While Markel's valuation hasn't reached the lows that originally got Berkshire invested, it's getting close. If Markel shares continue to weaken, don't be surprised to see Berkshire jump back in, especially given that its own stock trades at multiyear highs.
Markel stock at these levels is likely a better investment for Berkshire than repurchasing its own stock. It's likely a good investment for others, too.
