Transcript: What You Should Really Worry About

Owain Bennallack: Hello, and welcome to Money Talk, the investing roundtable from The Motley Fool. I’m Owain Bennallack, and joining me today in the studio is Motley Fool analyst Mark Rogers, while dialling in for the last time from the U.S. is a former denizen of these offices and long-time podcast cast member, Nate Weisshaar. Hello, guys.

Nate Weisshaar: Hello, Owain.

Mark Rogers: Hey, Owain.

Bennallack: Nate, it’s goodbye again. First you leave the U.K., but then we track you down to The Motley Fool U.S. But now you’re leaving the investing team. You do realise that if we track you down again, your only option is going to be to get one of those one-way tickets to Mars.

Weisshaar: You are reading my diary, Owain. That is my next step.

Bennallack: Mark did point out that you actually could be going to Mars; I don’t really know where you’re going. Are you off to Mars?

Weisshaar: No, no. I’m shifting over to The Motley Fool asset management community. I’ll be helping their research group try and find the best stocks around the world, so my job isn’t really changing. It’s just who I’m allowed to speak to that changes.

Bennallack: You’re basically saying that the U.S. regulators, the highest offices of government, say that to do that job properly, you can’t talk to me. Is that correct? That’s essentially what they’re saying. “Don’t talk to Bennallack if you’re going to be managing people’s money.”

Weisshaar: That is exactly the message from the SEC.

Rogers: Well, Nate, on behalf of everyone here at the U.K., congratulations. I’m sure you’re going to do an absolutely terrific job.

Weisshaar: Thank you very much, Mark. I think you might be one of the few people with that sentiment.

Bennallack: I was going to say, I’m going to reserve judgment!

In the year, if you’ve done really well, I will be the first … I don’t know how I’ll find out, because you won’t be able to tell me. But if I hear on the grapevine that you’re doing well, I’ll put a message into a bottle, toss it into the ocean. Maybe it will reach you one day.

Mark and I are going to soldier on without you. I’m sure, actually, Mark, that we’re going to have a substantially boosted entertainment budget to get over the grief of losing Nate. I’m almost certain that we’re getting an expanded doughnut and beer budget.

Rogers: It would have to be expanded, let’s face it, Owain. Obviously you’re here, Owain. No Nate here. We’re just going to be crying into our doughnuts.

Bennallack: And our beers. I want to clarify, it’s a doughnut and beer.

Rogers: I’ll have vodka, but if you insist, Owain.

Bennallack: Yes. And obviously we will have to, as is traditional in this country, set a place for Nate at the table, even though he isn’t here, and we’ll have to consume his share also.

Rogers: Right, exactly.

Bennallack: If you can get onto that as one of your last acts, Nate; put in a word for that, that would be good.

Okay, let’s crack on. The geopolitical situation looks bleak, but we’ve talked about that quite a bit recently. Instead, I thought we’d expand to discuss what may be realer threats; more real threats to the economy than the geopolitical situation — unless somebody objects and says, “That is a real threat,” in which case we’ll hear those views.

Secondly, there’s a new CEO at Tesco. Nate, you’ve followed this story for years now, so we are going to take the last opportunity to pick your brains about Tesco before you take the vow of the omertà, or whatever it is the Mafia do.

Then finally, Nate, with you leaving the team I thought it would be a good chance for me and Mark and our many listeners to hear what you’ve learned, warts and all. I guess I’m thinking it’s kind of a private confession session, albeit to tens of thousands of people who are listening in.

Rogers: I’m really looking forward to that.

Bennallack: Yes. Particularly I’ll be listening to your thoughts on the team members; not including me, but Mark is considered fair game.

Rogers: Yes, okay.

Bennallack: Finally, we will have your last-ever stock pick, Nate, plus two more picks from us; and I have introduced a twist this week, so that is going to be beyond exciting.

Are we ready for the Nate Weisshaar season finale, “The One Where He Really Does Leave,” in American TV sitcom parlance?

Weisshaar: I think we are. As ready as we can be, anyway.

Rogers: Let’s do it.

Bennallack: Nate is choking up over there, isn’t he?

Rogers: There’s a lump in his throat, that I can hear.

Bennallack: Yes. I think it’s a lump, or it’s almost one foot out the door.

Rogers: Yes, one or the other.

Bennallack: He’s almost like, “Get on. Get on, guys.”

Right, the recovery. The U.K. economy has returned to its pre-recessionary peak, if noted by GDP, and while the U.K.’s index of 100 leading shares has yet to hit new highs, it is well up over the past five years. Yet, people seem to believe that this happy state of affairs must come to an end sooner, rather than later.

Why? Why do they think that? Well, obviously, the situation in Ukraine is horrible, the situation in Gaza is …. you can’t even joke about it. It’s tragic. The whole Middle East situation is awful.

Is that going to immediately impact how we invest, and are we going to see different returns because of it? I would say perhaps not, unless it escalates, and possibly the same thing for the Ukraine. Nate, do you share those views?

Weisshaar: Yes, in general I do. I think there’s always some geopolitical thing in the headlines, whether it’s the Middle East, Ukraine, Southeast Asia, anywhere — Africa. My big thing on this topic is that, unless there is a dramatic impact on oil prices, the world economy will go forward despite the tragedy.

Rogers: I think they key phrase in there, when you posed that question, Owain, was “unless it escalates.” I think it’s just uncertainty; the sheer uncertainty of what could happen, potentially, if it did escalate, that maybe quite rightfully has some people nervous.

Bennallack: Yes, it is a factor. We had a sort of a dividend from the former Soviet Union becoming the Federated Republic of Russia. That had an impact on the global economy, so if that was to rewind, which is presumably the absolute worst-case scenario — short of the really worst-case scenario! — that would be bad, and hard to price in.

Weisshaar: Yes, that would be completely terrible for investors, if we saw the market actually literally disappear in certain parts of the world.

Bennallack: Yes. We have actually already seen that once in Russia, so I hope for their sake that that doesn’t happen.

I think, just a final point on the geopolitical uncertainty, something I like to do is go to the BBC website and look at the headlines from three or four years ago, and think how many of those really, in the grand scheme of things …

Rogers: Well, yes. The phrase “euro zone crisis” almost became a cliché of a wall of worry for the market to climb over at that time. We just looked at it through the rear-view mirror and, in retrospect, it doesn’t look like it’s made too big of an impact on our returns over the last couple of years.

Bennallack: Yes. These things can be terrible for the people on the ground, I should stress, but another one would be the conflict in Georgia. That was a big deal at the time. Ukraine looks worse than that, but it’s not 180° different.

Rogers: I think it does come back, though, to “unless it escalates.” It’s the worry of if it did — which, at the time — we can look back in hindsight at the situation in Georgia, and it didn’t escalate any further than it did.

Bennallack: Yes. You can almost look at it the other way. You could say what’s the counterfactual if, by some miracle, there was a two-state solution found for Israel and Palestine? If Russia got what we would consider a more legitimate government and corporate governance? You might almost be more worried by competition than war.

But in the absence of escalation, what do you think are the main threats to our short-term prosperity here, as investors? If we’re going to be worried — which people seem to want to be — then what should we be worried about?

I think we need to distinguish between being worried about the economy, and being worried about the stock market, because as we all know, those two things don’t always move in lockstep.

Weisshaar: Yes. I think that’s a very important point. The market tends to be more forward-looking, and when we read about the economy, all of the stats that we’re hearing about the economy tend to be backward-looking.

So, what you see in the stock market is — supposed to be, anyway — an anticipation of what’s coming, whereas when you hear that GDP grew 1% last quarter … well, that was last quarter. What’s happening now, and what’s going to happen, going forward? That’s what the stock market is supposed to be looking at.

Bennallack: If you were to be put on the spot, Nate, and asked to tell me what’s going to happen in two or three years that might be a threat, what would you say was your biggest concern?

Weisshaar: I think the biggest concern, and the one that the market is ignoring at this point, despite last year’s so-called “paper tantrum” is interest rates and the knock-on effect, the liquidity shock, that might happen if we did see interest rates get out of control; if we saw the prolonged efforts by the central banks finally unravel a bit and unleash faster than expected inflation throughout the world, or throughout the Western economies, anyway.

I think the threat of dramatically rising interest rates is something that people have been more nervous about. They got less nervous about it, but I still think it could potentially cause quite a lot of ripples if it actually comes to pass.

Bennallack: Yes, I think people need to realise, with interest rates, that there’s a lot of different ways in which that can be bad news. There is historical precedence for interest rates to rise, particularly when the economy’s going up, and for it not to be bad for stock markets.

I don’t think there’s any precedence for them rising from zero — very close to zero, and having been there for five years — because for a start, obviously, debt becomes more onerous. People might suffer from that, companies might suffer from that.

But also, a lot of the equations that are used in the financial world key off interest rates. The valuation of shares will change. If you can get money safely in the bank for 5%, you’re not quite so likely to want to take a punt on shares. So, there’s lots of different ways in which interest rates could affect our investments.

Mark, I appreciate that the essence of your investing style is not to worry about the future too much.

Rogers: Yes.

Bennallack: But as a thought experiment, let’s say if you were the CEO of your favourite company, Dewhurst, planning capital expenditure for the next five years. What would be most on your mind in terms of threats? Not in terms of, “I can do another billion lift buttons in India.”

Rogers: This is real fantasy stuff. If I was the CEO of Dewhurst …

Bennallack: Your face has lit up.

Rogers: It actually has.

Okay, Dewhurst is a relatively cyclical business, so maybe a decent enough example. When you’re running a cyclical business, in manufacturing or anything else, you’re always going to be mindful of, what’s going to be the next threat to even short-term economic growth? Even if you’re not basing long-term decisions off of that, you’re going to be worried about that. It’s going to be on your mind, it’s going to be a threat.

As well as that, even on a broader level, if there are certain regions where you’re making big capital investments, maybe they don’t live up to expectations if you’re making big investments, for instance in Asia at the moment, like a lot of companies are.

You’d have to be mindful, and you’re maybe right to be worried about that kind of thing. But, just like when we’re talking about investing in the stock markets for individuals, you do have to make long-term decisions on a basis that virtually anything out of your hands can happen, with the economy, with interest rate, and with developments around the world.

Bennallack: The great investors, or at least some of them — maybe the ones that we tend to focus on, so possibly it’s a biased selection — but the Warren Buffetts and the Peter Lynches of the world sort of imply that if you’ve spent five minutes thinking about interest rates or the macro economy, you’ve possibly wasted five minutes as an investor. Not because it wouldn’t be great to know, but because it’s uncertain.

Rogers: It’s really interesting that Warren Buffett, in terms of the insight that he has on the economy — and it’s clear that he thinks about it, that he’s even concerned about it, considering what he says in his media appearances, etc. The point is that he does not make decisions for the next 10 years on the basis of where interest rates might go in the short term.

Bennallack: Do you think that’s logical, Nate, or would you be a little more cautious than Uncle Warren?

Weisshaar: No. There is so much uncertainty as you go even a year out. Forecasting a year out is difficult, so if you’re pushing past that, then it’s really just throwing darts. I think you’ve got to think more about the fundamental drivers of your business at that point, and not worry so much about external forces, and just try to deliver on what you can do.

Bennallack: Well, the economy can throw up some surprises. It’s not like investing in companies doesn’t also toss a few curveballs your way. Investors have seen, from Tesco, quite a few of those nasty pitches — in baseball terms; maybe googlies in cricketing terms — from what now seems to be almost a surprisingly surprising profit warning a few years ago, given the string that have followed.

We’ve all seen a loss of shares, market share, we’ve seen loss of share price. Tesco has rolled back its global ambitions. All of these things would have been seen as not on the cards, maybe three or four years ago. I’d say Tesco, in fact, has been humbled.

Nate, it seems that the same is now true of CEO Philip Clarke.

Weisshaar: Yes, it’s been rough. It was a rough three years for Mr Clarke. He inherited a tough legacy from Sir Terry Leahy, back in April 2011. But since then, nothing has really gone Tesco’s way, or Philip’s way.

Bennallack: Would you say he was driven out, or would you say that he’s walked? He had to go?

Weisshaar: I think he was probably driven out, at least by major shareholders, if not a full-on revolt from the board. I don’t think he exited of his own free will, necessarily.

If you just look at the performance of the company, operating profits have fallen the past two years by more than 5% a year. Market share has slipped and, while the numbers aren’t dramatic, falling from 31% market share to just under 29% in that time frame does give you a lot of fodder to say that you’re losing touch with what the market wants.

Then the market has responded by sending the shares down 25%, down from 30 billion to 22 billion.

The scorecard does not sit in Philip Clarke’s favour at this point.

Bennallack: Absolutely, and if you were to look at that share price relative to the market, of course … I’m not the only person who, at one stage, added Tesco for a bit of safety ballast to their portfolio. That’s the level to which it’s been a surprise.

We know what Clarke was trying to do, I think. He was taking some pages out of the Amazon playbook, building out multi-channel retailing. And, because he’s got a whole lot of stores that are already built, he was also trying to make more of those. He was putting in restaurants and whatnot.

You liked that strategy, didn’t you, Nate? Do you think he didn’t have enough time for it to play out?

Weisshaar: I think it’s quite obvious that he didn’t have enough time. With a store footprint of over 3,300 stores in the U.K. alone, the amount of time it takes to refurbish stores and redesign stores, and just the physical task of updating the estate is quite daunting. The amount of time that he had to do that, it’s not feasible.

Unfortunately, there were a lot of headwinds going against him, and he just didn’t have a big enough window to prove his theories out.

Bennallack: This is going to be quite handy for the new guy, isn’t it, Dave Lewis? He’s going to come over from Unilever, Clarke’s stuff is already well in play. As long as he doesn’t switch it all off, then isn’t he going to be seen as the guy who saves the company — touch wood if you’re a shareholder — because he gets a bit of his own mark to make, but also he gets the benefit of all this investment Clarke’s made?

Weisshaar: Yes, it’s an ideal situation because the bar is set pretty low, given those numbers that I ticked off earlier. In reality, I think Tesco has a good plan in place. It’s just a matter of, it wasn’t happening fast enough, and maybe some of Dave Lewis — also known as “Drastic Dave” for his (unclear).

Rogers: I love that name.

Bennallack: “Drastic Dave,” did you say for his massive … massive … collars and fashion sense and whatnot? Is he just some sort of 1970s fashion disaster?

Weisshaar: No, no. He’s earned the title for his restructuring of the Unilever U.K. operation, back in 2007, where he slashed costs, and also fired a lot of people.

I don’t know that that will work, necessarily, here at Tesco.

Bennallack: Clarke has been hiring people, hasn’t he? He’s been adding staff, as I understand it, to the stores.

Weisshaar: Exactly, he’s been adding staff and he’s been spending heavily on improving the look and feel of stores which, I think, people will admit was one of the reasons Tesco fell behind in the U.K. They cut costs so far that they have stores that haven’t been changed since the ’80s.

I don’t know how much more room there is for slashing costs. We’ll have to see what spin Dave Lewis puts on the existing strategy.

Bennallack: I’m certainly keen to see what Drastic Dave can do with his knife.

Mark, Tesco was … I’m going to say it was almost boring enough for you to leap at the opportunity once, in terms of, it was a stable business, blah, blah, blah.

Rogers: Yes.

Bennallack: But, obviously, it’s not really a stable business at the moment, so how would you rate it now? Is what’s there predictable enough to potentially earn a place in the Rogers portfolio?

Rogers: You know, I’m still really interested in Tesco. I have been, pretty much throughout the company’s difficulties, with very much a long-term view in mind, that they can turn around what is a massive business — and that is going to take time.

You have to look at it from the point of view of five years from now, seven years from now, that they get their core proposition back on track, align that with what’s changed in the industry over the last few years; because even I would have to admit, it has changed in ways that I probably wouldn’t have admitted, even 12 months ago. It’s changing, and it’s changing fast. I think there are definitely challenges that Tesco faces, but when you look at how depressed the company’s valuation is …

Bennallack: It’s a 10-year low, isn’t it? A 10-year low for the share price.

Rogers: Exactly, and it doesn’t feel like there’s an end in sight to that — which, quite often when you can’t see an end in sight, is often the time to be quite interested. From my point of view, be patient with it, but it’s something that I’m still very much interested in.

Bennallack: At this point I’ll quickly mention a report that you can download, which includes some of our analysts’ latest thoughts on Tesco, as well as four other, similar shares for long-term income.

You can go right now — I would rather you went in about 10 minutes, but you could go right now — to www.fool.co.uk/retire. There you can download that report, and you can see our views on Tesco and four other, similar shares, if Tesco “gives you the willies,” in technical terms.

Nate, it’s the part of the show that everyone’s tuning in for. It’s like one of those films where everyone was tuning in for Hitler. Not Hitler, Churchill! And his address. I’m sure in Germany, they did tune in for Herr Hitler’s broadcast. The moment where the nation quietens itself, and it tunes in to hear your confessions!

Tesco, possibly, we’ve covered. We know the positives. We know that you are a naturally Foolish investor — with a capital F — long-term time horizon, like good businesses. I’m going to say there’s a dash of co-founder David Gardner’s liking for a few cutting-edge bells and whistles in there.

But let’s conclude with what you didn’t know beforehand, and what you learnt while picking stocks. In other words, let’s hear your bloopers!

Weisshaar: Well, I think one of the bloopers would have to be, tangentially and directly both, associated with Tesco. That is the degree and speed with which industries can shift. As I said, there was a time when Tesco had a 30% market share in the grocery industry, and that just seemed like a massive, insurmountable wall. No one’s going to penetrate that.

But, along comes Aldi with their perfect offering for the economic situation that we’re in, and they are rapidly moving up the ranks. A few years ago, they had less than 3% market share. Now they’re on the verge of surpassing Waitrose at almost 5% market share.

The speed with which industries can change is definitely one of the things that caught me off guard.

We’re also seeing that in the oil industry, as we see the debate raging on whether the oil majors like BP and Shell should be putting their money into new projects, or returning more of it to shareholders, because there are doubts rising that these companies can get actual returns on the investments for these very complex, very tricky — deep sea or Arctic or what have you — all of these new places that we’re looking for energy.

Bennallack: That’s an interesting one, I think, because some people will say they should be giving money back to shareholders. Some people say they should be investing in quite marginal projects, and in 10 years one half of those people, or one set of those people, are going to look like geniuses. Because it will change. The landscape will change, as you say. It’s not going to stay the same.

Weisshaar: Exactly. That’s one of the things that I’ve seen recently. I’ve always associated rapid change with the technology industry, but in the past decade we’ve seen significant changes in some of the more staid industries. It’s really becoming harder, but it’s becoming more interesting as well, as an investor, I think.

Moving on to my second lesson, and that was one that I should have known better; trimming my winners far too early. One of my early successes was catching onto Hargreaves Lansdown at a time when the price was suppressed, and riding it for some great returns. But I became concerned about their competition. I didn’t want them to become the next Tesco, I guess, and I cut my chance at riding the wave a little bit longer, and gave up some profits.

I just underestimated the company’s dominant position in an industry with very different growth prospects to that of the grocers.

Bennallack: I personally think that’s one of the hardest things to get right, because to keep hold of your winners … it’s a rare winning company that, at times, doesn’t look very overvalued. If you look at a lot of portfolios, they’ll post good long-term returns and they’ll say, “Look, we’ve bought and hold, and that’s what kept our returns up.”

But if you take out the top one or two shares, suddenly that average looks very different, so you’ve got to almost go against your investing convictions to keep hold of those winners, sometimes.

Weisshaar: Yes. It’s a lesson that I’ve read several times, and haven’t put to work quite as much as I should have. But they do say to water your flowers and trim your weeds, rather than cutting down your flowers.

Bennallack: Let’s not prolong the torture much more. Have you got one more for us?

Weisshaar: Yes. I’ve been reminded again and again over the past few years, how hard it is to estimate the worst-case scenario, whether it be geopolitical problems, whether it be industry shifts. It’s just, again, human nature to really truly be able to estimate how bad things can get, and what the world might look like if things aren’t as rosy as our natural optimism leads us to believe.

Bennallack: I think that’s an interesting one for you to mention because, don’t take this the wrong way, but I wouldn’t say that you’re one of life’s Panglossian optimists. We’ve had a lot of discussions over the years about the prospects for this and that, and you weren’t out there calling for a tickertape parade, a lot of the time. Even then, you found it hard to see the downside.

Weisshaar: Oh, yes. I may not be able to see quite as much of the upside as some other people, but I still find it hard to recognise exactly how far down things could go. It just reinforces the major lesson that I’ve always read in investing, and that is you need to demand a margin of safety, because our forecasts, our estimates, our human nature, is incredibly poor at forecasting the future. Because of that, you really, really, really want to have a margin of safety so that, when you are wrong, you’re not so painfully wrong.

Bennallack: Of your three lessons, that’s one that … I do demand, quite often, a margin of safety. But then the problem is you have to invest in things that look pretty in trouble, which potentially conflicts with some of the other lessons. It’s very hard to run your winners if you’ve got a margin of safety. That’s why investing is a hard game.

Mark, what is the number one thing that you’ve learnt from working with Nate? And you can’t say any of those three that he’s just mentioned.

Rogers: I’m going to use this as an opportunity to publicly embarrass Nate; make him turn red with what I have to say.

I owe Nate tremendously for a number of things. He’s been a great role model to me, since I joined the Fool. He was instrumental in bringing me in, and bringing me along as an investor as well.

If I had just one lesson, I think it would be this. If you hold yourself to high standards, and you carry out your work with absolute integrity, and it runs through everything you do, and you put in that effort, you’ll do very well. I think Nate is just proof of that.

Bennallack: Nate’s obviously red with embarrassment there, so I’ll add my thing, because I have actually learnt something from Nate. That doesn’t sound very good, does it? I have learnt something from Nate, actually. That still doesn’t sound very good.

I have learnt a lot from working with Nate. It’s been really enjoyable over the last three years. I think the thing that possibly I’ve learnt most is to look more internationally at opportunities. When I came to my metaphorical desk next to Mr Weisshaar, I’d think, “What’s BP versus Shell doing?” I wasn’t necessarily thinking, “What’s Exxon doing, or what’s Rosneft doing?” You can look at that across a lot of industries.

I guess some of that, Nate, came from your work on the Fool’s former global product. I think that’s been a big lesson to me. I still don’t find it easy to invest overseas, but at least you’re looking more … we talk all the time about a globalised economy. We’ve got to remember that that means there’s competition everywhere.

Weisshaar: Well, those are two lessons that I’m glad someone learned from me, and I’m a little surprised that either of you had anything to say.

Bennallack: I’m putting in the appropriate amount of sarcasm, to make up for Mark’s eulogy!

Now it’s time for our stock ideas. Nate, it’s going to be the last one for you, for the foreseeable future, because I think the Mars trip is one-way. I don’t know if the (unclear) is coming back.

So, I thought it would be fun if we put forward three ideas for the ultra-long-term. Realistically, that means 10 years; we won’t say 100 years. What would you buy, Nate, if you had to buy just one share and pop it in the drawer for the next 10 years? What would be your best idea?

Just to make it a bit harder, let’s say no funds or ETFs. It has to be a company.

Weisshaar: All right. Well, I’m going to tap into my trace of David Gardner here, and I’m going to go with Monitise, which is a company very integrated into digital banking, digital commerce. They help develop the platforms for banks’ online apps, and are moving more and more toward helping retailers do the same thing.

They’re part of the electronic payment processing ecosystem, and I think that their partnerships with some very important people, including Visa and IBM and MasterCard, puts them in a great position to be a winner in what is still a very young and very fragmented industry; one that you’re probably going to have to wait at least five years before we see anyone who come out as a clear winner.

This is one that has a bit more risk to it, because there’s the potential that Monitise can’t succeed, despite its partnerships. But it’s one that I think is perfect for sticking into a drawer, because there’s going to be a lot of volatility between now and when a winner is determined.

It’s one where I think the upside is so immense that it’s worth taking risks on a company that currently isn’t making any profits.

Rogers: That was the question that I really had to ask there. In terms of the company being cash flow negative at this time, roughly how long do you think that’s going to take, to turn around?

Weisshaar: I think if they can achieve what they think they can achieve, they should be able to achieve cash flow in the next two fiscal years, so 2016 would be that target, for me.

Bennallack: Mark, you pretty much do buy for at least 10 years, so this is a doddle for you. It’s like saying, “What share would you buy?”

Rogers: In order to handicap myself, I’ve decided not to pick a stock that I actually own in this, because that would be kind of unfair, and you’ve probably heard enough about those.

The company I am going to go for is Markel; sort of a mini Berkshire Hathaway in itself, so I guess it’s still kind of cheating. I had the pleasure of attending the Markel annual breakfast meeting in Omaha — it’s held the day after the Berkshire meeting — earlier this year.

I really believe in the business model that they have, in terms of being able to compound wealth over time. The company doesn’t pay out a dividend. It retains all of its cash, it uses insurance float, and it uses that money to invest back into the business. I think it’s a terrific business model, and I really believe in management there, too.

Bennallack: I’m going to ask a question — and you teed it up nicely there, with your last line — which is, given that this goes into a drawer for 10 years … I like Markel, I own it, but a key part of the business for me is the investment manager, Tom Gayner.

Rogers: Right.

Bennallack: Let’s say that Tom … let’s not say he gets hit by a bus. Let’s say he discovers his inner hippie. He quits and he moves to Mauritius after five years. You don’t know that, because it’s in the drawer — or you do, but you’ve thrown away the key. Is that not a risk for investing in Markel, that it’s so reliant on that guy, and he might not be there?

Rogers: It’s definitely a risk. At the same time, though, I would say I’m relatively confident that he would stick around. The business isn’t founder-run, in terms of Tom Gayner, but it has that feeling to it, similar to Buffett and Berkshire; he didn’t actually found Berkshire. But Gayner is ingrained in Markel, and it’s vice-versa too.

Bennallack: He could be hit by the bus.

Rogers: He could be hit by the bus. Even in that case, I think it’s the business model that really works, there. I think Gayner is a very experienced and talented investor, but I think that there are other deputies that could step in there.

Bennallack: Culturally, they’d bring someone in.

Rogers: Exactly.

Bennallack: Okay, this is a challenge for me, as in the last year or two I’ve been experimenting with slightly more active investing. I wouldn’t say it’s day trading or anything near to that, but maybe being a bit more short-term in terms of when I’m prepared to take my profits. Obviously, I’ll be re-examining that in the light of Nate’s lessons about running my winners.

I thought if I was going to put one share into the drawer for 10 years, I would pick Diageo, partly because I could put it next to a bottle of whiskey that would be in that drawer as well. I might need it at certain points.

But mainly because, short of people going teetotal across the globe, which I guess is a potentially possible thing, I can’t see this business really being derailed. It sells into 180 companies, has 6 of the world’s top 20 brands; Smirnoff, Johnnie Walker, all those great spirits — Baileys, that’s another one — Guinness. About 16% of the volume it ships is Guinness.

It is suffering some short-term wobbles. Emerging markets are slowing down, and that’s where it’s seen a lot of its growth. They perhaps overpaid for some key brands in China at exactly the wrong time, because now people are trying not to be quite so extravagant in China.

I think that’s reflected in the price. I think the price did get a bit carried away, 2013. I think it got over £21, and if you looked at the value of the company versus the sales, it was knocking out to look a bit stretched. That’s come back a bit, and the P/E is pretty much in line now with its long-term average, at about 17. There’s a bit of a dividend yield, about 2.6, but it is growing quite nicely; it grows about 7% a year.

I think that, even though it’s away for 10 years, I can’t ignore the initial valuation, which I think is reasonable, and I think that that company is virtually certain to be intact when I open my drawer again in a decade’s time.

Weisshaar: Taking the tack that you used with Tom Gayner and everyone going hippie, what if we see consumers become more health-conscious; obviously, tobacco being the traditional one, but now we’re actually seeing great brands like Coca-Cola start to experience a decline in the consumption of sugary drinks throughout some of its more mature markets as consumers become a bit more health conscious and recognise the fact that, while alcohol does have some joyous benefits, it also comes with health risks, and further societal risks.

Bennallack: You’re quite right. I had an argument with a friend of mine the other day, who said he never invests in drinks companies, and possibly had never even considered that. Then he listed all the reasons why, to do with health and — he was a lawyer — to do with all the crimes he used to deal with that were influenced by alcohol. It is possible we could see a societal shift.

You mentioned Coke. I think Coke’s an interesting comparison, because Coke is a mass-market product, whereas Diageo tends to be targeting the top of the market, not the binge-drinking segment; i.e., I think it will be a distance between not having a glass or two of Johnnie Walker, and not having a six-pack from the corner shop. I think possibly the former will endure a little longer than the latter.

Interestingly, from memory, Diageo does even better gross margins than Coke, so there’s a bit of defence in the business. I think that would be unlikely to happen to such an extent that the shares would be materially down, after 10 years. It could curve the growth, and on a 30-year view I think it could be, potentially, an issue. But I think at the moment I’d be happy to take that risk.

Okay, that brings us to the end of the podcast. It’s been a slightly longer than usual one, this edition, but I think that is warranted because Nate is, as I say, off to Mars. If you go look at the sky and see a star passing, that’s probably Nate.

Alternatively, he’s off to The Motley Fool’s wealth management division, but I think Mars is more romantic.

Rogers: It’s more fun that way, isn’t it?

Bennallack: It is. I’m a romantic, at heart. Nate, enjoy yourself there.

Weisshaar: I’ll do my best.

Bennallack: If you want to hear more from The Motley Fool, go to The Motley Fool’s website at fool.co.uk. That’s it from us. Thanks, Mark.

Rogers: Thank you, Owain. Thanks, Nate.

Bennallack: Cheers, Nate.

Weisshaar: See you guys.