Bloomberg Audio Studios, Podcasts, radio news. This is Masters in Business with Barry Ritholts on Bloomberg Radio.
This week on the podcast strap Yourself In for Another Banger, Chris Davis choose up the scenery. He is the portfolio manager of Davis Advisors. They've been kicking the smps but for the past I don't know, since nineteen sixty nine, twenty billion dollars in client assets. Fascinating conversation. Charlie Munger was his mentor. He sits on the board of Coke and On Berkshire Hathaway. I thought this conversation was spectacular.
I think you will also with no further ado, my sit down with Chris Davis.
It's so always good to be with you. Thank you so much.
So before we get into your career, master's degree with honors from the University of Saint Andrews in Scotland, Like, how did that come about?
Well, and one of the things that confuses people is I actually don't have an undergraduate degree. I only have the master's degree. Wait, I sort of skipped that.
Did you did you go to an undergraduate college?
Well, what happened is I went to Saint Andrews. I had originally only intended to go for a year. I wanted to be a veterinarian's that's a longside story. And I had worked at the Bronx Zoo. I wait, wait, wait, Humane Society.
So the original plan wasn't Dad's a fund manager, grand fought pause a grant fund manager. I guess I'm going to be a going to the family business. That was not the plan.
Definitely not. But I give both of them credit. They you know, they felt that all of their kids should be financially literate. And so every kid worked for my father or for my grandfather at some point point and learned because they just felt like, look, you'll have money over time. It's not taught in schools, just the basic fundamentals of investing. And if you got help, you turn on the TV, you're going to get a totally distorted view.
Of what invstipos of nonsense exactly.
And so we all had this grounding. But you know, for example, my my smartest sibling without question, as my sister, my younger sister. But she's a small town doctor, but boy does she understands investing. She's very thoughtful in how she's managed her financial affairs. So we owed that route, but we all thought we were going different paths. She was interested in medicine. I was interested in veterinary medicine,
and so I was going to go to Cornell. And I was very young for my high school class, and I was very late hitting puberty. I mean I was five feet tall my senior year in high school. That's when I broke five feet so you know that you can imagine what this looked like. But but my scores and grades were okay. And so Cornell took me into their prevet program. But the woman that ran it said, look, this is a seven year program. It's intense. Why don't you take a year off, like a gap year. So
I propose that to my father. He said, we don't do that in our family. Like you could go study, but there's no like year off like to go ski year. Find this.
Did you skip a grade or you?
Like me?
The back of like October November December, So you're young relative to no.
I had skipped a grade sort of early because I bazarrely. I didn't nobody in my family believes this now, but I didn't talk until quite late. So they had sort of and.
Then when I started talking, they jumped to me out and it never stopped since then.
But anyway, so I had this year period and it was the first year that the University of Saint Andrews wast in taking direct applications from students that where they dropped the requirement to have A levels or O levels to sort of British entry exams, mostly because they wanted the Yankee dollar. You've got to remember Thatcher had just become Prime Minister. She was slashing the public support of
the Scottish universities. So I applied. There were I think eight of US Americans that came in that first year, and they had a program where after two years you could apply into the honors program, which would allow you to concentrate on just one subject, and I ended up picking two, but needless, it was philosophy and theology and interesting,
you know. I picked them my freshman year, thinking well, when I go back to Cornell, I'm going to be filled up with organic chemistry and biology and anatomy and so on, so I may as well pick things that I would never I'll never get to study again. So I picked things like medieval history, philosophy, theology.
I love that. That's something I always, in hindsight wish I did. And I started out physics and math and switched the political science and philosophy. So I got to study some stuff that was fun. But like medieval history, sounds like that would be a delightful semester.
You use the perfect word fun. I mean I became a good student in high school. I wasn't a good student. In fact, recently I found my elementary school my eighth grade final report card. I went to a school here in New York and it was a pretty strict, you know where, a uniform sort of boys' school, and the headmaster would review each report card before it went to the parents and then make a comment on the bottom.
And the headmaster's comment on my final elementary school report card was yet another semester of squandered potential.
Not living up to his potential. God, my children classic.
My children found that my mother David to my children, which was a big problem you could imagine.
But anyway, so I thought I'll just be in Scotland for a year. I picked subjects I would never study again. They were so fun.
It was just it was especially in Scotland.
Medieval in a medieval university and where Hume had been a professor. I mean, you know, it was just amazing, And of course it was. It's also a Presbyterian seminary, so so Saint Mary's, which is one of the colleges there. So I thought, well, you know, and I'm not. It wasn't that I was a deeply faithful sort of person. I more thought of theology from the point of view of you know, people organize their lives around religion, people die for it, people, you know, I should study this.
And but I also there was a secondary reason that I was interested, which is, if you look at communities that have a religious institution at their center, whether they're rural, whether the urban suburban, almost all outcomes are better, you know, intact families, crime rates, graduation rates, you know, all of these sorts of statistics tend to go better. So to me, there's I was lucky that I didn't. I was never you know, didn't have one of those childhoods where it
was beaten into me or something. So it was more this curiosity about how it seemed to serve communities to have a shared value system. Anyway, I picked those subjects I applied into this honors program, so I was able to get the Masters at the end, but there was no undergraduate degree along the way.
And there was no going back to Cornell to become a vet now, although the order for that faded.
Although because I deferred my admission freshman year, I still get mailings from their alumni department because I matriculated but then deferred, And I'd like to think the Development department has nothing to do with them sending me these mailings. But I lived on a sheep farm in Scotland, and of course that was when I realized I was confusing loving animals with wanting to be a vet, and those are very different things.
Yeah, very much.
So.
I'm always as we used to foster dogs and get them adopted, and anytime I meet someone who was like, oh, I really don't care for dogs, it's like.
Oh, that's a big ex don We weren't allowed to have dogs when I was a kid, But I grew up right in the city of East eighty fourth Street.
But my parents from the time I was in maybe third grade or so, so what would that be, probably nine years old or eight years old something like that, they said I could walk dog, I could be a dog walker, provided I didn't cross any street, so you know, i'd put up a notice in the elevator and their building if anybody needed their dog walk, and then I would just walk the dogs around the block before school and after school. I can still remember the name of
every dog I walked, which is amazing. And I loved it. And of course it actually became seed capital, which is unexpected. But the reason was, you know, I could probably charge fifty cents a walk back then, so it was nothing, but I got to be with dogs and I enjoyed it. It was like a.
Paper running a small business. I had a paper route and it was just so formative so far.
And this was like a paper route for city kids because you didn't couldn't have a paper route New York. But then an amazing thing happened New York City around nineteen I'd have to be around nineteen seventy seven or seventy eight passed the Pooper Scooper line, I remember, and everything changed because people had these dogs with nobody even knew what to do they nobody had ever imagined cleaning
up after a dog. There are all sorts of inventions, you know, talls, but people didn't you know people were so gross they had to carry shovels with them.
Change the diaper on the baby. How it's just processed food. There's no big deal.
Well for me that my rates could go from fifty cents to five dollars and people were glad to pay it. And instead of one or two dogs, I had four or five. And it was real money because what it meant was I was suddenly making you know, fifty dollars a week.
In nine sixty.
Dollars a week.
Yeah, that's good.
Yeah, And so you start, you know, thinking about holy cow, you know, I'm making two hundred and fifty dollars a month. You know, I'm making thousands of dollars a year. And it was just fantastic. So I've I've loved dogs ever since.
So let's talk a little bit about the early days of the career. You start as an accountant at State Street Bank and ultimately end up as a unglamorous research analyst at Tanaka Capital Management. These are, you know, very much bottom rung on the Oh Street ladders. What you learn in those well, it.
Wasn't really my first job. My first job was I became a pastoral ass at the American Cathedral in Paris, so I lived. I moved from rural Scotland to Paris. Well, that was like landing in oz you know, you get honest to God, you my eyes lit up, but again in the same way that living on the sheep farm convinced me I was confusing loving animals with wanting to be a vet, you know. Working for the American Cathedral convinced me I was confusing loving people with wanting to
you know, be a priest or something. So I moved from there to Boston, and I thought about teaching. I actually even applied to the CIA because I was very interested in research and international affairs. I'd lived abroad then five years, and I thought it would be an amazing thing to be the greatest expert on let's say Czechoslovakia's learned the language, the history, the people, the economics, the business,
the military, the topography. And so I didn't want to be a spy, but I wanted to be an analyst. And CIA wisely turned me down, having briefly had a stint in you know, sort of the Worker's Revolutionary Party, you know, and.
Oh so they looked at your history and said, this guy's.
Yeah, they're like, this needs to ripe it a little more.
We don't know have ethical malleability that we're looking for.
But I and so, you know, I started thinking about the summers that I had spent working with my dad and my grandfather, both of whom loved their jobs. They loved investing, they loved their career, and of course that was infectious even as kids. I thought the idea of investing was so interesting because they didn't highlight the math to begin with. They highlighted the stories, the people, the ideas.
And but I realized that even though I've had this study of sort of the idea of businesses being made up of people and ideas and this sort of interest in that, I had no grounding in the rigor of it. And so what I like to say is, you know, my father and grandfather, you know, let us live in a foreign country, like live in France for some time and hear French spoken and see this new culture. But we did that before. We had to learn the grammar and read the textbooks and so on. So they got
the order right for setting the hook of curiosity. But I knew enough to know that I couldn't go into investing without a real grounding, and of course a bank is perfect. And I got I mean I interviewed a lot of places. George Putnam himself turned me down for a job at Putnam. So I had a lot of rejects before. And State Street Bank had an program for entry level accountants, and you know, they had a wonderful
training program. And so I had an operations center in Quincy, Massachusetts, and I would take the red line down there and and I could do my day job. But they would also pay for all of any schooling you wanted. They had something called the State Street Institute, and you could take courses and anything to do with economics, accounting, business, and so I took advantage of that, although I will
say I was fooled by one course. They had a course in their catalog that was called the Rules of Rhythmic Touch.
Now I thought that sounds like massage.
That sounds pretty good, right, I figure I circled that one in a little course catalog.
It was only a two night's course, and I showed up and it was how to use a ten punch tape calculator, you know, without looking at your hands, so you know when you're summing up the column is the rules of rhythmic touch. And I would say, if you put what on this table now, I would be calf I would bet you a large sum of money. I could run a column of numbers faster than you.
I'm going to that one.
But so that's so I got the grounding there. Graham Tanaka was somebody I had met during my summer jobs. He was a very talented analyst at Fiduciary Trust. He'd been at JP Morgan before, and uh, we'd sort of stayed in touch, and I learned that he was hanging out his own shingle and starting his own firm. And he's a Japanese American really a very you know, driven, talented guy. And uh he said he wanted an apprentice,
and uh, and you know it would be everything. I would be his first hire and we would go from there. And that was a terrific hell did I stayed there about two years. Uh, And we stayed because what happened after the first stretch is my grandfather, who I was close with when I went to work for Tanaka. My grandfather opened up an account at Tanaka because he thought this was you know, he had big investments in Japanese firms. He had a lot of admiration for Japanese culture values, and.
He admired late seventies, early eighties.
This was late eighties now, so we're probably in eighty nine, something like eighty eight eighty. Yeah. Well, but Graham was a growth investor primarily in the US, and so he just happened to have Japanese heritage. But so my grandfather opened account and as the time there progressed, my grandfather
was worried about his health failing. He loved the business and he wanted to die at his desk, and so he started asking if I would come in on the weekends and go through his you know, his accounts with him. And Graham, of course, was so respectful of that, and so it was sort of a very gradual transition out. There wasn't an end date of my time with Graham so much as there was a start date of my time working with my dad and father.
So your father launched Davis Advisors in nineteen sixty nine, yea, and your grandfather was still running his Davis investing shop. Yeah, parallel. Did they ever end up murging what happens when they decided all right, it's you know, it's time.
Well, my father was my grandfather's only son, and as often happens, they had a very complicated relationship, and so they never worked together. My father grew up with his famous name because your numbers were right. In the beginning. It was one hundred thousand dollars that he borrowed from his wife's family. It was eight hundred million when he died, and it was two point two billion when his wife died, and she was sort of the successor trustee, and then
it all went to charity after that. He didn't believe in inheritance, but it was in trust for her and she lived to be one hundred and six.
Wow.
Although I will tell you I managed her account, and you know, in two thousand and eight, of course I had to go see her and we had a lot of financial stocks and we had a really bad mark at the bottom, probably down forty or fifty percent. And I went to see her in Florida and I said, you know, grand I just I want you to know the businesses are sound. You know, we took some body blows, but you know, in the long run, it's going to be fine. She said, you idiot, I'm ninety eight years old.
She said, I don't buy green bananas, and you're you're telling me I'm down fifty percent and you go.
Get back to work. So she teached me because of course she lived long enough to see it all come back. But we would always she would always tease me about not buying green bananas, and my telling her she just had to have a little bit of a longer term perspective. But anyway, so my my my grandfather built his firm which was called Shelby Colin Davis and Company. My father built his which in the beginning was called Davis, Palmer
and Biggs and Uh. And then the New York Venture Fund was a client or a fund managed by Davis, Palmer and Biggs. And And when I was working at Tanaka, I went to a meeting. It was Chub Insurance, you know,
analyst day sort of thing. And there weren't that many analysts then, so it was held around a big sort of boardroom table, and the CEO is Dino Hare, and he'd sit there and say, we Chubb you know this he was it was and uh, And I looked around the table and both my father and grandfather were at the same meeting by chance, and uh and I thought this seems a little nuts and uh uh. And so you know, I spoke to them both because I was
very close with them both. And you know, one of of the things my father was very clear on is he wanted out at age sixty. He said, I'm not yep our age. Yeah, hard stop. And here was my grandfather at the time, and he was probably in his late eighties and early eighties probably then, and he said, you know, I want to die at my desk. I mean, he was the one that called investing the best game in town. He would say, this is the best game
in town. He loved his firm. He loved now his firm, well most of it was his own capital, and so in a way he was just managing his own but he loved being in the flow. He loved in a way, my grandfather loved being a great man. You know. He had served as an ambassador, He was a co founder of the Heritage Foundation chairman for a long time. He had very conservative political views, although that was slightly different
organization twenty five years ago than it is now. But he was a passionate Reagan Republican and sort of a Hoover Institute sort of Republican, and his namesake, Shelby Cullum, was, you know, a Republican senator and governor under Lincoln. So I mean, you know, it was it was in him deep. And so he loved the game, and it wouldn't have occurred to him to stop working. My father loved investing, but he did not like the responsibility of the business.
He didn't like boards and clients and you know, employees. That was not his thing. Is much more a wonderful human being, but very different than my grandfather. So he wanted out before he turned sixty. My grandfather wanted to die at his desk. And I thought, well, here I am. I don't know what I am at the time, twenty six or something. I was like, well, here's a great idea. Why don't we merge the companies and then I'll come in and you know, I'll learn from both of you.
And I was an SNL and a banking analyst then, and of course this was going right into the teeth of the SNL crisis, so it was an exciting time to invest. And then you know, we'll figure out a way for the three of us to do.
It, and how long did it take for that to all come together?
I think my grandfather my father turned sixty in nineteen ninety seven, nineteen ninety eight, somewhere like that. And my grandfather died six.
Eighty six something like that, you.
Know, don't quiz me. And then my grandfather died in let's see, nineteen ninety four, so I have to say he was eighty six or eighty seven when he died, and so in a way, the timing all sort of overlapped beautifully. And so my grandfather worked almost to the end. My father helped coach me through that transition, and then he walked out the door in nineteen ninety eight, and that was that. And wow, he's been an incredible mentor.
He's always available to talk, but as he said, I'm here to give you advice, I'm not giving any orders. And he didn't sit on our boards, and you know, he just walked out, and just like my grandfather, started giving his money away. And he's you know, he created and oversees the largest international scholarship program on earth.
Really, yeah, I know there's a foundation. I haven't read the book, but online there's John Rothchild, who was I think Peter Lynch's Yeah, author lovely man, the Davis Dynasty. How odd is it to have, like, hey, you know this story, the game isn't over and you're you're writing this book. How odd is it to be art of a book like that?
Well, you know, first, it's probably a book read by dozens of people nationwide because remember it is the riveting biography of the dean of insurance stocks. So it's not you know, that's a pretty narrow.
Narrow pool, not a hot seller yourself.
And I do think I experienced the writing of that book as you know, sort of terrifying, you know, really, yeah, because it was a lot to live up to. Well, it's a lot to live up to. And I will say it's it's something that I'm just profoundly grateful to my dad, well really to both of them. But my dad was is a very humble person. And you know, when you in that book, it is, you know, ninety percent about my grandfather. And my dad was, you know,
sort of what I call a quiet doer. He loved investing, he loved research, but he was very low profile and so his view was very much that despite the sort of graphic title, this is really a book about his father,
and I think that that's true. And in fact, when we at our firm, we made slim down versions of that book and called it the Davis Discipline instead, which was much more consistent with our sort of view of life, because you know, dynasty implies sort of dynastic wealth, it implies inherent and there's no inherent and there was that was none of that, which, as.
I would imagine, people would be surprised to learn.
Yeah, and it's funny, it's it's not something I'm quite as fanatic about.
Well, Warren Buffett is a big believer in, hey, if you give your kids, you should give your kids enough. I know, I'm going to mangle this. Give them enough money so they could do anything, but not so much money that they can do nothing.
You didn't mangle it. You stuck the landing. That's exactly, and that is exactly the right floss. And I would say, you know, my father, my grandfather sort of believed that. I mean, I have siblings that you know where you know they were helped out, and you know I had an aunt. You know that that my my grandfather left some money to to ensure that she and her kids would be all right and so on. So it wasn't ruthless, and I think, but I think there was. It came
from a place of sort of compassion. I mean the sort of view that you know, there's something dignified about burning your way in the world, and and I think there's you know, the idea of wanting well, look, Barry, let's I mean, if you look at the greater world, there's a lot of fear. And fear can be a motivator, but God, is it a weight to you know, people live, you know, one operation away from bankruptcy or you know, a layoff away from being foreclosed on. That is it.
I mean, if you as a parent can put a safety net if our society doesn't, if you as a parent can do that for your kids. And my grandfather did that, and my father did that, there was I don't think we ever grew up with a feeling that there wasn't a safety net. And so the freedom from that fear is a huge gift you give your kids. It was a huge gift that was given to me.
And that's what gives you the confidence to be able to try anything right because you're not worried that you know, especially when you start having kids, and you think, my god, if you know, I can't I can't take this risk. I can't leave State Street. You know. It's it's like it never occurred to me that I couldn't leave and and and so I but I think their view was, you know, if you raise your kids with you know.
The fortunate thing was both my dad and my grandfather were very frugal, and so we didn't live in hardship. But we certainly didn't go to Southampton and Palm Beach and Aspen and you know that was all uh, you know, they had a very sort of puritanical sense of that that you know, that sort of view that uh, you know, we went out to Fire Island and we had a house on stilts that I still have a house out there, you know, and it's in a swamp and and uh, you know, it's one storm away from the end, and
there's no cars. You take a little aerry out there, and and you know, I always think of it as the anti Hampton's uh very much. Yeah, and so and that's that's what what I love. And and uh, and you know, my parents had a place in Maine, but it was just you know, it was no not a fanily deal. Yeah, they had a nice house, but it wasn't it wasn't a Newport mansion. And they had it because, you know, they used to call them in the twenties,
people like my grandparents were called rusty caters. Isn't that a funny word? And it was people that were wealthy but would go and live very simply in the summer, you know, very and that it's very much just sort of a Scandinavian ethic, and I think it developed especially
in the late nineteenth century. There was a movement called the Chautauqua Movement that I'm still a supporter of, which basically said, as the bourgeoisie and wealth was being created, there was this one branch of wealth creators that decided they wanted to be English aristocrats and they built mansions
in Newport and they had yachts. And then there was another branch that sort of said that's not the American way and they and in many ways, I mean Rockefeller in many ways embodied a certain amount of that, that sense of stewardship some or even more extreme in terms of restraint. But the Chautauqua movement sprung up and said they created these there's still one left. It's in upstate
New York. But where you would go with your family for self improvement and you would live simply and there would be lectures, there would be you would improve your mind, you'd improve your soul, and you'd improve your health, and you'd bring your kids and there would be sort of daycamp for the kids, and there'd be church on Sunday. But it was a non denominational church that was about service, and then there was you know, there were lectures. It's
where Solomon Rushdie was stabbed. If you remember a couple of years ago, he was in Chautauqua. He was lecturing at this place that still exists. People go for a week or two weeks every year. So that's what the place I go on Fire Island was part of that Chautauqua movement. But the ethos of it, I think is something my parents and grandparents really subscribed to.
Huh, really really fascinating. Coming up, we continue our conversation with Chris Davis, chairman and portfolio manager at Davis Advisors, discussing how he developed his philosophy and investment process at Davis. I'm Barry Ridults, you're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. Chris Davis is my extra special guest.
He is the chairman of Davis Advisors. In two thousand and five, he was named Morning Stars Portfolio Manager of the Year. He helps to oversee twenty billion dollars in client assets, a healthy chunk of which is he and his colleagues. We briefly mentioned Buffett earlier when I later on, I get to ask people who they're meant were. But I have to bring this to this part of the conversation. Warren Buffett and Charlie Munger were your mentors. Is this remotely true? It just seems insane. Oh.
I mean it started and I want to say it was nineteen might have been nineteen ninety ninety.
So he's already a well known investing rock star at that point.
Well, the way it really started was with Charlie. I met Charlie long before Warren. Oh really. But the reason was I was trying to sell a business my grandfather. As I started going through his accounts and going in there on the weekends. He had a business called securities lending. And I don't know how well you know that your business.
And anytime you're in a short stock, you gotta need to borrow somebody, and it's going to cost you a little.
It's going to cost you a little margin. So my grandfather's view was he had a portfolio of appreciated stocks that he was never going to sell, and he said, if somebody wants to short the stock and pay me to borrow it, fine, And you the number one borrowed stock in those days was Birkshaw, of course, because you couldn't borrow it anywhere because everybody had the certificates and you know they weren't literally, yeah, there was no There
was very little Berkshire that was in street name. It was in individual pew and therefore you couldn't borrow it.
It was locked away in safe.
Yeah. So he had a big holding and he had a broker dealer, Shelby cam Davis was a registered broker dealer, and so he could lead down the shares and make a couple hundred basis points a year extra return on top of the Berkshire return. So that's how he started in the securities lending business. But gradually the guy who was doing it for him and administering it. Said well,
you know, we could also help. We've got all these people that want to short all sorts of different securities, and we can be act as what was called a broker finder. We'll go out and find the securities for these people to short, and we'll make a little a little spread as they go through. Well, this business grew and grew and grew, and soon there were you know, seventeen employees in this securities lending business, and it was
a big operation. And my grandfather by then was you know, probably in his eighties, and was nervous because, you know, as I went through the list of counterparties with him, there were firms we had never heard of. There was this one called l TCM, and he and I said, what is this LTCM. We've got like, you know, five eight hundred million dollars lent out to them. What oh, that's long term capital management. So we talked about it. He said, yeah, I think we've got we got to
get it. We got to get rid of this thing. That reminds me by the way of what Jerry side.
Wait, did he hold on to that business? So did they?
So I said to him, like you know, we got to get rid of this thing. And he said, fine, well, see if you can find somebody to take it over, because we do have seventeen employees and you know, they made their careers here. We're not going to fire everybody. And so we started calling around and I thought, what characteristics do we need. We need a lot of excess capital, I help. Ideally an appreciated portfolio of securities, you know, sort of a triple A type balance sheet, and somebody
that can understand. So I thought, well, Berkshire. So a wonderful friend in those days named Bob Lensner, who was a reporter at Forbes but was very I recall I had.
Lunch with him at I want to say, the Harvard Club. I think he was an alumnus.
They could have been his kids, our kids were. Our kids were in the same elementary school. And I got to know him just, you know, watching basketball game but third graders or something, and he was and I have you know, I heard his name around and he said he mentioned casually in the conversation that he had met
this brilliant guy, Charlie Munger. And I said, well, I you know, I know Charlie is but I'm dying to meet him, and so Bob arranged for us to have breakfast, and Charlie was in New York and I went down. It was at the Millennium Hotel down by the World Trade Center, and I went down and I sat down and introduced mister Munger. Pleased to meet you. I'm Chris David, and I said, you know, I'm working with my grandfather. Shall we call him David's a company? And have I
got a business for you? And I pitched our securities lending business, and Charlie put up his hand after about four minutes and he said, I have no intention of buying a business run by seven guys named Vinnie.
And Verry.
It was the perfect description. I mean, we had Vinnie, Tony, Mikey, Nikki, you know. And so we did end up finding finding a buyer eventually. Yeah, And it wasn't really a buyer. We just did sort of an earn out. We just wanted everybody. We just wanted them to have jobs. And so they all got a job at a broker dealer.
And so beyond the pitch to monger how to do your relationships well?
So the pitch ended in four and a half minutes, and so I said, well, I'm sorry I wasted your time. And I got up to leave, and he said, where are you going? And I said, well, I just don't leave. I'm only just getting to know you. I'm not interested in your business. But tell me about you and tell me and we got talking about, you know, a few things. But what really happened was I started listening. And so you can tell I like to talk around Charlie. I just listened as much as I could, and we sat
at that table till lunchtime. Charlie said, I have to go to a lunch but if you find yourself in Los Angeles, give me a call and I'll make time for you. And so of course I started going to Los Angeles pretty regularly. And so that was a huge gift in my life. And it was a gift professionally, but my god, it was a gift personally. I mean, he helped me through some hard times in my personal life. I mean he was just a wonderful mentor in every dimension.
So there is a lot of things that all of us have learned from Warren and Charlie, through the letters, through the annual meetings, through just all sorts of stuff. I'm curious, what did you learn from Charlie that none of us can find in the public materials. Well, good question.
I think most deeply, I learned about integrity in the traditional sense, meaning wholeness. Charlie was a whole person. He the alignment. What he thought, what he said, what he did, they were all the same thing. And his sense of his own code of being was so disciplined, but was filled with this sort of you know, his reputation as a curmudgeon may have been cultivated, I never saw it.
He was a truth speaker, but he was also, in a very profound way, a very loving person, a very cheerful, very committed, profoundly loyal, and so it was, you know. I used to sort of joke that if I did a ven diagram of the things that I admire about my father and the things I admire about Charlie Munger, there's surprisingly little overlap. They were both frugal, but my Charlie didn't was an incredibly broad thinker. My father was
just single minded about investing. Charlie was curious in everything. Charlie was very sort of committed to relationship, continuity, to breadth. My father is very sort of specialized. Very Now, my father is incredibly physically fit and remains to this day very vigorous. You know, Charlie was willfully sedentary. You know, my father is very nomadic. And Charlie went to the same island in Minnesota and the same lived in the
same house his whole life. You know, it's very you know, very much a creature of habit and so they were very different that way.
Just imagine if Charlie exercised, how much longer he could have left.
I don't know. Ninety nine and three quoters is pretty good. That's one of the things he said. He said, I'm not sure I see the alignment.
So let's talk a little bit about the returns and about the philosophy. Back of the envelope. I calculated Davis Advisors has been compounding shareholder wealth at greater than ten percent annually since nineteen sixty nine. Does that sound remotely?
That sounds right. You're still ahead of the market from the beginnings.
Starting out in nineteen sixty nine, so you're, you know, early days of a horrific bear market. You have managed money through well, you're in grad school. But your dad during the eighty seven crash, you're involved during the dot com implosion, during the financial crisis, during the pandemic. I mean, you have seen lots and lots of cycles across all of these decades and all of these different environments. What key investment principles stand out as absolutely core, non negotiable.
This is the heart of what we do well.
The entire investment and process boils down to these two questions, what sort of businesses do we want to own? And how much do we pay for them? And you know the types of business characteristics that we focus But in the interplace, I should say before I go on that the interplay between those two is part of the nuance
of investing. You may own a slightly lower quality business because the price is so extreme, But the characteristics that we look for in every business have to do with the durability, because we buy businesses thinking we will our goal is to own it forever. Our goal is for the return to be driven by the year earnings yield on the business over time, not by some change in
the valuation and finding an exit strategy. And so those sorts of characteristics are exactly the characteristics you would look for if I said you've got to put a business away for your kids or your grandkids. So you know the nature of the business, the returns on capital, the competitive modes, the nature the balance sheet, the risk and very importantly the character of the people running it. We spend a lot of time on management evaluation in this land of AI. You know, I just came back from
the Markel annual meeting. You know, character will not show up efficiently, I don't think in the AI world. And boy does it matter when you think about navigating in unpredictable future. Just that ability to be resilient, to adapt, but always to be investing the money as if it's your own. And they're CEOs that do that. So those are the nature of the business. And then the valuation discipline is sort of the securities analysis part of what we do. If the first part is business research, then
it's the securities analysis. It's adjusting the income statement, you know, that's where the accounting training comes in, and it is understanding the incremental returns on capital, and it's adjusting the balance sheet, every account on the balance sheet, because of course gap earnings is a convention, but it may or may not reflect reality. And so you know, you put those two things together and we build an i RR,
an internal rate of return forecast. We work on this concept of owner earnings in each business, and then we focus on the quality and the durability of the business.
I can help but point out that you talk about buying or owning businesses, not buying stocks. That seems to be like a very fundamental distinction compared to most fund manager.
It's so profoundly important, you know. It is. We view ourselves as business owners. We view the management as our partners. In most cases, we view the you know, the signs of short termism as dangerous. It's one of the reasons we feel that the activist movement has completely lost the thread and should be greatly resisted, whereas it was very useful when it started. And we can talk about that later. But absolutely, we're owning businesses, and we're trying to own
businesses that are compounding machines. Right. I watched what it meant for my grandfather to owned businesses for twenty thirty forty years. You know, I look at our own portfolio. I look at companies like you know, American Express or Wells Fargo or JP Morgan. In the financial world, look at you know more recently at companies like Amazon Texas Instruments. You look at what a business can do compound over
twenty thirty years. I mentioned Markel. You know, when I first met the now CEO of Markel, we met in Omaha at the Orpheum Theater at a Berkshire Annual meeting in like nineteen ninety. The stock was at like nineteen or twenty and it's at two thousand now, you know. And by the way, they have an activist idiotic saying they split up the company. It's like company's doing fine, and it's a company that is being built to last.
And the idea of getting a quick sugar fix because you can sell some part to private equity at a premium that doesn't serve capitalism and it really won't serve the long term shareholders of that business.
You mentioned a number of financials in that list. I'm kind of curious because financials have had some pretty good years. They've had some pretty rough years. Obviously, the financial crisis was devastating. Although my pet theory about JP Morgan Chase is when they had their subprime problem, it predated everybody by five years, and there was still a bid when they had to get out, so they got a little lucky,
and they happen to have a particularly talented CEO. But this concentration of financials, I'm curious what led to it, And I'm curious of the relationship between what some people describe as high conviction investing and concentration in a particular sector like financials.
Well, I think high conviction investing is exactly the right description. And if we end up with a focus on a particular sector, it's not necessarily because of a view of the sector. It's because the individual companies. Financials is one of the most misleading sectors there is, because to me, what creates a correlation risk is when businesses are tied to the same macroeconomic variables. Financials is a massively broad category.
There are financials that have risk if the wind blows in certain parts of the world, the financials that have risk if interest rates change, financials that have risked that have to do with recessions, some to capital markets. They are all different. And I'll give you a really powerful example. I started our financial fund, I don't know, something like
nineteen ninety. That fund, from then to today has outperformed the S and P five hundred, and it has outperformed the S and P five hundred quite meaningfully when you compound it out. At the time we started it, I didn't even know there was a financials index. But it was founded with this belief that one of the and
my grandfather of course, specialized in financials. I started as a financials analyst, and he had a phrase that he loved, which is, in financials you can find growth stocks in disguise. And he said, the reason is is that you have very You have businesses industries that are huge where companies can grow for a long period of time by simply growing. Just this year, Progressive finally passed State Farm. Progressive has probably compounded in the high teens for thirty years and
it still is. Just became maybe the largest insurance company in personal Auto's massive industries where you can compound for a long time without outgrowing your sector. Second advantage, the business model doesn't really go obsolete, right making us spread on money is about the oldest business there is, maybe maybe the second oldest, thank you. What else, It's an industry where you have huge dispersion of outcomes but relatively homogeneous valuations. So you I mentioned Progressive I mean, you
have companies that have grown Capital one. You look at Capital One's growth record from nineteen eighty seven today, and yet it's trading at nine or ten times earnings because it's a financial I'm like, it looks like a growth stock to me. Right, I've got it's still run by the founder, it's a fintech company, it's a data science company. It's in the top ten of all holders of AI and machine learning patents. But it trades at nine point eight times earnings and one point two times book value
liquidating value with a mid teen's return on equity. It seems just nuts to me, but whatever, we love it. So that's the idea of growth stocks and discussion. And the last advantage of financials is that culture is a defining and sustainable difference.
This is a theme I have heard from so many really savvy executors CEOs as well as investors. How do you, as an investor wrap your arms around culture? It feels like you almost have to be in it to see it, Like, is it something that as an outside investor you get access to? You how do you identify quality culture?
Well, it's it's a perfect question, but I'll give you the punchline for the differentiation. Last year, our financial fund, which is ninety five percent in large cap financials, outperformed the S and P Financials Index and the XLF the largest financials ETF by twelve one hundred basis points.
Not too shabby, right, So, I mean it was a great.
Year for us. But the point is that they're in large cap financials. We're in large cap financials. How can you get such dispersion? Right?
But the same is they own everything and you own them.
But they're very concentrated. They're concentrated in the megacap banks by and large and Visa and MasterCard, you know. But we're fairly concentrated to We only have twenty twenty five names and they, you know, twenty or twenty five names are probably eighty percent of the index.
Does the gap come from the stock selection or the screening out of what you don't like?
Well, it really goes back to the culture question. So to bring it full circle to your question about culture, what it is is that within financials, we are looking for the companies that we feel can be compounding machines, and we're looking for the companies where their culture creates
a durable advantage. The reason culture can create an advantage in financials is because in most cases, your cost of goods sold is an estimate, and if you have an aggressive management, they can use accounting to upfront earnings that you'll pay the piper three five, excuse me, ten years from now. So we think can look good for a long time, whereas if you do the opposite, if you have a good culture, you're understating the near term, but
you're building cushion for the long term. And so when the times go rough, when the tide goes out, and you see who's swimming without a bathing suit, that's where the culture really matters. Now, you mentioned all of the crises that I've seen over my career. I've seen a lot of these management teams and these companies go through crises and you see who's wearing a bathing suit. So we just went through an interest rate crisis right to five hundred base and we used to get questions from
clients all the time, don't you own first Republic? In October, my colleague Pierce Crosby wrote a research report just internal just for his own saying he's just startled by the amount of risk Silicon Valley and First Republic are taking He said, it's sort of amazing look at the duration on their assets. They're assuming that their liabilities, their deposits are going to be with them for eight, ten, twelve years and that they're uncorrelated. So, you know, we used
to get questions, why don't you own them? They've been they've had such great growth records, and our view as well, it's been a mistake not to own them in terms of they've outperformed. But we are not going to own the companies that are optimized to the upcycle, right, and that's a different culture. They had a growth culture, but it was it blew them up, and so you know, we instead looked at companies like well JP Morgan was
an outstanding example. Wells Fargo was capital one where they didn't reach for the easy money of taking that extra risk on the interest rates they could have. You know, Jamie Diamond stood up at an analyst meeting said I could add a billion or two billion dollars to my profits with a phone call, and I'm not going to.
Do it because of the risk.
Because of the risk, you guys want you know, I could put out my money for five seven years and he didn't do it. So when that you could see that. So some of it is quantitative. You identify culture by accounting choices. Look at how accident your reserves develop at insurance companies, look how credit loss developed, Look at the duration in the asset portfolio of a bank, look at the mark to market risks that an investment bank is taking,
so on. So you can identify culture quantitatively in financials. That's a big advantage. But then the next part is qualitative, and there I think Warren put it best. He said, in a complex financial the CEO has to be the chief risk officer, and you could have somebody with that title. But if the CEO doesn't the nature and the complexity of the risks, they should not be the CEO of a financial company.
So not only am I hearing a lot of Warren's voice in things you say, I'm also hearing a lot of similar companies Coca Cola, MX, Wells, Fargo coincidence.
Well, I mean it would be strange if we ended up different. Of course, I always like it when we owned it first. So for example, we were I think the largest shareholder of General Ree before Berkshire bought it, and so and by the way, our research was not so good on that one. Really no, and as you see subsequently, Jenry did not perform very well for many years. It was And I think Warren would say, I mean, I think he has said publicly, I won't put words.
I think he said that that was well, I'll put it this not his favorite pick. Yeah. Well, I'll tell you what, Charlie. Charlie came to visit us and we have a wall of mistakes where we frame the stock certificate.
Is that what that is?
Yeah? And Charlie was looking through it and he said, where the hell's here, Genery, And I said, Jenry wasn't a mistake. We got Berkshire stock for Jenry. That was fantastic.
Did you have anything to do with the transaction or they just went out and bought him? And you happen to be a big O.
And you know we we were big Geico shareholders, you know, so no, it was uh and we overlapped an MX but we but no, I mean we're much more diversified. We never owned Apple. We you know, there's there's huge differences. I mean, starting with the fact that you know, Warren has outperformed all investment advisors for fifty years and and so, but you'd be crazy not to study, you know, when Warren owned something, or to study Berkshire itself.
And that makes a lot of sense. There's another distinction between the two of you. You say that you are neither deep value nor go go growth. So what does that leave you? You growth at a reasonable price Somewhere something is you love.
Growth at a reasonable price because what are the other growth at unreasonable prices?
That were unreasonable?
And now, I think what we would say is it's obvious to us that growth is a component of value.
Right, Growth is a component of value.
So a company that grows profitably is more valuable than one that doesn't grow, right, I mean it's it's again, think of the business. A business that grows profitably is more valuable. A business that can redeploy its capital at high incremental rates of return is way more valuable than one that it can't, one that's capital intensive and shrinking and so on. So growth is a component of value.
And the difference between us and a typical growth manager is we tend to believe more deeply, based on experience, that high rates of growth attract competition. Competition lowers returns, and so we believe in capitalism, and we believe that growth is hard and maintaining growth is hard. So we tend to be more skeptical than the average go go growth investor, but we tend to be more open to paying a fair price for a company that can grow
profitably than the typical value investor. So so much of our research is about the durability of the growth, the competitive advantages that a business has. So our portfolio currently trades in aggregate. If you took all of our companies at something like fourteen times times earnings, well, the market middle of the role is at twenty or twenty one, the value indexes at nineteen times. And yet we have a portfolio of companies that have grown their earnings over
the last five years. It's something like fourteen percent a year. So we feel we have what my dad used to call the value investors dream, right, and that's what we low cost, fast growth, low valuation, and durable sustainable.
Growth really really fascinating. So before we jump too deep into the current state of affairs, I have to ask you about a quote of yours that I really like. As human beings, we don't welcome fear and panic, but as investors, we welcome the bargain prices that those emotions tend to produce.
Discuss well, you know, obviously the market is of course a voting machine in the short term, it reflects psychology term a weighing machine.
And that's that's a great quote I'm gonna write there.
Yeah, and so psychology and helps shape prices. And what happens we find is that risk is you know, there's time, it's all, there's always risk. What varies is people's perception of it. And I think today we're in a time when people are underestimating risks and therefore prices are generally high. It's one of the reasons I find it so amazing
that our portfolio is trading at fourteen times earnings. I'm like, you know, the market scares me at twenty one, twenty two times earnings, but our portfolio feels like this below long time averages. So I feel this disconnect where I'm simultaneously pessimistic about the market because of the euphoria. There's no skepticism, there's no fear in prices, and at the same time, very feel very comfortable with our portfolio.
So let me push back a little bit, just to hear your reaction. We keep hearing artificial intelligence and Nvidia and all the semis being compared to the dot com era, and every time I hear that, aside from the fact that many of those companies forget profits, didn't even have revenues, and this is a giant revenue, giant profit era, markets today are training at twenty twenty two times. We finished the nineties at thirty two times. Theoretically, there's a ton
of upside from here, especially if Earning's growth continues. Is is it the contrarian take that, hey, this market could go another five or ten years before things get really stupid.
Well, what I'd say is, right now, as I look out there, I see two types of you know, end investor. Right. One is this sort of belief that we're on a plateau of permanent prosperity. This time is different permanently yes, yes, And and they are all in on the momentum trade, which has worked so well. Now I have a really i am believe that momentum investing, even though it's worked so well, to me is crazy because it's not common sense.
It works until it stops, it works.
Until it stops, and when it stops, you really feel foolish that the fact that you are paying an ever higher price you thought was a good thing.
Why does price matter if it's going up by it if it stops going up exactly.
And so that's one group of investors, and they're taking a lot of risk because they tend to be in the highest multiple parts of the market and the parts of the market where there is the most presumption that high margins and high growth rates are sustainable. And the data is over. I think fewer than three percent of companies can maintain a ten growth rate in revenue of twenty percent for more than a decade. Like fewer than three percent.
I mean, and that's a huge growth rate for a long time.
And there are a lot of valuations today that have that baked in. You get these analysts reports, and there's even fewer less than I think it's five tenths of one percent, but you could check me. It's either might be three tenths, but it's a low fraction of a percent that are able to maintain fifty percent margins for more than a decade. Those are very high margins. But again, there are in a lot of models right now, So
I think there's risk on that. Now. The other side of people taking risk are the ones that are huddled in cash, saying it's the end of the world. Everything that's happening AI is going to swallow our children. The world is falling apart. Everything that's happening in washings, and they're sitting in cash, which is risky as well, really risky. I mean, just since two thousand, the purchasing power of
a dollars down something like fifty five percent. Right in my grandmother's lifetime, I think the purchasing power of a dollar fell like ninety four ninety five percent, So.
They're take sevand dollars for exactly.
So though, I think these huge crowded sides of the market, the people sitting in cash and the people at the assuming the extreme growth, are both taking a lot of risk.
That's a terrible barbell. You've just spake yes, Like the extremes are either either inflation is going to kill them or speculation is going to go.
And where I would say, you know, we land in the middle is with this idea that there are durable, overlooked businesses right now and they're business as I say, we have a portfolio of twenty five companies trading at an aggregate portfolio of fourteen and a half times. By the way, that in includes owning some Amazon, it includes owning some Google, but also owning some Capital One, owning some Tyson Food, some MGM. You know which portfolio is this?
This is our flagship portfolio. So there's the Davis Adventure Fund. But really the way people are finding us increasingly. Ten years ago, Barry we launched our ETFs. We were alone for nine years. Like no, we're the only true active manager running a value ETIM. I think our value ETAM which is called DUSA. D USA is the number one active or passive value ETF for three years. But nobody really cares. It's just you know, it's but that's all right.
Although the past year or two we have seen a lot of flows. Hey, most of the money you're going to the passive indexes. But the things that the third or quarter that's not going there active exactly.
So they're finding our way and I'm proud that we were so early. I don't mind being early, you know. And so but what I'd say is that the optimistic case layout, I think the three elements of change in the civilization that our increasing risk today is we certainly have a change in the monetary world order. Right, You and I spent our entire careers in a world of
falling interest rates, approaching zero, falling inflation. All of the things that fed into that, you know, low wage pressure, deunionization, globalization, all of that stuff, all of that has stunningly and permanently, I believe come to an end. We are in a state where you know, we are printing so much money relative to what the interest rates are. I think there's a lot of risk, but certainly we're not going back to zero probably ever. Again, that was a once in
history phenomena free money. The second big change is geopolitics. There's no question that for our entire career, we are in a world of globalization. We're in a world of functional peace, we are in a world of stability. We're in a world where the wall fell and markets doubled. All of these things that is also absolutely come to an end, and that increases risk. So those first two things increase risk. And what's the third ai there's this
massive technological change that increases risk. It increases the risk of all different types of businesses, and it increases opportunity but increases risk. So when you have three fundamental shifts going on, all of which have unpredictable outcomes, and yet you have valuations not at all time highs, but elevated highs, certainly relative to the direction of travel of interest rates over time, then I'd say, you know, I like where
we are with our fourteen fourteen yield. You know, solid growth rate in the businesses, durability AI as a lens, globalization as a lens, inflation as a lens. Put those things together. We sit with twenty five companies with these great characteristics in our etf or and our funds or SMA or however the advisor finds.
Us really interesting. Coming up, we continue our conversation with Chris Davis, portfolio manager at Davis Advisors, discussing the current market environment. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. Chris Davis is my extra special guest. He is the chairman and portfolio manager
of Davis Advisors. So I'm glad you mentioned add artificial intelligence as one of those three big shifts that are taking place. How do you, as an analyst and a fund manager separate what is a transformative technology and potentially a transformative source of value creation from just the rampant speculative excess that rears its head on a regular bag.
Well, what we're seeing is Amara's law in full bloom, and Amar's law states that transformative technologies are overestimated in the short term, they're underestimated in the long term. We're in the overestimation hype phase. And what I would say we do is we recognize it as a transformative technology. That is absolutely a baseline assumption. Our other baseline assumption at this stage is that we don't see it as
a winner take all. So we see it more a little bit like railroads or something where or the tele or electricity where the users maybe end up making more money than the builders. And so we will talk about hedging that bet. But we do think it increases the risk environment in terms of terrorism, it increases the risk of obsolescence in certain businesses. But we start with this idea that it's real. Then what we do is, as we do our research, we found every company we look
at falls into one of five categories. It's the emerging winners. That's where all the heat is, all the speculation, and there there's real danger. You and I started very early talking about Cisco and remembering, well, the three obvious winners of the Internet were AOL, Yahoo, and Cisco. You know, the two don't exist and one's a fraction of what it was. And so picking the emerging winners in the
early hype phase is risky. But we'd say, if you want to look in that space, focus on the businesses that have a real shot at being emerging winners but do not have to constantly raise capital, have proven business models, proven leaders, and businesses that are accreted by the investments that they're making, so that they earn more money by making these investments, even if it takes longer than not the hyperscale, not the hyperscalers, I think that that is.
And so for us, that's where we've sat with a little bit of Google, we still have Meta and Amazon. We've trimmed the first two because they were huge holdings for us because we bought them when they were so out of favor. But if you're going to play in the emerging winners, that's The first second category is, Okay, who are the enablers of this technology? Right, that's the
pigs and shovels mindset. They're the ones that are going to benefit from the spending wave but will not be penalized if the return on the spending is very low.
So semiconductors.
So yeah, I would say there for us, it's been analog chips, Texas instruments, it's been semiconductor capital equipment. We are a big shareholder of Samsung, you know, which did nothing, nothing, nothing, and then went up fourfold and in the.
Year they're driving the entire toss by UH in Korea.
It's a amazing, amazing So but you know again that we viewed those as enablers. But in Indian enablers, I would also include things like natural gas and copper. Right, they're going to be they are big, big beneficiary. So we own you know, Kotera which is now Devin, UH Conico, Phillips, UH Tourmaline. You know, our focus is on natural gas and copper. Okay, so those are the enablers, the users
who are going to be the beneficiaries use it. Well, there, You've got to think UH Financials is a great extent anything that where you have a big amount of laptop class workers. Right, it's what Elon called the laptop class that you know, it's likely that AI will do to the laptop class what globalization did to to blue collar workers.
Meaning very much hollow it out.
Hollow it out, hollow it out. The best will still have work, the best will be more valuable, they'll be more productive. But there's going to be a you know a lot of unemployed second year lawyers and things like that, and so that that and so healthcare you know, claims processing, uh, compliance functions, things like that. So there we focus on the banks that have the scale, the tech stack and the management to do it. So Capital one number one. I keep Wells Fargo on that list. I think US
Bank gets over that crosses that chasm. Uh so those but also with JP Morgan Chase has done such a great job. But the valuation is how do you.
Put the MX's and master card visas of the world.
We don't own Visa or MasterCard, and we have a very small position in AMEX. And essentially the reason is we just think that that is an area where there is a big spread. They may be on the other side but boy, there are a lot of people, especially merchants, that would like to figure out some way to bypass that big number. It's a big number.
This first time in my lifetime, I have started noticing cash and credit card prices on restaurant may yeah. Absolutely, it's never a thing.
Though, and you really see it when you travel. Yeah, and so that we and again those are they're so highly valued at thirty times earnings for visa, you know, it just seems does there's too much risk there? I'll own the capital one at nine times. So those are the users, right. Then the next category or what Jeff Bezos we call them the the indifferent or the protected? Right, So what Jeff Bezos when he said people ask me what's going to change? They all ask me what's not
going to change? That's a very important question. So there, what do we you know, Tyson Foods, all right, Chicken's not going to change, right, and.
We have Chicken's not going to lose their jobs.
Yeah, yeah, Chicken. It's a good shape. And you know, but here you have to be careful because you don't have high growth rates, so you don't want to overpay. And they're cyclical businesses, so you don't want to pay it at the top of a cycle. So Tyson, I think is has a low multiple on cyclically depressed earnings.
What else does MGM? I think owning you know, fifty percent of the Las Vegas strip, and you know twenty or thirty percent of Macau and one hundred percent of the only legal gambling in Japan and Osaka when it opens twenty twenty nine, that's very valuable. I don't think that gets disintermediated by AI. So call those that protected the what won't change. The last category is the walking dead, and there you know you mentioned Visa and MasterCard. I
don't know, title insurance, I don't know. There are all sorts of things where it is really amazing how much money is made for something that you should be able to get around. We've seen some of the pressure in the SaaS companies, and so that's the lens that we look at for all of our companies. We put them through this lens of this fast changing We want to
stay nimble and barry. One of the things I think is really important is I think this is a world where taking liquidity risk is really dangerous because there's so much flux. So I think that's some of the pressure we're seeing in private equity, private credit. I think people are saying, why did I lock up my money seven years? For seven years if you're lucky, Yeah, it's going to be longer, I think. So I think that wheels are
coming off that. I think that indexes. Remember the Kodak you ready for a number, ten million digital cameras had been sold when Kodak was still in the top third of the S and P five hundred.
It's amazing, isn't that amazing?
And it's like ten million people knew they would never buy a roll of film again. It was dead. And so the advantage you know, when Japan peaked in the eighties, every active every active manager in international investing outperformed for the next ten years by just saying, oh, Japan's going down, I'm out. And so the index got killed because it had to sort of go down with the ship. So I think nimbleness, liquidity, flexibility, and this sort of research
lens going to actually become more valuable. So I think we could see some of the time tested things that worked in the last decade diven end Darling's momentum private equity indexing. I think all of those things could be challenged given this fast changing world.
So I'm glad you brought up a few things there, because when you look at some of the fallout from low cost indexing, the Vanguard effect, Blackrock, whatever you want to call it, they have all put the fund industry under a lot of pressure. There's fee compression. There's been a move to not just indexing, but to ETFs generally. So when your own business, you're looking at businesses with moats and businesses with defendable proceeds and a good culture.
You're running a business with a lot of employees and a lot of clients. How do you respond to this external pressure? How do you manage not the investments, but the business of investing when it's just becoming more competitive and more challenging than ever.
Well, we're lucky because we're one. We're a very we charge low fees, right, so we it's you know, if you charge two and twenty, you know.
You're if only I could, I know, I'm just I mean, emotion intellectually, I have a problem with that, but part of me is like nice work, if.
You I know, I know, I spoke to a guy that charged two and twenty years ago, and I said, why too and twenty? What's the business model? He said, I can't get three and thirty. So we've always we've always just run with this idea, you know, Charlie one said to me, Charlie Munger, you know what's wrong with giving people a bargain right, or at least a fair price right, And it makes it easier for you to outperform over time. So so I feel one, we two.
We're a frugal place. You know, I work with seven colleagues. We've been together on average twenty years, twenty five years average experience. And we would do this with no outside money, right because of the inside money. So we run it with what I would call a real family office mindset, with our own money alongside in a very low cost operation. But we like And the last thing, Barry is we
are in a lasting game. What I can tell you is if ninety percent of the market was passive, the remaining ten percent of active would make a fortune.
I've said that exact thing. Hey, if indexing is taking over, doesn't that create all sorts of inefficiencies for a savvy active mass.
Absolutely? And I you know, I don't think it's a coincidence that we started out performing the ESSEY. I mean, we've outperformed the value index for all periods, but we but we lagged the S and P in this momentum market. But that changed about four years ago, and nobody's talking.
About it coming out of the pandemic.
But basically, yeah, we've been grinding an advantage over the S and P for the last three three and a half years. I mean, and this is with less than half the weight in technology that the index has so underweighted the hottest sector. But yet we've been grinding out an advantage for three or four years. Why And I think it's just because there's way more money index than is thought of. There's way more money in momentum than is And when I say there's more in indexing, it's
because there's so much closet indexing. So I think, I don't think it's impossible that we're already at seventy percent functionally indexed, so that will really help us. So we're in a lasting game. We got the balance sheet to do it. We're going to be on the other side.
Huh, that's really fascinating. You mentioned you guys would just do this without outside money. But let's put some flesh on those bones. Davis Advisors, the company, the Family Foundation, you and your partners employees. You collectively have more than a few billion dollars in the fund, so you are not only a line with your clients. I almost feel
like skin in the game has become a cliche. But the question I want to ask is being invested that way alongside the clients, how does that affect your decision making process? And what does that do when you're going through one of those periodic crises that we've seen so much over the past twenty five years, dot COM's GFC pandemic. How does having skin in the game affect your decisions?
Well, I think it makes us much more rational and much more long term. It means that, you know, I once had a colleague that we had to part ways because he said that, you know, I was so unimpressed by things like momentum, even if they worked. And he said, look, if I had a blind monkey in my office pointing to the newspaper every day at a stock and every single day that stock went up, that it pointed to whatever stock it pointed to went up every day, he said,
you could watch that monkey for six months. You could watch it for a year, you could watch it for two years, and you still wouldn't invest with the monkey. And I said, of course I wouldn't. It's a blind monkey, right, this is my money, this is my client's life savings. You think I'm going to say, oh, the blind monkey pointed at the paper. So when we're in an environment where the market is on a tear and people are saying, oh,
you're dinosaurs, we're able to hold our discipline. In two thousand and seven, we had our financial fund had lagged all other financial funds, not all, but most other financial wess because we were underweighted in real estate and we didn't own any Fanny, we didn't own any Freddy, we didn't own any country Wide, we didn't own bear Stearns, we didn't own WAMU. And people would say, wow, you're like a dinosaur, you know, And it's because it's our money, and so we don't mind if it takes a while
for the reality for that weighing machine to work. What we look at every years, did the companies get stronger, did they get heavier, did they get more valuable? And if so, we view our research as working. Sometimes the stocks don't go up, sometimes they do, but we're focused on the businesses.
On the process, and not just what's going up that day. You know, the blind monkey reminds me of a fascinating quote from Ken French of Dartmouth. Michael Mobison has written a lot about the separation between skill and luck and French of Fama. French had said, you know, it's very challenging to tell the difference between skill and luck with fund managers, and to really have a data set where you can make an informed decision takes about twenty years.
So if you're going to wait for that blind monkey, you got to wait twenty years. Well, and you're starting out with the blind monkey, I think we have to assume that it's luck and not skill.
Well, and look, Berry, your clients come to you. You could say that it's because of your performance, and performance matters. Well, well, I was going to say, what really matters is trust, right and conviction, And so one of the things that you know, we have clients that say, hey, you went through a period of underperformance, you were at a sync with the market. We weren't worried. You're building wealth for us every year we don't care all this index one here,
the index went there. We're with you because we have conviction that you'll get us to our retirement, You'll get us to our kids college funding. You'll help us achieve our goals and maintaining that's something you do with your own money. You don't chase the hot dot. But if you're an investment manager and all of your value comes from the assets under management, you have to chase the
hot dot. So trust is an undervalued part of the promise and the value that an investment manager can give to their clients if they If your clients trust you, they will get a better return even if you underperform an index. If you are if their trust is able to keep them invested through the ups and downs.
Huh really really fascinating. All right, last question before I get to my favorites that I ask on my guests. What do you think investors are not generally talking about thinking about but perhaps should be, could be a topic of geography and asset class What important issue is kind of getting overlooked these days?
Well, I think you know, I think this, These three big transitions in the economy are going to turn a lot of what's become conventional wisdom about investing upside down for a while. So I think you know what hasn't worked? You know, active management hasn't worked. What hasn't worked? Value price discipline hasn't worked. I think you're seeing that. What what has worked? Oh, you know alternatives, you know, illiquidity that's been great. What you know has worked? That I
think is dangerous. You know, dividend aristocrats absolutely, I think that any you.
Think divit and aristocrats are dangerous because.
Because they're looking in the rear view mirror and they are not factoring in these big three changes that we talked about.
Well, there isn't that the prob with all models.
Yeah, Kodak was a dividend aristocrat, you know, Xerox was a dividend aristocrat. Polaroid was a dividend And that's fine unless there is systemic change, right, And when you have a big change like you had coming out of the seventies, you know, and the change into the eighties nineties, you know, you have these big changes and then everything that worked, you know, everything that helped you survive the crash and the depression in nineteen forty eight, you could say I'm
not greedy. I just want to own bonds. Stocks are too dangerous, and you were wiped out in a generation and bonds became certificates of confiscation. So I think people are underestimating how much these conventional strategies, alternatives the rear, the backward looking models, including even momentum indexing and versus active. And I would even maybe add international International had underperformed for so long, and you know.
Just the past two years starting to look.
Starting to look pretty good.
So you like international.
I like international. We run an international ETFDINT and it's just like us. It's all stock picking. It's run by my partner, Danton, you know, and our family probably has, you know, always keeps probably fifteen to twenty percent our assets an international And that looked really stupid until two years ago, and it's looking a little better. So I think those conventional things are being likely to turn upside down.
What's the old joke? Being diversified means there is always something to apologize for, absolutely all right, So let me jump to my favorite questions I ask all my guests. Even though I would love to stay here and keep you chatting for another three hours, I know you have places to go on people to see And the first question I always ask, I kind of know the answer, but I'm going to give you another opportunity at another swing at it. Who were your mentors who helped shape
your career? And I kind of see four people already.
Well, you certainly got my dad, my grandfather, and mine and Charlie. I think if I was gonna add another one, I would add Tom Gaynor, the CEO of marc Al. I just think, you know, that sort of principled stewardship leadership, that servant leadership, a company that is built with an enormous durability and culture of stewardship in mind. You know, he's you know, we've served on boards together. He's helped me through difficult times. I've done my best to help
him through difficult times. It's a great thing to go through life surrounded by people you admire, and of course I get to work with people I admire, and that's big plus.
Huh, really really interesting. Let's talk about I know you're a fellow reader. What are some of your favorite books? What are you reading currently?
Well? I have too many favorite books to list, but I all.
The way people always tell me, oh that's my favorite question. I'm always looking for something.
Well, I'll give you the most recent one I read that I think is a good antidote to the AI phenomena or the AI highysteria, or or the AI the the obsession, that's a better word. And it's a book called Alchemy. The author is Rory Sutherland. Yeah, I think that's a very useful.
Book to read right now on marketing and advertising.
It's really on ways in which we maybe fetishize. If I said that, right, rationality and that when you look at human behavior, it's very irrational, but it's often irrational and predictable ways. And the more we say what's the rational solution to a problem and expect people to obey that, the more we're going to keep getting crazy outcomes. People react in ways that you know, people react to placebos,
but we don't study placebos. Right that. The example he gives that I love is if you wanted to create a really spectacular competitor to Coca Cola and you hired mckensey, they would say, well, you should make something that tastes good, sell it a little cheaper, and make it ubiquitous. What you wouldn't say is make it more expensive, make it taste bad, and put it in a smaller can. And that's red Bull. And so there's a lot to study in a case like that. How has that worked so well?
So I think alchemy is a useful one now, you know. I think everybody should read themselves and then have their kids read Morgan Housel's two best books, which should be read as a single book, The Psychology of Money and The Artist. They go together. I said, one is like the sequel to The Godfather. It's the Godfather too. It's not a different movie. It's it's it's the culmination in a way.
And you skip three. Okay, that's a three, just doesn't.
I agree? I agree. And then for a third book, you know, just the one that immediately comes to mind at the moment is is Americana. Uh. It's a book by there's two books by the same name. I know because Charlie had told four hundred years of American Capitalism. I love that book that I had him on the podcast years ago.
Yeah.
Spectacular, spectacular, and and it's just really just I think people are just so unaware of the history of American capitalism and that book just does a fantastic job laying out the success.
And it will help you as an investor if you think in chapters of that book, if you think about okay Ai is unfolding. You know, he talks about the interstate highways being built. Well, the interstate highways were built. You know who made money? Right McDonald's Wendy's right. The railroads were built. Who made money? It wasn't the railroads, right, it was the factory. Is the ability to distribute? And
who too were the dead men walking? You know when the car was developed, But there were three thousand car companies, right, there were two three hundred and seventy one publicly traded internet companies. You know, that's why picking the emerging winners in the early stages is tricky. But think of the chapter, think of that whole arc, and that's a terrific book.
What are you streaming these days? What's keeping you entertained? Either Netflix, podcast, whatever?
Well, you know, anybody who knows me knows that I watch almost nothing, and I particularly don't watch sports. I don't know a lot about sports. With one exception. I love ice hockey, and I love ice hockey in part because we had a lot of family history. My mom's family helped start the NHL and founded the Boston Bruins.
Wait what, Yes, your mom's family helped start.
The NHL and founded the Bruins, and we owned the Bruins through my childhood. Can you imagine? Come on, what a deal that my father, who's probably been to eight hockey games in his life, has his name carved on the Stanley Cup twice because he was Shelby Davis was the treasurer of the Boston Bruins, and so they won
the Cup twice. He got his day own choice. But I think one of the things that I love about it is that my grandfather, in explaining his love for it to me, he said, you know, every sport handicaps the athletes. You know, you can't use your hands, you can't use your feet, you have to dribble, whatever it is. He said, hockey accentuates every human ability. And the skates and the skates, the stick, the pads, the oval, rink, the ice. I mean, it's just an amazing accelerator of
human ability. And I guess the reason I think of it right at this moment, of course, it's we're moving into the Stanley Cup playoffs. We were in the last two rounds. But it's also because I think there's a way to look at AI as accentuating human ability.
It's an accelerator.
It's an accelerator. And what that could mean for healthcare, what that could mean for health care, inflation going negative. I mean, they're all sorts.
Of We're already finding so many new molecules. If anything's going to find a cure to a lot of cancers, it's going.
To be yes. And you know, and again we have to recognize that of course, like every technology, there are going to be negatives. They're going to be delays, and as people get disillusioned, we could get a big swing the other way. So equanimity. But again going back to Americana and I get to is Hockey. Think of those long chapters.
All right, our final two questions. What sort of advice would you give to a recent college grad interest in the career in investing?
Well, I would say, learn everything you can about business, and ideally work in business. You know, I met a guy down at Markel had their reunion just yesterday. I just flew back from Richmond yesterday. Their reunion is a great event. I recommend everybody go just buy a Shara Markel. Go to the reunion, you'll see something a lot, you know, a lot again was compared to Berger. But I just I love the value system there. But I met a guy who was an engineer at Altria, which is headquartered
in Richmond. He owned a lot of Altria. He owned a lot of PMI, but he started investing for himself about twenty twenty five years ago. He showed me his portfolio, including his cost basis. He's built a wonderful record as an investor. And so, you know, I think I don't love all these kids going to the Goldman Sacks and to private equity. I think private equity is it was a wonderful business to begin with, and I think it is absolutely lost the.
Thread, all the size. It's just ramped up.
And they're all selling to themselves, right, and they're trying to get the widows and orphans in there so that they can hold some final sale, just like they did with you know, MLPs and the oil and gas partnerships in the eighties. And I really hate it. There are people within the world of private equity that I admire, that have built stunning records, but most of what's happening at this scale is just stealing money from pension plans for one downments four oh one k's and it's going
into penhouses and ferraris. You know, where are the customer's yachts. Look at the returns over the last ten years of the average state pension plan, then look at the breakdown of assets, and you realize that all of the drag on their returns is alternatives.
Huh amazing. Final question, what do you know about the world of investing today might have been useful back in the late eighties early nineties when you were first getting started.
Well, every investor, if they're honest, will say that their biggest mistakes were what they sold, and so you know, I would say that I've always put all my money in the funds, and I think that's the right alignment. But I realize now which I didn't realize then, that there's some real differences, which is that, you know, in
the funds we have to really think about diversification. If each time I bought a stock in the funds, I bought it in my own name, instead of putting my money in the funds and buying I probably would have just left it alone for the last thirty years and it would have done very well. So you know all of the you know, I first bought Amazon in two thousand and two, good time, you know, Yeah, but I sold it in two thousand and four, so thank you.
I could, I could tell you the same thing Apple. Yeah, it was fifteen dollars or thirteen cash. Yeah, triple my money. I was a genius. I was like ten thousand percent ago.
I know. We did the same thing in Apple, and it was we viewed it as a real estate plate. We said, if you marked the real estate to market and added to the cash, it was an eighty dollars Yeah, and then when it went to two dollars, We're like, oh, too much for our blood. So I do think that I'm trying to really learn and think about how can I how can I improve results over the next twenty years by being more willing to hold? And what does that mean in terms of position size? What does it
mean in terms of volatility? What does it mean in terms of client expectation? Would I feel the same if a client has twenty five thousand dollars with us that I would if it was just my own money, because I can absorb a bigger loss and I can absorb more volatility. So that's something I'm still trying to process. But God, I love the business. And you know, like my grandfather, if I could die at my desk at a very old age, I am. I do have the best job on Earth. I get to study success. I
get to work with people I admire. I go and visit companies to focus on that elusive idea of culture. I get to meet the incredible people that have built our society, that have built businesses. And we have a country that loves to tear down the heroes, you know, so we admire the guy on the way up, but once they succeed, we somehow decide they're a villain. I
don't think that's constructive. I think it's a strange thing for us to admire athletes and not admire Jeff Bezos for what he created and how it has served all of us. Every day we all use Amazon and serves us, you know, every day we delight in seeing our kids on Instagram or using Google Maps. And you know, the idea that we continue to vilify our heroes instead of judging people by their biggest accomplishment, not their weakest moment.
Chris, thank you so much for being so generous with your time. This has been absolutely delightful. We have been speaking with Chris Davis. He is the chairman and portfolio manager at Davis Advisors. If you enjoy this conversation, well check out any of the six hundred and forty one we've done over the past twelve years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you get your
favorite podcasts. I would be remiss if I didn't thank the correct team that helps with these conversations together each week. Alexis Noriega is my video producer. Joan Russo is my researcher. Anna Luke is my podcast producer. Barry Results. You've been listening to Master's in Business on Bloomberg Radio.