← Masters in Business
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A
The world is transforming faster than ever, and standing still isn't an option. At Oppenheimer, we're working at the forefront of the innovation economy to invest where progress begins, finding opportunities that build and protect wealth for individuals and institutions that want a seat at the edge of tomorrow. Put the power of Oppenheimer thinking to work for you. Wealth management, capital markets, investment banking. Get the news you need in just 15 minutes. Start your day with Bloomberg Daybreak, the podcast with a global view on the stories that matter. I'm Nathan Hager. And I'm Karen Moscow. Join us each morning for curated stories on current events, politics, business and foreign relations, plus one conversation on the day's biggest developments, all in just 15 minutes. Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter. Listen to Bloomberg Daybreak each morning on Apple, Spotify, or anywhere you listen. Bloomberg Audio Studios Podcasts radio news. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
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B
This week on the podcast, strap yourself in for another banger, Chris Davis chews up the scenery. He is the portfolio manager of Davis Advisors. They've been kicking The S&P's butt for the past, I don't know, since 1969. $20 billion 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.
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A
It's so always good to be with you. Thank you so much.
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B
So before we get into your career, master's degree with honors from the University of St. Andrews in Scotland. Like, how did that come about?
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A
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 little step.
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B
Did you go to an undergraduate college?
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A
Well, what happened is I went to St. Andrews. I had originally only intended to go for a year. I wanted to be a veterinarian. That's a long side story. I'd worked at the Bronx Zoo.
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B
Wait, wait, wait.
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A
Humane Society.
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B
So the original plan wasn't, dad's a fund manager, grandpa's a grant fund manager. I guess I'm going to be going to the family business. That was not the plan.
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A
Definitely not. But. 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 and learned because they just felt like look, you, you'll have money over time. It's not taught in schools, just the basic fundamentals of investing. And if you, God help you, turn on the tv, you're going to get a totally distorted view of what investors of nonsense. Exactly. And so we all had this grounding. But you know, for example, my, my smartest sibling without question, is my, my sister, my younger sister, but she's a small town doctor, but boy, does she, she understands investing, she's very thoughtful and 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, 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 pre vet 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 proposed that to my father. He said we don't do that in our family like you. You can go study, but there is no like year off like to go ski or find yourself.
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B
Did you skip a grade or you like me the back of like October, November, December. So you're young relative to the rest of.
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A
No, I had, I had skipped a grade sort of early because I, bizarrely, 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. It never stopped since then.
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B
Right.
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A
But anyway, so I had this year period and it was the first year that the University of St. Andrews was interested in taking direct applications from students where they dropped the requirement to have A levels or O levels, the 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 univers. 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 to say, what were the two? It was philosophy and theology.
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B
Huh. Very interesting.
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A
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 biolog 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.
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B
I love that. That's something I always, in hindsight, wish I did. And I started out physics and math and switched to 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.
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A
You used the perfect word, fun. I mean, I, I became a good student in high school. I wasn't a good student. In fact, recently I, I found my elementary school, my 8th grade final report card. I went to a school here in New York and it was a pretty strict, you know, wear a uniform sort of boys school and, 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 school report card was yet another semester of squandered potential, not living up to his potential.
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B
Classic.
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A
My children found that. My mother gave it to my children, which was a big problem, you can 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.
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B
It was just, especially in Scotland, studying
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A
medieval history 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 St. 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 they're 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 was, 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 master's at the end, but there was no undergraduate degree along the way, so.
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B
And there was no going back to Cornell to become a vet.
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A
No.
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B
That the order for that faded, Although,
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A
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 by them sending me these mailings. But. 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.
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B
Yeah, very much so. I'm always as. We used to foster dogs and get them adopted, and anytime I meet someone who's like, oh, I really don't care
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A
for dogs, it's like, oh, that's a big X.
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B
Done.
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A
We weren't allowed to have dogs when I was a kid, but I grew up right in the city, East 84th 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 be a dog walker, provided I didn't cross any street. So, you know, I'd put up a notice in the elevator in our 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 do 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 50 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 route.
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B
You're running a small business. I had a paper route, and it was just so formative, so form.
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A
And this was like a paper route for city kids, because you couldn't have a paper route in New York. But then an amazing thing happened. New York City, around 19. It'd have to be around 1977 or 78. Passed the pooper scooper, I remember, and everything changed because people had these dogs with. Nobody even knew what to do. Nobody had ever imagined cleaning up after a dog. There were all sorts of inventions.
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B
You know, it's not that complicated.
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A
You know, people were so gross, they had to carry shovels with them.
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B
You changed the diaper on the baby.
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A
How.
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B
This is. It's just processed food. There's no big deal.
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Well, for me, it meant that my rates could go from 50 cents to $5. 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, $50 a week, $60 a
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B
week, 10 year old. That's good.
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A
Yeah. And so you, you start, you know, thinking about, holy cow, you know, I'm making $250 a month. You know, I'm making thousands of dollars a year. And it was just fantastic. So I, I've, I've loved dogs ever since, so.
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B
So let's talk a little bit about the early days of the career. You start as an accountant at State street bank and, and ultimately end up as a unglamorous research analyst at Tanaka Capital Management. These are, you know, very much bottom rung on the street ladders. What'd you learn in those days?
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A
Well, it wasn't really my first job. My first job was I became a pastoral assistant 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 can. Honest to God, 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, to learn 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 the CIA wisely turned me down, having briefly had a stint in, you know, sort of the Workers Revolutionary Party, you know.
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B
Oh, so you, they, they looked at your history and said, this guy's.
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A
Yeah, like this, this needs to ripen a little more.
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B
We don't know ethical malleability that we're looking for.
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A
But I, and so, you know, I, 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. 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 my, 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. And 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 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 the, 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 in anything to do with economics, accounting, business. And so.
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B
And you took advantage.
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A
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.
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B
Now I thought that sounds like massage.
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A
That sounds pretty good, right? I figured I circled that one in a little course catalog. It was, it was only a two nights course. And I showed up and it was how to use a 10 punch tape calculator, you know, without looking at your hands. So you know when you're summing up a column account. Yeah, it's the Rules of Rhythmic Touch. And I would say if you put one on this table now, I would be confident. I would bet you a large sum of money I could run a column of numbers faster than you.
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B
I'm gonna, I'm gonna defer on that one.
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A
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 J.P. morgan before and 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 driven, talented guy. And he said he wanted an apprentice and it would be everything. I would be his first hire and we would go from there. And that was a terrific experience.
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B
How long did you stay at Tanaka?
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A
I stayed there about two years. 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, and, and he admired late 70s, early 80s. This was late 80s now. So we're probably in 89, so. 88. 80. 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 an 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, and, and Graham, of course, was so respectful of that. And so it was sort of a very gradual transition out. There wasn't a, an end date of my time with Graham so much as there was a start date of my time working with my dad and grandfather.
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B
So your father launched Davis Advisors in 1969.
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A
Yeah.
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B
And your grandfather was still running his Davis Investing shop.
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Yeah.
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B
Parallel. Did. Did they ever end up merging? What. What happened when he decided, all right, it's, you know, it's. It's time.
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A
Well, my father was my. My grandfather's only son, and as often happens, they had a very complicated relationship. And, and so they never worked together. They, they. My. My father, you know, grew up with this famous name because your numbers were right in the beginning. It was $100,000 that he borrowed from his wife's family. It was 800 million when he died, and it was 2.2 billion when his wife died.
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B
Wow.
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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 106.
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B
Wow.
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A
Although, I will tell you, I managed her account. And in 2008, 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 40 or 50%. And I went to see her in Florida and I said, gran, I want you to know the businesses are sound. We took some body blows, but in the long run, it's going to be fine. And she said, you idiot, I'm 98 years old.
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B
What do I care about?
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A
She said, I don't buy green bananas and you're here telling me I'm down 50% and go get back to work. So she teased me because of course she lived long enough to see it all come back and, 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 fir was called Shelby Colin Davis and Company. My father built his, which in the beginning was called Davis, Palmer and Biggs. And then the New York Venture Fund was a client or a fund managed by Davis, Palmer and Biggs. And when I was working at Tanaka, I went to a meeting. It was Chubb Insurance 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, the CEO was Dean o'. Hare. And he'd sit there and say, we at Chub, you know, and I looked around the table and both my father and grandfather were at the same meeting by chance. And I thought, this seems a little nuts. And so, you know, I spoke to them both because I was very close with them both. And you know, one of the things my father was very clear on is he wanted out at age 60. He said, I'm not really. Yep.
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B
Your age.
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A
Yeah, hard stop. And here was my grandfather at the time and he was probably in his late 80s, early 80s pride then. And, 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, 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, my grandfather loved being a great man. You know, he had served as an ambassador, he had, 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 25 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, he, 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, 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 wonderful human being, but very different than my grandfather. So he wanted out. Before he turned 60, 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, 26 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. We'll figure out a way for the three of us to do this.
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B
And how did, how long did it take for that to all come together?
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A
I think my grandfather, My father turned 60 in 1997, 1998, somewhere like that. And my grandfather died. 86, something like that. Yeah, you know, just don't quiz me. And. And then my grandfather died in, let's see, 1994. So I, I have to say he was 86 or 87 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 and in 1998, and that was that. And 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. Didn't 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.
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B
Really? Yeah, I know there's a foundation. I haven't read the book, but online there's John Rothschild, who was, I think, Peter Lynch's co author, the Davis Dynasty. How odd is it to have, like, hey, you know, this story, the game isn't over. And you're writing this book. How odd is it to be part of a book like that?
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A
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.
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B
Not, not, Not a hot seller, you're saying.
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A
And I, I do think I experienced the, the writing of that book as, you know, sort of terrifying, you know. Oh, really? Yeah, because it was a lot to live up to. It was a lot of dad and a lot to live up to.
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B
Sure.
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A
And I will say it's something that I'm just profoundly grateful to my dad. Well, really to both of them. But my dad is a very humble person. And in that book, it is 90% about my grandfather. And my dad was sort of what I would 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 slimmed 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. Well, it implies inheritance, and there's no inheritance. And there was. That was. There's none of that, which I would
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B
imagine people would be surprised to learn.
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A
Yeah. And it's funny, it's not something I'm quite as fanatic about.
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B
Well, Warren Buffett is a big believer in, hey, if you give your kids, you should give your kids enough. I know I'm gonna mangle this. Give them enough money so they could do anything, but not so much money that they can do nothing.
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A
You didn't mangle it. You stuck the landing. That's exact. 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, but I think there was. It came from a place of sort of compassion. I mean, this sort of view that, you know, there's something dignified about earning your way in the world. And I think there's, you know, the idea of wanting. Well, look, Barry, 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 the 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 take this risk, I can't leave State Street. You know, it's like it never occurred to me that I couldn't leave. And so. But I think their view was if you raise your kids with. 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 that was all they had a very sort of puritanical sense of that sort of view that, that, 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 you know one. It's one storm away from the end and there's no cars. You take a little ferry out there and, and you know, I always think of it as the anti Hamptons.
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B
Oh, very much is.
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A
Yeah. And so, and that's, that's what, what I love. And, and, and you know, my, my parents had a place in Maine, but it was just, you know, it was no, not a fancy like a little cabin.
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B
Not Kenny Bunkport.
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A
They had a nice house, but it wasn't a Newport mansion. And they had it because, you know, they used to call them in the 20s, people like my grandparents were called rusticators. 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 19th 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. And then there was another branch that sort of said that's not the American way. And in many ways, I mean Rockefeller in many ways embodied a certain amount of that, that sense of stewardship. Some were 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 day camp 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 Salman 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 subscribe to.
- [31:49]
B
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 Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
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A
On June 10, Bloomberg Invest is back in Hong Kong. We look at the role Hong Kong plays between China and the world as major powers compete and markets realign. As global investors rethink risk, we'll explore the forces driving Asian demand and the future of private capital. Catch exclusive interviews with top newsmakers, plus a live recording of Bloomberg's Odd lots podcast. Visit BloombergLive.com investhongkong to learn more. Supporting sponsor Deutsche Bank
- [32:55]
B
I'm Barry Ritholtz. 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 2005, he was named Morningstar's Portfolio Manager of the Year. He helps to oversee $20 billion in client assets, a healthy chunk of which is he and his colleagues. We briefly mentioned Buffett earlier when, when I later on I get to ask people who their mentors 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.
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A
Oh, I mean, I, it, it started in, I want to say it was 19, it might have been 1990.
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B
So he's already a well known investing rock star at that point.
- [33:58]
A
Well, the way it really started was with Charlie. I met Charlie long before Warren. Oh, really? And it, 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, he had a business called securities lending. And I don't know how well you know that business.
- [34:18]
B
And, and anytime you're going to short a stock, you got to borrow it, you need to borrow it, and that's going to cost you a little bit.
- [34:23]
A
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 the number one borrowed stock in those days was Berkshire Hathaway, of course, because you couldn't borrow it anywhere because everybody had the certificates and they weren't.
- [34:48]
B
Literally had the paper.
- [34:49]
A
Yeah. Was very little Berkshire. That was in street name. It was in individual people and therefore you couldn't borrow.
- [34:56]
B
It was locked away and safe. Yeah.
- [34:58]
A
So he had a big holding and he had a broker dealer. Shelby Column Davis was a registered broker dealer. And so he could lend out 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 can 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 spread as they go through. Well, this business grew and grew and grew, and soon there were, you know, 17 employees in this securities lending business, and it was a big operation corporation. And my grandfather by then was, you know, probably in his 80s 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 LTCM. And he, and, and I said, what is this LTCM? We've got like, you know, five, $800 million 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, we got to get rid of this thing. It reminds me, by the way, of what Jerry said.
- [36:28]
B
Wait, did he hold on to that business or did they.
- [36:31]
A
So I said to him, like, you know, we've 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 17 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, 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 Lenzner who was a reporter at Forbes but was very, I recall
- [37:13]
B
I had lunch with him, him at, I want to say the Harvard Club. Yeah, I think he was an alum.
- [37:19]
A
It could have been his kids. My, our kids were wrong. Our kids were in the same elementary school and I got to know him just, you know, watching basketball game with third graders or something and he was, and I, 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 know who 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 Mr. Munger. Pleased to meet you, I'm Chris Davis. And I said I'm working with my grandfather at shelby Colin Davis Co. 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 Barry. It was the perfect description. I mean we had Vinnie, Tony, Mikey, Nikki and so we did end up finding, finding a buyer eventually, just not Berkshire. 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.
- [38:45]
B
So beyond the pitch to Munger, how did your relationship.
- [38:48]
A
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 he says 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 as 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 and 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 thank 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.
- [39:54]
B
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?
- [40:17]
A
Well, good question. Right. I think most deeply I learned about integrity in the traditional sense, meaning wholeness. Charlie was a whole person. 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. 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, very cheerful, very committed, profoundly loyal. And so it was, you know, I used to sort of joke that if I did a Venn 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 Charlie 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 narrow. 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.
- [42:14]
B
And.
- [42:15]
A
And so they were very different that way.
- [42:17]
B
Just imagine if Charlie exercised, how much longer he could have lived.
- [42:20]
A
I don't know. 99¾ is pretty. That's one of the things he said. He said, I'm not sure I see the alignment.
- [42:28]
B
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 10% annually since 1969. Does that sound remotely.
- [42:47]
A
That sounds right. Still ahead of the market from the
- [42:51]
B
beginning, starting out in 1969. So you're, you know, early days of a horrific bear market. You have managed money through while you're in grad school, but your dad during the 87 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.
- [43:29]
A
Well, the entire investment 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 the types of business characteristics that we focus. 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 our goal is to own it forever. Our goal is for the return to be driven by the 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 the nature of the business, the returns on capital, the competitive moats, the, the nature of 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. I just came back from the Markel annual meeting. Character will not show up efficiently, I don't think, in the AI world. And boy does it matter when you think about navigating an unpredictable future. Just that, that ability to be resilient, to adapt, but always to be investing the money as if it's your own. And there are 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, understanding the incremental returns on capital. And it's adjusting the balance sheet, every account on the balance sheet. Because of course GAAP earnings is a convention, but it may or may not reflect reality. And so you put those two things together and we build an irr, an internal rate of return forecast. We work on this concept of owner earnings in each business. We, and then we focus on the Quality and the durability of the business.
- [45:57]
B
I can't 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 managers.
- [46:13]
A
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 could talk about that later. But absolutely, we're owning businesses and we're trying to own businesses that are compounding machines. I watched what it meant for my grandfather to own businesses for 20, 30, 40 years. I look at our own portfolio. I look at companies like American Express or Wells Fargo or JP Morgan in the financial world, I look at more recently at companies like Amazon Texas Instruments. You look at what a business can do compound over 20, 30 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 1990. The stock was at like 19 or 20 and it's at 2000 now. You know, and by the way, they have an activist idiotically saying they should 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 could sell some part to private equity at a premium, that doesn't serve capitalism and it really won't serve the long term shareholders, shareholders of that business.
- [47:48]
B
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 JPMorgan 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.
- [48:42]
A
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. Financial is a massively broad category. There are financials that have risk if the wind blows in certain parts of the world. There are financials that have risk if interest rates change. Financials that have risks that have to do with recession 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, in something like 1990. That fund from then to today has outperformed the S&P 500.
- [49:37]
B
Really?
- [49:37]
A
And it has outperformed the S&P 500 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 that 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 30 years and it still just became maybe the largest insurance company in personal auto. So you have these 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 a spread on money is about the oldest business there is, maybe maybe the second oldest.
- [50:44]
B
Right?
- [50:47]
A
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 1987 today and yet it's trading at 9 or 10 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 10 of all holders of AI and machine learning patents. But it trades at 9.8 times earnings and 1.2 times book value liquidating value with a mid teens return on equity. It seems just nuts to me. But whatever, we love it. So that's the idea of growth stocks in disguise. And the last advantage of financials is that culture is a defining and sustainable difference.
- [51:43]
B
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's, 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? How do you, how do you identify quality culture?
- [52:09]
A
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 95% in large cap financials, outperformed the S and P Financials index and the XLF, the largest financials ETF, by 1200 basis points.
- [52:32]
B
Not too shabby, right?
- [52:33]
A
Like it's 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
- [52:44]
B
everything and you own the better companies.
- [52:47]
A
But they're very, very concentrated. They're concentrated. The mega cap banks by and large, and Visa and MasterCard, you know, but we're fairly concentrated too. We only have 20, 25 names and they, you know, 20 or 25 names are probably 80% of, of the index.
- [53:04]
B
Does the gap come from the stock selection or the screening out of what you don't like?
- [53:11]
A
Well, it really goes back to, 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 will, you'll pay the piper three, five, excuse me, ten years from now. So they 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?
- [54:26]
B
20, 22, 500 basis points.
- [54:28]
A
We used to get questions from clients all the time. Why 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 8, 10, 12 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 was, 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 blew them up. And so, you know, we, 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 money of taking that extra risk on the interest rates they could have. You know, JP Jamie Dimon stood up at an analyst meeting, said, I could add a billion or $2 billion 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, you could see that. So some of it is quantitative. You identify culture by accounting choices. Look at how accident year reserves develop at insurance companies, look how credit loss develop. 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 can have somebody with that title, but if the CEO doesn't understand the nature and the complexity of the risks, they should not be the CEO of a financial company.
- [56:34]
B
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, Amex, Wells Fargo. Coincidence?
- [56:48]
A
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 RE before Berkshire bought it. And by the way, our research was not so good on that one.
- [57:13]
B
Oh, really?
- [57:14]
A
No. And as you see subsequently, Jen RE did not perform very well for many years. It was. And I think Warren would say, and I think he has said publicly, I won't put words. I think he's, he said that. That was. Well, I'll, I'll put it this way,
- [57:31]
B
not his favorite pick.
- [57:32]
A
Yeah. Well, I'll tell you what. Charlie's. Charlie came to visit us and we have a wall of mistakes where we frame the stock certificate, the sample of shame.
- [57:40]
B
Is that what that is?
- [57:41]
A
Yeah. And Charlie was looking through it and he said, where the hell is your genre? And I said, genre wasn't a mistake. We got Berkshire stock for genre. That was fantastic.
- [57:51]
B
Did, did you have anything to do with the transaction or they just went out and bought it and you happen to be a big. No.
- [57:57]
A
And I, you know, we, we were big Geico shareholders, you know, so. No, it was. And we overlapped in Amex, but we, but no, I mean, we're much more diversified. We never owned Apple. We, you know, know there's huge differences. I mean, starting with the fact that, you know, Warren has outperformed all investment advisors for 50 years. And so. But you'd be crazy not to study, you know, when Warren owns something or to study Berkshire itself.
- [58:32]
B
That makes a lot of sense. There's another distinction between the two of you. You say that you are neither deep value or nor go go growth. So what does that leave you? You, growth at reasonable price. Somewhere, something.
- [58:51]
A
Don't you love growth at a reasonable price? Because what are the other guys?
- [58:53]
B
Who doesn't want growth at a reason?
- [58:54]
A
Growth at unreasonable prices or unreasonable, silly prices? No, growth at a reasonable price. I think what we would say is it's obvious to us that growth is a component of value, Right?
- [59:06]
B
Growth is a component of value.
- [59:09]
A
A company that grows profitably is more valuable than one that doesn't grow, right? I mean, 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 or 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 have has. So our portfolio currently trades in aggregate. If you took all of our companies at something like 14 times earnings, well the market pretty middle of the road is at 20 or 21, the value index is at 19 times. And yet we have a portfolio of companies that has grown their earnings over the last five years at something like 14% 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 low valuation and durable sustainable growth.
- [60:57]
B
Really, really fascinating. So, 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 immense emotions tend to produce. Discuss.
- [61:20]
A
Well, you know, obviously the market is of course a voting machine. In the short term it reflects psychology. The long term, a weighing machine.
- [61:31]
B
And that's a great quote. I'm going to write that down. Yeah.
- [61:36]
A
And so psychology helps shape prices. And what happens, we find is that risk is, you know, there's, it's all, there's always risk. What varies is people's perception of, 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 14 times earnings. I'm like, you know, the market scares me at 21, 22 times earnings. But our portfolio feels like this is 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 feel very comfortable with our portfolio.
- [62:33]
B
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 trading at 20, 22 times. We finished the 90s at 32 times. Theoretically there's a ton of upside from here year Especially if earnings growth continues. Is, is it the contrarian take that? Hey, this market could go another five or 10 years before things get really stupid.
- [63:25]
A
Well, what I'd say is right now is, as I look out there, I see two types of, of, 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.
- [63:38]
B
A permanently high plateau.
- [63:40]
A
Yes, yes. And they are all in on the momentum trade, which has worked so well. Now I have a really. I believe that momentum investing, even though it's worked so well to me, is crazy because it's not common sense.
- [64:01]
B
It works until it stops.
- [64:02]
A
It works until it stops. And when it stops, you really feel foolish that the fact that you are paying an ever higher price, price you thought was a good thing.
- [64:10]
B
Why does price matter if it's going up, buy it if it stops going up.
- [64:15]
A
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 3% of companies can maintain a 10 growth rate in revenue of 20% for more than a decade. Like fewer than 3%.
- [64:47]
B
I mean, that's a huge growth rate for a long time.
- [64:50]
A
A long time. And there are a lot of valuations today that have that baked in. You get these analysts report, and there's even fewer, less than. I think it's 5, 10 of 1%. But you could check me, it's either. There might be 3, 10, but it's a low, a fraction of a percent that are able to maintain 50% margins for more than a decade. Those are very high margins, but again, they're in a lot of models right now.
- [65:15]
B
Right.
- [65:16]
A
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 Washington, and they're sitting in cash.
- [65:35]
B
Which is risky as well.
- [65:37]
A
Really risky. I mean, just since 2000, the purchasing power of a dollar is down something like 55%.
- [65:44]
B
Right.
- [65:44]
A
And in, in my, my grandmother's lifetime, I think the purchasing power of a dollar felt like 94, 95%.
- [65:51]
B
So they're two set in dollars for 90 years. Exactly right.
- [65:55]
A
So, so I think these huge Crowded sides of the market, the people sitting in cash and the people assuming the extreme growth are both taking a lot of risk.
- [66:05]
B
That's a terrible barbell you've just described. Yes, like the extremes are either inflation's going to kill them or speculation is going to kill.
- [66:13]
A
And where I would say we land in the middle is with this idea that there are durable overlooked businesses right now and their business. As I say, we have a portfolio of 25 companies trading at an aggregate portfolio 14 and a half times. By the way, that includes owning some Amazon, it includes owning some Google, but also owning some Capital One, owning some Tyson Food, some mgm. You know.
- [66:39]
B
Which portfolio is this?
- [66:41]
A
This is our flagship portfolio. So this is the Davis New York Venture Fund. But really the way people are finding us increasing. Interestingly, 10 years ago, Barry, we launched our ETFs. We were alone for nine years. Like we are the only true active manager running a value etf. I think our value etf, which is called D USA do you say is the number one active or passive value ETF for three years. But nobody really cares. It's just, you know, it's it. But that's all right.
- [67:11]
B
Although the past year or two we have seen a lot of, of flows. Hey most of the money going to the passive indexes. But the things that the third or quarter, that's not going there. Active.
- [67:25]
A
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, that the, the optimistic case you way layout, I think the, the three elements of change in the civilization that are 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 low wage pressure, de unionization, globalization, all of that's 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 prices 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, 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 14, 14 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 25 companies with these great characteristics in our ETF or in our funds or SMA or however the advisor finds us really interesting.
- [69:45]
B
Coming up, we continue our conversation with Chris Davis, portfolio manager at Davis Advisor, discussing the current market environment. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
- [70:12]
A
On June 10, Bloomberg Invest is back in Hong Kong. We look at the role Hong Kong plays between China and the world as major powers compete and markets realign. As global investors rethink risk, we'll explore the forces driving Asian demand and the
- [70:27]
B
future of private capital.
- [70:28]
A
Catch exclusive interviews with top newsmakers, plus a live recording of Bloomberg's Odd lots podcast. Visit BloombergLive.com investhongkong to learn more. Supporting sponsor Deutsche Bank.
- [70:45]
B
I'm Barry Ritholtz. 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 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 basis?
- [71:28]
A
Well, what we're seeing is Amara's Law in full bloom. And Amara'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, 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 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, Cisco and remembering well, the three obvious winners of the Internet were aol, Yahoo and Cisco. You know, 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. So not the hyperscaler, 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, okay, who are the enablers of this technology? Right, that's the, the picks and shovels mindset. They're the ones that, that are going to benefit from this spending wave but will not be penalized if the return on the spending is very low.
- [73:45]
B
So semiconductors.
- [73:47]
A
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 on up fourfold in a year.
- [74:01]
B
They're driving the entire Cosby in Korea.
- [74:06]
A
It's amazing, amazing. So, but you know, again that we viewed those as enablers, but in the enablers, I would also include things like natural gas and copper. Right. They're going to be, they are big, big beneficiaries. So we own, you know, Katera, which is now Devon, ConocoPhillips, Tourmaline. You know, our focus is on natural gas, 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 financials is a great example. 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 blue collar workers.
- [74:49]
B
Meaning very much hollow it out, hollow
- [74:52]
A
it out, 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 you know, a lot of unemployed second year lawyers and things like that. And so that, that and so health care, you know, claims processing, compliance functions, things like that. So there we focus on the banks that are have the scale, the tech stack and the management to do it. So Capital One number one one. I'd keep Wells Fargo on that list. I think US bank gets over that crosses that chasm. So those. But also Morgan Chase is JP Morgan Chase has done such a great job but the valuation is.
- [75:30]
B
And how do you put the Amex's and MasterCard visas of the world?
- [75:34]
A
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.
- [75:53]
B
That 3% big is a big number.
- [75:56]
A
It's a big number.
- [75:57]
B
This is the first time in my lifetime I have started noticing cash and credit card prices on restaurant menus. Never a thing before.
- [76:06]
A
And you really see it when you travel. Yeah. And so I. That we. And again those are. They're so highly valued value to 30 times earnings for Visa. You know it just seems to us 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 are what, what Jeff Bezos, we call him 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, right. Chicken's not going to change range.
- [76:38]
B
Right. Wait, chicken's not going to lose their jobs.
- [76:40]
A
Yeah, chickens in 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, 50% of the Las Vegas Strip and you know, 20 or 30% of Macau and 100% of the only legal gambling in Japan and Osaka when it opens 2029 that's very valuable. I don't think that gets disintermediated by AI. So call those the 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 it and people are saying why? Why did I lock up my money for 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 Kodak? You ready For a number? 10 million digital cameras had been sold when Kodak was still in the top third of the S&P 500.
- [78:18]
B
That's amazing.
- [78:19]
A
Isn't that amazing? And it's like 10 million people knew that they would never buy a roll of film again. It was dead. And so the advantage, you know, when Japan peaked in the 80s, every active manager in international outperformed for the next 10 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.
- [78:43]
B
Right.
- [78:44]
A
So I think nimbleness, liquidity, flexibility and this sort of research lens are going to actually become, become more valuable. So I think we could see some of the time tested things that worked in the last decade. Dividend darlings, momentum, private equity, indexing. I think all of those things could be challenged given this fast changing world.
- [79:05]
B
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, 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 processes and a good culture. You're running a business with a lot of employees and a lot of clients. 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?
- [79:59]
A
Well, we're lucky because we're one. We're a very, We. We charge low fees, right? So we, it's, you know, if you charge 2 and 20, you know, you're.
- [80:09]
B
If only I could.
- [80:10]
A
I know, I'm. I mean. Emotion.
- [80:13]
B
Intellectual. Actually, I have a problem with that. But part of me is like, nice work. If you.
- [80:19]
A
I know, I know. I spoke to a guy that charged two and 20 years ago and I said, why two and 20? What's the business model? He said, I can't get three and 30. So we've always, we've always just run with this idea. You know, Charlie once said to me, Charlie Munger, you know, what's wrong with giving people a bargain, right?
- [80:36]
B
Or at least a fair price, right.
- [80:38]
A
And it makes it easier for you to out, outperform over time. So I feel one, two, we're a frugal place. You know, I work with seven colleagues. We've been together on average 20 years, 25 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 robust operation. But we like. And the last thing, Barry, is we are in a lasting game. What I can tell you is if 90% of the market was passive, the remaining 10% of active would make a fortune.
- [81:19]
B
I've said that exact thing. Hey, if, if indexing is taking over, doesn't that create all sorts of inefficiencies for a savvy active manager? Absolutely.
- [81:30]
A
And I, you know, I don't think it's a coincidence that we started outperforming the S. I mean, we've outperformed the value index for all periods, 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 we have are 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 indexed than is thought of. There's way more money in momentum that's than 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 70% 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.
- [82:34]
B
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 aligned with your clients. I almost feel like skin. 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 25 years. Dot coms, GFC pandemic. How does having skin in the game affect your decisions?
- [83:30]
A
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, 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 2007, we had our financial fund had lagged all other financial funds, not all, but most other financial, because we were underweighted in real estate and we didn't own any Fannie, we didn't own any Freddie, we didn't own any Countrywide, we didn't own Bear Stearns, we didn't own WaMu. And people would say, wow, what, 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 year is did the companies get stronger, did they get heavier, did they get more valuable? And if so, we view our research as working. And sometimes the stocks don't go up, sometimes they do, but we're focused on
- [85:07]
B
the businesses, on the process and not just what's going up. That's, you know, the blind monkey. Reminds me of a fascinating quote from Ken French of Dartmouth. Michael Maubouson has written a lot about the separation between skill and luck. And French 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 20 years. So if you're going to wait for that blind monkey, you got to wait 20 years and you're starting out with a blind monkey. I think we have to assume that it's luck and not skill.
- [85:52]
A
Well, and look, your clients come to you, you could say that it's because of your performance and performance matters, but
- [86:00]
B
I don't think my clients come.
- [86:02]
A
Well, I was going to say what really matters is trust. Trust and conviction. And so one of the things that we have clients that say, hey, you went through a period of underperformance, you were out of sync with the market, we weren't worried. You were building wealth for us every year. We don't care. Oh, this index went 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, 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 your clients trust you, they will get a better return even if you underperform an index. If their trust is able to keep them invested through the ups and downs.
- [87:03]
B
Really, really fascinating. All right, last question before I get to my favorites that I ask all my guests. What do you think investors are not generally talking about, thinking about, but perhaps should be, could be a topic, a geography, an asset class. What, what important issue is kind of getting overlooked these days?
- [87:27]
A
Well, I think, I think 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 what hasn't worked? Active management hasn't worked. What hasn't worked? Value price discipline. Discipline hasn't worked. I think you're seeing that. 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.
- [88:05]
B
Oh really?
- [88:06]
A
Absolutely. I think that any.
- [88:08]
B
You think dividend aristocrats are dangerous because.
- [88:11]
A
Because they're looking in the rearview mirror and they are not factoring in these big three changes that we talked about.
- [88:17]
B
Well, isn't that the problem with all mod.
- [88:20]
A
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 70s, you know, and the change into the 80s, 90s, 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 1948, 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 backward looking models, including even momentum indexing versus Active and I would even maybe add International. International had underperformed for so long and
- [89:18]
B
you know, just the past two years
- [89:20]
A
starting to look, starting to look pretty good.
- [89:22]
B
So you like International?
- [89:24]
A
I like International. We run an international ETF D I N T 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 15, 20% for assets in 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.
- [89:48]
B
What's the old joke? Being diversified means there's always something to apologize for in your portfolio. 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 and people to see. And the first question I always ask, I kind of know the answer, but I'm gonna give you another opportunity, another swing at it. Who were your mentors who helped shape your career? And I kind of see four people already.
- [90:22]
A
Well, you certainly got my dad, my grandfather in Warren and Charlie. I think if I was gonna add another one, I would add Tom Gaines, the CEO of Markel. I just think that sort of principled stewardship, leadership, that servant leadership, a company that is built with an enormous durability and culture of stewardship in mind. 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, work with people I admire. And that's a big plus, huh?
- [91:01]
B
Really, really interesting. Let's talk about. I know you're a fellow reader. What, what are some of your favorite books? What are you reading currently?
- [91:10]
A
Well, I have too many favorite books to list, but I, that's three. I, I, by the way, people always
- [91:15]
B
tell me, oh, that's my favorite question. I'm always looking for something new.
- [91:18]
A
Well, I'll read. 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 Highest area, or the AI 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
- [91:40]
B
book to read right now on marketing and advertising.
- [91:43]
A
It's really on ways in which we maybe fetishize, if I said that right, rationality. And that when you look at human behavior here, it's very irrational, but it's often irrational in 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's the example he gives that I love, is if you wanted to create a really spectacular competitor to Coca Cola, and you hired McKinsey. 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. 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 Art of Spending, they go together. I said, one is like the sequel to the Godfather. It's the Godfather 2. It's not a different movie, just continuation. It's the culmination, in a way. And you can see skip three. Okay, that's it.
- [93:14]
B
My father three just doesn't.
- [93:15]
A
Oh, I agree, 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. It's a book by. There's two books by the same name. I know because Charlie had told 400 years of American Capitalism.
- [93:37]
B
I love that. I had him on the podcast years ago.
- [93:41]
A
Yeah, spectacular, Spectacular. And it really just.
- [93:45]
B
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
- [93:55]
A
will help you as an investor. If you think. In chapters of that book, if you think about, okay, AI is unfolding, holding. 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 factories, the ability to distribute. And who, too, were the dead men walking, you know, when the car was developed? But there were 3,000 car companies, right? There were 200, 371 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. That's a terrific book.
- [94:42]
B
What are you streaming these days? What's keeping you entertained either Netflix, podcasts, whatever.
- [94:49]
A
Well, I, you know, anybody who knows me knows that I watch almost nothing. And I particularly don't watch. 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.
- [95:12]
B
Wait, what?
- [95:13]
A
Yes.
- [95:13]
B
Your mom's family helped start the NHL
- [95:18]
A
and founded the Bruins, and we owned the Bruins through my childhood. Can you imagine?
- [95:23]
B
Come on.
- [95:23]
A
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 on 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
- [96:01]
B
between the skates and the stick.
- [96:02]
A
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 were in the last two rounds. And. But it's also because I think there's a way to look at AI as accentuating human ability.
- [96:27]
B
It's an accelerator, for sure.
- [96:28]
A
It's an accelerator. And what that could mean for health care. What that could mean for health care. Inflation going negative. I mean, there are all sorts of.
- [96:36]
B
We're already finding so many new molecules. If anything's going to find a cure to. To a lot of cancers, it's going to be this.
- [96:45]
A
And again, we have to recognize that, of course, like every technology, there are going to be negatives, there are 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 tying it to ice hockey. Think of those long chapters.
- [97:03]
B
All right, our final two questions. What sort of advice, advice would you give to a recent college grad interested in a career in investing?
- [97:13]
A
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 share of Markel, go to the reunion. You just, you'll see something. A lot, you know, a lot was compared to Berkshire, But I just, I, I love the value system there. But I met a guy who is 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 20, 25 years ago he showed me his portfolio including his cost base of 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 Sachs 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.
- [98:17]
B
Well, the size, it's just ramped up
- [98:19]
A
and they're all selling to themselves and they're trying to get the widows and orphans in there there so that they can unload some final sale just like they did with MLPs and the oil and gas partnerships in the 80s. 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, 401 investments, 401ks and it's going into penthouses and Ferraris. Where are the customers? Yachts. Look at the returns over the last 10 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.
- [99:09]
B
Amazing. Final question. What do you know about the world of investing today? Might have been useful back in the late 80s, early 90s when you were first getting started.
- [99:21]
A
Well, every investor, if they're honest, will say that their biggest mistakes were what they sold. And so 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 census, which is that 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 it, I probably would have just left it alone for the last 30 years and it would have done very well. So all of the. I first bought Amazon in 2002.
- [100:06]
B
Good timing.
- [100:07]
A
Yeah. But I sold it in 2004.
- [100:09]
B
Bad sale.
- [100:10]
A
Thank you.
- [100:11]
B
I could tell you the same story with Apple. Yeah, it was $15 with 13 cash.
- [100:17]
A
Yeah.
- [100:17]
B
Tripled my money. I was a genius. That was like 10,000% ago.
- [100:21]
A
I know. We did the same thing in Apple and it was, we viewed it as a real estate plate. We said if you mark the real estate to market and add it to the cash, it was an 80 cent dollar. Yeah. And then when it went to $2 we're like, oh, too rich for our blood. So I do think that I'm trying to, to really learn and think about how can I, how can I improve results over the next 20 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 $25,000 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. 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 it 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.
- [102:16]
B
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 641 we've done over the past 12 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 crack team that helped put these conversations together each week. Alexis Noriega is my video producer. Joan Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.
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The Bloomberg Sustainable Business Summit returns to Singapore on July 22. Our 5th annual Asia Pacific Summit will open explore how business and finance leaders are shaping the next phase of globalization by strengthening resilience, advancing climate adaptation and driving a multi speed energy transition across Asia's diverse markets. Join us for solutions driven discussions, interactive workshops and networking opportunities. Learn more@Bloomberglive.com SBS Singapore.