Transcription
I think all investing is value investing. And if it isn't, it's it's either gambling or speculating. And investors should recognize that the biggest threat to their generating a return over time is their own behavior. I have the patience to be out of favor for a decade and but I love the idea that my thoughts and ideas are right and I have the patience to let them unfold.
In a classic American story, Chris Davis followed his father and grandfather before him into the family business. It just so happens that family business is a $20 billion investment firm. Davis Advisors. Both my grandfather and father loved what they did, so that has a huge influence on a kid. Chris. His grandfather, Shelby Davis, began investing in insurance stocks in the 1940s. He turned an initial investment of $100,000 into more than $800 million by the time he left the business in the 1990s. He talked to people about this concept of own or earnings that, you know, don't just look at the reported earnings, look through it what the business if you owned the whole business the value creation.
As the third generation Davis to run the firm, Chris still uses his grandfather's value investment approach. That's sort of the core of what we do, making an assessment about what the value of the business is generated by the earnings of the business, rather than by a prediction about changing psychology or or being lucky. Chris is militant about his discipline of investing in which a company's fundamentals are paramount. In a sense, we always say we're value investors because the valuation discipline is so central to us, but we want to own businesses that we can own for a decade or longer.
In addition to his father and grandfather, Chris had another value investor as a mentor, the late Charlie Munger. Outside of my family, Charlie mattered more to me than any mentor that I could think of. He had made a huge difference, both as somebody that taught me a lot about investing in business, but also taught me a lot about life and wisdom. Even has a bust of Munger in his office. Charlie Munger once said deferring gratification gives him so much gratification that he's not sure he's actually deferring it, and that patience is still a hallmark of Chris's investing style. I don't mind that patience to let the value of the business appear over time. I don't need it all at once. I don't need the big payoff.
Tell me what a value investor really is. I think value investing is a redundancy. I think all investing is value investing. And if it isn't, it's it's either gambling or speculating. And if it's gambling, that means you're you're making you're putting up money for something that has a negative return expectation, but you feel lucky. All the rest does is about investing. You're putting up money with the expectation of getting more in the future. And that expectation is based on an assessment of the cash flows and the probability of that assessment being validated. So that's sort of the core of what we do is, is an asset, you know, making an assessment about what the value of the business is generated by the earnings of the business rather than by a prediction about changing psychology or or being lucky.
But most investors would not describe themselves probably as value investors. So you're saying most investors are really buying some future anticipated earnings that they hope will be there but may not be there today? Yeah. Or often people make a distinction between growth investors and value investors. And I would say that to us is a strange distinction because a company that grows profitably is more valuable than one that doesn't grow. So growth is a component of value. What I would distinguish from is momentum investing, and maybe that's been a big characteristic of the market in the last ten years. The idea that because something is going up, it's likely to continue going up. So I'm buying it without regard to the underlying value of the business, but with an idea that somehow this pattern will continue.
So today we have the Magnificent Seven, so called. Do you regard stock purchases of those stocks as value investing or momentum investing? Well, a little bit like when Fang was popular or BRICS. And, you know, people come up with an acronym like the Magnificent Seven, but each one of those business has totally different business models, different prospects. They just happen to all be in favor at the moment. And I think the way to think about it is that when you get the valuations getting higher and higher and higher, you think about what would have to happen for you to earn a 10% return if you bought the whole business. And when you start breaking each one of those businesses down, what you find is there's some of them where they would have to grow, you know, 20% a year for a decade, they'd have to maintain margins above 50%. And when you look at how many companies have done that in history, I think it's a 10th of a percent of companies in the S&P 500 have kept margins above 50% for more than a decade.
But if what you say is true, most people who are buying stocks are not really a value investors, right? Well, I think that there's a whole category of people that get excited because stocks have already gone up and then they want to jump in. So in a sense, they're what I would call momentum investors, but they aren't really value investors. Their stocks have this peculiarity that they're the only asset where somehow the more the price goes up, the more people want to buy them. So if a stock is, let's say, like in Nvidia, very highly valued stock company or even Apple, which is used to be very highly valued, still valuable, but not quite at the same multiple it once was. You would say those are not value investments though. Warren Buffett did buy Apple. Yeah, yeah. It's well, what I would say is that in order for Nvidia to be worth what it is, you have to extrapolate the durability of their competitive advantage way into the future. And if you think about the early days of the Internet, you know, we all knew who the winners were, right? It was, oh, it was Cisco, it was AOL, it was Yahoo! Those were the three titans of the Internet. And in the early days of the transformative technology, people are very anxious to identify the winners. But remember, you know, Google wasn't public yet. Amazon had gone up to 80 and collapsed down to about six. Meta, then Facebook, I don't think had come public yet. So you were there was a huge amount of speculation about who the winners of the Internet were going to be before it was. Right now, there's speculation today that Nvidia has won the AI game that the future of AI will be driven by Nvidia in the same way the PC was driven by Intel. Let's say it does. It's possible that that could happen, but it needs to happen to justify the current valuation. You need growth for a decade to come. You need to sustain high margins. And in a company like Nvidia where we admire them very much and obviously I have some sour grapes because I missed it, but I think that I think you have a lot of their customers who are going into their business trying to design their own chips. You have a fabricator, later TSMC, Taiwan, tell me that in a sense the only company on earth that can make their chips. So Porter's forces would say that there's a lot of pressure on that going forward.
Your view on the economy now with tariffs as something that the president wants to impose as inflation is still not completely under control. Are you worried about a recession in the near term? Well, I'm certain we're going to have a recession. I'm just not sure when. And and that's a big part of our mindset is if we're buying a business that we're going to own for a decade, we know we're going to own it through some sort of shock in the system. What we sort of say is we can't predict. We can prepare. We have to be prepared both for the sunny days where we'll make a lot of progress, but also to withstand the storms and trying to predict the timing of those and reposition your portfolio, we think is a dangerous game.
So you're on the board of Berkshire Hathaway. Do you give any tips to Warren Buffett about value investing or you mostly learn from him? What's so amazing about Warren and really Warren and Charlie is in addition to being, you know, maybe the greatest practitioners of of all time of this art of value investing. They also both were dedicated teachers and talented teachers. Now, in your office, you have a bust of Charlie Munger, so you must obviously admire him. Did you have a special relationship with him? Yeah. I mean, you know, outside of my family, Charlie mattered more to me than any mentor that I could think of. He was. I met him when I was young enough. He had made a huge difference, both as somebody that taught me a lot about investing in business, but also taught me a lot about life and wisdom.
Warren Buffett used to say, I'd like to buy something for $0.50 that is really worth a dollar. And Charlie Munger said, Well, if you buy something for $0.50, you want to make sure that's going to be a company that could be worth many, many dollars in the future. So you should buy at a discount things that are really going to improve and get much more valuable as opposed just buying something cheap. It might stay cheap. Is that an essence of what they talk about? Well, it's something that really connects to sort of the way we invest here, which is this idea that, you know, you you want to buy something that is an attractive value, but if that underlying business has durability, high quality, resilient growth, it's so much more valuable because of just the nature of compounding over time. So if you think of buying that dollar for $0.50, well, imagine if that dollar is growing 15% a year, then it may be worth paying $0.75 for that dollar because it has the ability to grow. So in a sense, we always say we're value investors because the value valuation discipline is so central to us, but we want to own businesses that we can own for a decade or longer. In which case you want them to have those qualities of durable, resilient growth.
Take us inside and tell us what you can without violating confidences, what it's like to be in a board meeting of Berkshire Hathaway. You've got for a long time you had Charlie Munger, you have Warren Buffett still there as the chair, and you've got other people now on the board. Do people ever say, Warren, you're wrong on this, or Charlie, you don't really know what you're talking about? Is that ever happen? Well, I would what I'd say is, you know, I probably attended Berkshire Hathaway annual meetings since 1989, let's say, and and I read every annual report and 10-K. And the difference on the inside versus the outside is really very limited. In other words, this is a company that's valued transparency, candor. I mentioned Warren and Charlie, their ability to teach. And so I would say there were no surprises being on the inside versus the outside because of that that culture. I would say the one difference of nuance is it's just amazing how much Warren and and before Warren and Charlie together think about their the the durability of the business, how much they think about risk, how how much they are determined that they are trying to build something to last and the sense of responsibility they feel to their shareholders, the people that have their life savings in. And and that was one of the big lessons from Charlie in terms of our business was to really reinforce this culture of stewardship.
Both my grandfather and father loved what they did, so that has a huge influence on a kid. Well, let's talk about how you became a value investor. Your grandfather was a very famous investor. His name was Shelby Davis. Shelby Davis. And he started with nothing and worked his way up. How did that happen? Well, he was he had originally wanted to be in public policy and to be a diplomat. And he had a Ph.D. in international relations that he earned in 1929. And and he worked for Hoover and worked for Governor Dewey when he was running against Truman. Well, when Dewey lost, he made my grandfather, the deputy superintendent of insurance for the state of New York. So you can imagine what a comedown that what must have been. But, you know, he went up to Albany and what he realized is, of course, the soldiers were coming home. The baby boom was underway. The suburbs were being built. And life insurance was the first thing you bought when you got married and you created a family. So life insurance was like biotech. I mean, it was this hot growth sector. And my grandfather as a regulator looked at it and said, Oh, no, these are gold mines. So he resigned at the end of his term and he borrowed $100,000 from his wife's family and he started investing exclusively in financial stocks and general insurance in particular.
Was he investing his own money? Took the $100,000, invested himself, made $800 million for himself and his family. But did he take outside investors at some point? No. And that was that was really where my father came into it. So my father got into the business in 1958, and he decided that he should build an investment counseling operation, in a sense, using my grandfather's discipline and approach, but to take an outside money. And that was when we started the client business and really 1966, '66, called Davis Advisor. And now you manage $20 some billion dollars, $27 million. And we started the mutual funds in '68 and with separate accounts and so on. And, and, and my father, while my grandfather, stayed exclusively focused on financial stocks. My father took that same mindset and then applied it more broadly.
If I put $10,000 into your firm at the very beginning, 1966, what would I have today? Well, today you'd have about $4.3 million. Now, if you'd put that would be a rate of return of what? Well, if you put the same amount in the S&P 500, it would be about 2.8. So that difference is only about 100 basis points. But the power of compounding over time, it's just amazing that the difference that makes. So the market returned, you know, eight or nine and we've returned ten. That difference is compounded over time is life changing. Right?
And you grew up in a family where your father and your grandfather said you have to be a professional investor. You couldn't do anything else? No, sort of the opposite. I think my both my grandfather and father loved what they did. So that has a huge influence on a kid. You know, if your dad is happy getting off the train at night, you know, I. I would go beat the train. How did tuxedo and all the commuters are getting off and, you know, they're looking gray and worn with their briefcases. And my dad would sort of spring off the train and he loved what he did. So we grew up, you know, But I'd go away to school. You know, my dad drove me. We would often visit companies on the way. So we grew up knowing, one, that they loved what they did to that. It was interesting because stocks weren't pieces of paper wiggling around, you know, in the news charts and so on. They were ownership interest in businesses. So we would visit businesses and their people. And it was just always sort of an interesting world.
After you got your master's, did you come and join the family business then? Definitely not. You know, there is always a risk that a family business becomes employer of last resort for people with the same last name. And so there was sort of a strong understanding that there was no no seat waiting in a family business. You had to go out and find your own way. Now, interestingly, when I first got out of university, I went to seminary and I had thought to becoming an Episcopal priest. So I actually moved to Paris and worked for the American Cathedral.
So when did you full time come to work in this firm? Well, around 1990 or so. 1990. And you became the chairman when? And I became the chairman in 1998. Okay. So now are you spending time running the firm, investing, looking for clients? What are your responsibilities? Well, you know, if I had a business card, it would say analyst on it. That that's still my full time job. It's a part of the job I love. I love visiting companies. I love, you know, this idea of business people. PRICE You know, it's a constant puzzle every day. It's interesting. So I spend I still. I spend a lot of time visiting companies. I love that that part part of of the job. I like going out and traveling. So I'd say that's the lion's share.
So your grandfather was an investor, Your father was an investor. You're an investor. Do you have a child who ultimately will succeed you? I don't. I love my kids. They are the most proud of in life. And but each one of them has chosen a different path. One in real estate. One is a litigating, working for the attorney general. And and one has started her own business and and is an entrepreneur. And it's moving in that direction.
I don't mind that patience to let the value of the business appear over time. I don't need it all at once. I don't need the big payoff. Let me ask you, what do you do outside the office? You know, are you a big art collector? Are you a big philanthropist? What do you do with your outside activities? And generally, if you're a value investor, you wouldn't probably be a big spender. That would be my impression, because value investors don't spend a lot of money on their personal habits. Warren Buffett doesn't seem to spend a lot of money on his personal habits living in the same house he's lived in for 50 years or so. So are you a big spender on the outside? The money you make here, or do you basically live a very simple life? Well, compared to my grandfather, my grandfather would say I'm a big spender because he once asked me to paint his oven rather than replace it. And my father's very frugal, I would say that. But none of us have ever felt deprived. Charlie Munger once said deferring gratification gives him so much gratification that he's not sure he's actually deferring it. So but both my father and grandfather were at the end of the day, philanthropists, they they, you know, they my father would talk about, learn, earn, return. You know, you spend a third of your life learning, a third earning, and then you move into this return phase that both of them have essentially gave away their entire fortune. They did not believers in inheritance.
Did you ever raise your hand and say, don't give it all away? My grandfather said, I don't I don't want to deprive you of of the dignity of earning a living. So you just deprive me a little bit. And but but I will say, you know, I have sort of the same mindset and each one has my my grandfather's passion was public policy. My father's was education. And and for me, I creating parks is something I love I think about that is, you know, very sort of democratic with a small d sort of mindset that, you know, you create a park not unlike building a building. The operating costs are very low. It becomes more valuable in itself. Programming. People go there and and I think that connection, where do you do that? So my biggest project is in the Hudson Valley Park in the Hudson Highlands, and I've worked with groups like Scenic Hudson.
So if somebody is watching this and says, I'm watching a famous value investor and I want to get some tips about what I should do, should you go try to look for stocks yourself? Should you give money to a money manager? Should you give it to a long only money manager or a hedge fund money manager? On what kind of rate of return should the average person watching a show like this try to get for his or her money? Is it 6% a year? Be happy with 7%? 5%, 8%. What do you think a value investing person should feel they should get as a rate of return on a consistent basis so they can go away, take a trip around the world and not have to worry about their money? An investor should recognize that the biggest threat to their generating a return over time is their own behavior. And so if somebody has the mindset of when stocks go up, I get excited and want to get in. When they go down, I want to get out. That behavior penalty will swamp any other choices they make in terms of whether they picked great stocks, whether they hired a great manager, whether they invested in a great fund. So what I would say is, if you are prone to these very normal behavioral biases, having a great financial advisor who can provide that sort of courage, that fortitude and that patience, like the two lions at the public library, patience and fortitude, you know, an advisor who can modify your behavior is is one of the most important investments you make. Now, if you're wired where you don't have that investor behavior problem, then that simple systematic investing, you know, putting something away every month, every quarter, every year, those will matter so much more than whether you selected the hot manager or the right. So you can get in and get in at the wrong time. But if you stay in, you can earn your way out of that. What really matters is the behavior.
Why should somebody, a young professional, want to get into the value investing business? Is there a big future in that business? Is it more exciting than the other ones I've just mentioned? Why should some young professional want to be a value investor? Well, they might be a masochist, but in a way I think there's something I would say the temperament of the young person is what's going to matter. In other words, do they have that patience or they thoughtful? This idea of being able to move in a very deliberate fashion? For me, it it is incredibly suited to a research mindset. The other areas you mentioned, you know, tech investing, it's exciting, it's dynamic, it's fast changing, and that suits a very different temperament. You think about the idea that. Being right more than you're wrong. Well, for a value investor, we think along those terms. But technically, what really matters is not how often you're right and how often you're wrong. It's how much you make right when you're right. So I don't mind that that patience, that sort of that that sort of traditional mindset that says I'm willing to to to let the the value of the business appear over time. I don't need it all at once. I don't need the big payoff.