Beating the S&P For Generations with Davis Funds Chairman Chris Davis

Barry sits down with Chris Davis, Chairman and Portfolio Manager at Davis Funds. They discuss his approach to managing risk and the key elements changing the economy. Chris and Barry also discuss Chris's mentors including Charlie Munger, and how he settled into the family business. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

• 0:34Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 1:16Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 1:59Speaker 01

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• 2:07Speaker 01

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 2:14Barry Ritholtz?

  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 and P's butt for the past, I don't know, since 1969. Twenty billion dollars in client assets. Fascinating conversation. Charlie Munger was his mentor. He sits on the board of Coke and on Berkshire Hathaway. I thought this conversation was spectacular. I think you will also, with no further ado, my sit down with Chris Davis.

• 2:50Speaker 03

  It's so always good to be with you. Thank you so much.

• 2:54Barry Ritholtz?

  So before we get into your career, a master's degree with honors from the University of St. Andrews in Scotland, like, how did that come about?

• 3:06Speaker 03

  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. I sort of skipped that middle step.

• 3:15Barry Ritholtz?

  So, did you, did you go to an undergraduate college?

• 3:18Speaker 03

  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, that's a long side story and I, I had worked at the Bronx Zoo.

• 3:29Barry Ritholtz?

  Wait, wait, wait.

• 3:30Speaker 03

  I had worked at the Humane Society.

• 3:32Barry Ritholtz?

  So, the original plan wasn't dad's a fund manager, grandpa's a grant fund manager, I guess I'm going to be a, go into the family business? That was not the plan?

• 3:42Speaker 03

  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're, 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 gonna get a totally distorted view of what investing is.

• 4:12Barry Ritholtz?

  A fire hose of nonsense.

• 4:14Speaker 03

  Exactly. And so we all had this grounding, but you know, for example, my, my smartest sibling, uh, without question is my, my sister, my younger sister, um, and 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 gonna go to Cornell. And, uh, 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.

• 4:55Speaker 03

  So, uh, you know, that you can imagine, uh, 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's no like year off, like to go ski or find yourself.

• 5:25Barry Ritholtz?

  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 the class?

• 5:31Speaker 03

  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, they jumped to me up. And, uh, it never stopped since then.

• 5:49Barry Ritholtz?

  Right.

• 5:49Speaker 03

  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 that 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, the public support of the Scottish. Universities. So I applied, there were, I think, eight of us Americans that came in that first year. And they had a program where after two years, you could apply into the honors program,

• 6:32Speaker 03

  which would allow you to concentrate on just one subject. And I ended up picking two. But needless to say.

• 6:39Barry Ritholtz?

  What were the two?

• 6:39Speaker 03

  It was philosophy and theology.

• 6:41Barry Ritholtz?

  Huh, very interesting.

• 6:42Speaker 03

  You know, I picked them my freshman year, thinking, well, when I go back to Cornell, I'm going to be filled up with organic chemistry and biology and anatomy and so on. So I may as well pick things that I would never, I'll never get to study again. So I picked things like medieval history, philosophy, theology.

• 7:00Barry Ritholtz?

  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 mid,

• 7:15Barry Ritholtz?

  medieval history, sounds like that would be a delightful semester.

• 7:19Speaker 03

  You used the perfect word, fun. I mean, I, I, I became a good student in high school. I wasn't a good student. In fact, recently, I found my elementary school, my eighth grade final report card. I went to a school here in New York and it was a pretty strict, you know, 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 elementary school report card was, yet another semester of squandered potential.

• 7:55Barry Ritholtz?

  Not living up to his potential. That's the, that's a classic.

• 7:58Speaker 03

  My children found that. My mother gave it to my children, which was a big problem, you could imagine. But anyway, so I thought I'll just be in Scotland for a year. I picked subjects I would never study again. They were so fun. It was just.

• 8:12Barry Ritholtz?

  Especially in Scotland, studying medieval history.

• 8:16Speaker 03

  In a medieval university 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, 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.

• 9:01Speaker 03

  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 masters at the end, but there was no undergraduate degree along the way. So.

• 9:32Barry Ritholtz?

  And there was no going back to Cornell to become a vet.

• 9:34Speaker 03

  No.

• 9:35Barry Ritholtz?

  That the order for that faded.

• 9:37Speaker 03

  Although because I deferred my admission freshman year, I still get mailings from their alumni department because I matriculated, but then deferred. And I'd like to think the development department has nothing to do with them sending me these mailings. But, 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.

• 10:04Barry Ritholtz?

  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 for dogs. It's like.

• 10:16Speaker 03

  Oh, that's a big X.

• 10:17Barry Ritholtz?

  Done.

• 10:18Speaker 03

  We weren't allowed to have dogs when I was a kid, but I grew up right in the city of East 84th Street. And, but my parents, from the time I was in maybe third grade or so, so what would that be? Probably nine years old or eight years old, something like that. They said I could walk. I could be a dog walker, provided I didn't cross any streets. 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 dog I walked, which is amazing. And I loved it. And of course, it actually became seed capital.

• 10:59Speaker 03

  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

• 11:08Barry Ritholtz?

  And you're running a small business. I had a paper route and it was just so formative.

• 11:13Speaker 03

  So for, and this was like a paper route for city kids, because you didn't, couldn't have a paper route in New York. And but then an amazing thing happened. New York City around 19, it'd have to be around 1977 or 78, passed the pooper scooper.

• 11:29Barry Ritholtz?

  I remember.

• 11:30Speaker 03

  And everything changed because people had these dogs with, they, nobody even knew what to do.

• 11:38Barry Ritholtz?

  Right.

• 11:38Speaker 03

  They, they, and nobody had ever imagined cleaning up after a dog. There are all sorts of inventions, you know.

• 11:44Barry Ritholtz?

  Just need a bag. It's not that complicated.

• 11:47Speaker 03

  You know, people were so gross, had to carry shovels with them.

• 11:49Barry Ritholtz?

  You changed the diaper on the baby. How, this is, it's just processed food. There's no big deal.

• 11:55Speaker 03

  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, it was real money because what it meant was I was suddenly making, you know, $50 a week.

• 12:12Barry Ritholtz?

  In 1970 as a 10 year old, that's good, that's good.

• 12:15Speaker 03

  Yeah. And so you, you start, you know, thinking about, holy cow, you know, I'm making $250 a month. Uh, you know, I'm making thousands of dollars a year and it was just fantastic. So I, I, I've, I've loved dogs ever since.

• 12:30Barry Ritholtz?

  So, 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. The, these are, you know, very much bottom rung on. The Wall Street ladders, what what'd you learn in those?

• 12:50Speaker 03

  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 get 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

• 13:32Speaker 03

  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. So 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 CIA wisely turned me down, having briefly had a stint in, you know, sort of the Workers Revolutionary Party, you know.

• 14:06Barry Ritholtz?

  Oh, so you they they looked at your history and said, this guy's

• 14:09Speaker 03

  Yeah, like this this needs to ripen a little more.

• 14:13Barry Ritholtz?

  We don't know if you have the ethical malleability that we're looking for.

• 14:17Speaker 03

  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.

• 14:46Speaker 03

  And but I realized that even though I've had this study of sort of the idea of businesses being made up of people and ideas and and this sort of interest in that, I had no grounding in in 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 I couldn't go into investing without

• 15:29Speaker 03

  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 a program for entry level accountants and and, you know, they had a wonderful training program. And so I there I had an operations center in Quincy, Massachusetts, and I would take the 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.

• 16:13Barry Ritholtz?

  And you took advantage.

• 16:14Speaker 03

  I took advantage of that. Although I will say I was fooled by one course. They had a course in their catalog that was called The Rules of Rhythmic Touch. Now, I thought

• 16:26Barry Ritholtz?

  That sounds like massage.

• 16:27Speaker 03

  That sounds pretty good, right? I figure I I circled that one in the little course catalog. It was it was only a two nights course. And I showed up and it was how to use a ten punch tape calculator, you know, without looking at your hands. So you know, when you're summing up a column.

• 16:46Barry Ritholtz?

  Good skill for an accountant, right?

• 16:47Speaker 03

  It's the rules of rhythmic touch. And I would say if you put one on this table now, I I would be confident, I would bet you a large sum of money, I could run a column of numbers faster than you.

• 16:58Barry Ritholtz?

  I'm gonna, I'm gonna defer on that one.

• 17:00Speaker 03

  But so that's, so I got the grounding there. Graham Tanaka was somebody I had met during my summer jobs. Uh, he was a very talented analyst at a fiduciary trust. He'd been at JP Morgan before and uh, we'd sort of stayed in touch. And I learned that he was hanging out his own shingle and starting his own firm. And uh, he's Japanese American, really a very, you know, driven, talented guy. And uh, he said he wanted an apprentice. And uh, and you know, it would be everything. I would be his first hire and we would go from there. And that was a terrific experience.

• 17:42Barry Ritholtz?

  How long did you stay at Tanaka?

• 17:43Speaker 03

  I stayed there about two years. Uh, and we stayed, because what happened after the first stretch is my grandfather, who I was close with, when I went to work for Tanaka, my grandfather opened up an account at Tanaka because he thought this was, you know, he, he had big investments in Japanese firms. He had a lot of admiration for Japanese culture values and, and, and he admired.

• 18:09Barry Ritholtz?

  This is late seventies, early eighties?

• 18:12Speaker 03

  This was late eighties now. So we're probably in eighty-nine, something like eighty-eight, eighty. Yeah. Well, but Graham was a, a, a growth investor primarily in the US. And so he just happened to have Japanese heritage. Uh, but so my grandfather opened an account and as the time there progressed, uh, my grandfather was worried about his, 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 uh, and Graham, of course, was so respectful of that. And so it was sort of a very gradual transition out.

• 18:54Speaker 03

  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.

• 19:02Barry Ritholtz?

  So your father launched Davis Advisors in nineteen sixty-nine?

• 19:06Speaker 03

  Yeah.

• 19:06Barry Ritholtz?

  And your grandfather was still running his Davis investing shop.

• 19:13Speaker 03

  Yeah.

• 19:13Barry Ritholtz?

  Parallel, did they ever end up merging? What, what, what happened when he decided, all right, it's, you know, it's, it's time?

• 19:22Speaker 03

  Well, my father was my, my grandfather's only son. And as often happens, they had a very complicated relationship. And, uh, and so they never worked together. They, they, my, my father, uh, you know, grew up with this famous name. Uh, because your, your numbers were right in the beginning. It was a hundred thousand dollars 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.

• 19:53Barry Ritholtz?

  Wow.

• 19:54Speaker 03

  And she was sort of the successor trustee. And then it all went to charity after that. He, he didn't believe in inheritance and, but it was in trust for her and she lived to be 106.

• 20:05Barry Ritholtz?

  Wow.

• 20:06Speaker 03

  Although I will tell you, I managed her account and, uh, you know, in, 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, you know, Gran, I just, I, I want you to know the businesses are sound. You know, we took some body blows, but you know, in the long run it's going to be fine. She said, you idiot, I'm 98 years old.

• 20:35Barry Ritholtz?

  What do I care about?

• 20:37Speaker 03

  She said, I don't buy green bananas and you're, you're telling me I'm, I'm down 50% and, and you go, go get back to work. So she teased me because of course she lived long enough to see it all come back. And, uh, 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. Um, but anyway, so my, my, my grandfather built his firm, which was called Shelby, Colin Davis and Company. My father built his, which in the beginning was called Davis Palmer and Biggs. And, uh, and then the New York Venture Fund was a client or a, a fund managed by Davis Palmer and Biggs and, um,

• 21:18Speaker 03

  And when I was working at Tanaka, I went to a meeting, it was Chubb Insurance, you know, Analyst Day sort of thing. And there weren't that many analysts then, so it was held around a big sort of boardroom table. And the CEO was Dean O'Hare, and he'd sit there and say, "We at Chubb," you know, this, he was, it was, and, and I looked around the table, and both my father and grandfather were at the same meeting by chance. And, and I thought, "This seems a little nuts." And, 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.

• 22:03Speaker 03

  Your age? Yeah, hard stop. And here was my grandfather at the time, and he was probably in his... Late 80s? Early 80s, probably then. And, and he said, you know, "I want to die at my desk." I mean, he, 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

• 22:46Speaker 03

  a long time, had very conservative political views, although it was a 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...

• 23:28Speaker 03

  Employees, that was not his thing. He was much more a 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. And 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 it.

• 24:12Barry Ritholtz?

  And how did, how long did it take for that to all come together?

• 24:15Speaker 03

  I think my grandfather, my father turned 60 in 1997, 1998, somewhere like that. And my grandfather died.

• 24:27Barry Ritholtz?

  Eighty-six?

• 24:28Speaker 03

  Yeah.

• 24:28Barry Ritholtz?

  Eighty-eight, so eighty-six?

• 24:29Speaker 03

  Something like that, you know, just don't quiz me. And, and then my grandfather died in, let's see, 1994. So 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 in 1998. And, 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

• 25:12Speaker 03

  he didn't sit on our boards, didn't, you know, he just, he just walked out and, and just like my grandfather started giving his money away. And he's, you know, he, he created and oversees the largest international scholarship program on earth.

• 25:30Barry Ritholtz?

  Really?

• 25:31Speaker 03

  Yeah.

• 25:31Barry Ritholtz?

  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.

• 25:42Speaker 03

  Lovely man.

• 25:42Barry Ritholtz?

  The, the Davis Dynasty, how?

• 25:47Barry Ritholtz?

  Um, odd is it to have like, hey, you know, the story, the game isn't over and you're, you're writing this book. How odd is it to be part of a book like that?

• 25:59Speaker 03

  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.

• 26:12Barry Ritholtz?

  Not, not a, not a hot seller yourself?

• 26:14Speaker 03

  And, uh, I, I do think I experienced the, the writing of that book as, you know, sort of terrifying, you know?

• 26:23Barry Ritholtz?

  Oh, really?

• 26:24Speaker 03

  Yeah, because it was.

• 26:25Barry Ritholtz?

  Lots to live up to with your dad and your grandfather.

• 26:29Speaker 03

  A lot to live up to.

• 26:29Barry Ritholtz?

  Sure.

• 26:30Speaker 03

  And I will say it's, it's something that I'm, you know, just profoundly grateful to my dad. Well, really to both of them. But my dad was, is a very humble person. And, you know, when you, in that book, it is, you know, 90% about my grandfather. And, and my dad was, you know, 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, and I think that that's true. And in fact, uh, when we, uh, at our firm, we made slimmed down versions

• 27:15Speaker 03

  of that book and called it the Davis discipline instead, which was much more consistent with our sort of view of life. Uh, because, you know, dyna- dynasty implies sort of dynastic, well, it implies inheritance.

• 27:30Barry Ritholtz?

  And there's no inheritance.

• 27:31Speaker 03

  And there was, that was, there's none of that.

• 27:32Barry Ritholtz?

  Which I, I would imagine people would be surprised to learn.

• 27:36Speaker 03

  Yeah. And it's funny. It, it's.

• 27:40Speaker 03

  It's not something I'm quite as fanatic about.

• 27:43Barry Ritholtz?

  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.

• 27:57Speaker 03

  You didn't mangle it, you stuck the landing. That's exactly, and that is exactly the right floss. And I would say, you know, my father, my grandfather sort of believed that. I mean, I have siblings that, you know, where, you know, they were helped out. And, you know, I had an aunt, you know, that, that my grandfather left some money to, to ensure that she and her kids would be all right and so on. So it wasn't ruthless. And I think, but I think there was, it came from a place of sort of compassion. I mean, this sort of view that, you know, there's something dignified about burning your way in the world. And, and I think there's, you know, the idea of wanting,

• 28:42Speaker 03

  well, look Barry, let's, I mean, if you look at the greater world, there's a lot of fear and, and fear can be a motivator. But God is at a weight to, you know, people live, you know, one operation away from bankruptcy. You know, a layoff away from being foreclosed on. That is, 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, my father did that. There was, I don't think we ever grew up with a feeling that there wasn't a safety net. And so the freedom from that fear is a huge gift you give your kids. It was a huge gift that was given to me.

• 29:24Speaker 03

  And it, that's what gives you the confidence to be able to try anything. Right? Because you're not worried that, you know, especially when you start having kids and you think, my God, if, you know, I can't, I can't take this risk. I can't leave State Street, you know, it's, it's like, it never occurred to me that I couldn't leave. And, and, and, and so, I, but I think their view was, you know, if you raise your kids.

• 29:51Speaker 03

  With, you know, the fortunate thing was both my dad and my grandfather were very frugal. And so we didn't live in hardship, but we certainly didn't go to Southampton and Palm Beach and Aspen. And, you know, that was all, you know, they had a very sort of puritanical sense of that.

• 30:09Barry Ritholtz?

  Interesting.

• 30:10Speaker 03

  You know, that sort of view 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, it's one storm away from the end and there's no cars. You take a little ferry out there. And, you know, I always think of it as the anti-Hamptons.

• 30:31Barry Ritholtz?

  Mm hmm. Oh, very much is.

• 30:33Speaker 03

  Yeah. And so, and that's, that's what, what I love and, and, you know, my parents had a place in Maine, but it was just, you know, it was no, not a fancy deal.

• 30:44Barry Ritholtz?

  Like a little cabin, not, not Calabongport.

• 30:46Speaker 03

  They had a nice, they had a nice house, but it wasn't, it wasn't a Newport mansion.

• 30:51Barry Ritholtz?

  Mm hmm.

• 30:51Speaker 03

  And they had it because, you know, they used to call them in the twenties, 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 in, 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.

• 31:34Speaker 03

  And, and then there was another branch that sort of said, that's not the American way. And they, and in many ways, I mean, Rockefeller in many ways embodied a certain amount of that, that sense of stewardship, some were even more extreme in terms of restraint. But, 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

• 32:17Speaker 03

  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 and 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.

• 32:47Barry Ritholtz?

  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.

• 33:19Speaker 00

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• 33:58Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 34:40Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 35:23Barry Ritholtz?

  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.

• 35:54Barry Ritholtz?

  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.

• 36:11Speaker 03

  Oh, I mean, it started in, I want to say it was 19, it might have been 1990, 90.

• 36:21Barry Ritholtz?

  So he's already a well-known investing rock star at that point?

• 36:26Speaker 03

  The way it really started was with Charlie. I met Charlie long before Warren. And, but the reason was, I was trying to sell a business. My grandfather, as I started going through his accounts and going in there on the weekends, he had a business called Securities Lending. And I don't know how well you know that business.

• 36:45Barry Ritholtz?

  Sure, of course. Anytime you're going to short a stock, you gotta borrow it from somebody. And that's going to cost you a little.

• 36:51Speaker 03

  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.

• 37:01Barry Ritholtz?

  Knock yourself out.

• 37:02Speaker 03

  And pay me to borrow it, fine. And you, the number one borrowed stock in those days was Berkshire.

• 37:09Barry Ritholtz?

  Berkshire Hathaway.

• 37:10Speaker 03

  Of course. Because you couldn't borrow it anywhere, because everybody had their certificates and, you know, they weren't.

• 37:16Barry Ritholtz?

  Literally had to pay for sales.

• 37:17Speaker 03

  Yeah, there was no, there was very little Berkshire that was in street name. It was in individual, and therefore you couldn't borrow it.

• 37:24Barry Ritholtz?

  It was locked away and safe.

• 37:25Speaker 03

  Yeah, so he had a big holding, and he had a broker dealer. Shelby Combs 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 this. Securities for these people to short and we'll make a little, a little spread as they go through.

• 38:09Speaker 03

  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. And, uh, my grandfather by then was, you know, probably in his eighties and was nervous. Because, you know, as I went through the list of counterparties with him, there were firms we had never heard of. There was this one called LTCM. And he, and, and I said, what is this LTCM? We've got like, you know, five, eight hundred million dollars lent out to them. What? Oh, that's long-term capital management. Uh, so we talked about it. He said, yeah, I think we've got, we gotta get, we gotta get rid of this thing.

• 38:54Speaker 03

  It reminds me, by the way, of what Jerry said.

• 38:56Barry Ritholtz?

  So wait, did he hold on to that business or did they?

• 38:59Speaker 03

  So, so I, I said to him, like, we, you know, we gotta 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. So we started calling around and I thought, what characteristics do we need? We need a lot of excess capital, a help, ideally an appreciated portfolio of securities. Uh, you know, sort of a triple A type balance sheet, uh, and somebody they can understand. So I thought, well, Berkshire. So, uh, a wonderful friend in those days named Bob Lenzner, uh, who was a reporter at Forbes, but was very.

• 39:40Barry Ritholtz?

  I recall I, I had lunch with him at, I want to say the Harvard Club.

• 39:46Speaker 03

  Yeah.

• 39:46Barry Ritholtz?

  I think he was an alum.

• 39:47Speaker 03

  It could have been. His, his kids, my, our kids were.

• 39:50Barry Ritholtz?

  I could be wrong.

• 39:51Speaker 03

  Our kids were in the same, uh, 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 had heard his name around and he said, uh, he mentioned casually in the conversation that he had met this brilliant guy, Charlie Munger. And I said, well, I, you know, I know Charlie is, but I'm dying to meet him. And so Bob arranged for us to have breakfast. And Charlie was in New York and I went down. It was at the Millennium Hotel down by the World Trade Center. And I, I went down and I sat down and introduced Mr. Munger. Pleased to meet you. I'm Chris David. And I said, you know, I'm working with my grandfather at Shelby Colton Davis Company.

• 40:35Speaker 03

  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.

• 40:52Speaker 03

  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.

• 41:03Barry Ritholtz?

  Just not Berkshire.

• 41:03Speaker 03

  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.

• 41:12Barry Ritholtz?

  So beyond the pitch to Munger, how did your relationship?

• 41:16Speaker 03

  Well, so, so the pitch ended in four and a half minutes. And so I said, well, I'm sorry I wasted your time. And I got up to leave and he said, where are you going? And I said, well, I'm like, just don't leave. I'm only just getting to know you. I'm not interested in your business, but tell me about you and tell me. And we got talking about, you know, a few things. But what really happened was I started listening. And 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.

• 41:59Speaker 03

  And so of course I started going to Los Angeles pretty regularly. And, and so that was a huge gift in my life. And, and, and it was a gift professionally, but my God, it was a gift personally. I mean, he helped me through some hard times in my personal life. I mean, he was just a wonderful. A full mentor in every dimension.

• 42:21Barry Ritholtz?

  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?

• 42:45Speaker 03

  Well.

• 42:47Barry Ritholtz?

  Good question, right?

• 42:48Speaker 03

  I think most deeply, I learned about integrity in the traditional sense, meaning wholeness. Charlie was a whole person. He, the alignment, what he thought, what he said, what he did, they were all the same thing. And he, his sense of, his own code of being was so disciplined and, but was filled with this sort of, you know, his reputation as a curmudgeon may have been cultivated. I never saw it. He was a truth speaker, but he was also, in a very profound way, a very loving person,

• 43:33Speaker 03

  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 my, Charlie didn't, was, 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, to relationship continuity, to breadth.

• 44:14Speaker 03

  My father is very sort of specialized, very, now, my father is incredibly physically fit and remains to this day, he's very vigorous. You know, Charlie was willfully sedentary.

• 44:29Speaker 03

  You know, my father is very nomadic and Charlie went to the same island in Minnesota and the same, lived in the same house his whole life. You know, it's very, you know, very much a creature of habit. And, and so they were very different that way.

• 44:45Barry Ritholtz?

  Just imagine if Charlie exercised, how much longer he could have lived.

• 44:48Speaker 03

  I don't know. Ninety-nine and three quarters is pretty good. That's, that's one of the things he said. He said, I'm not sure I see the alignment.

• 44:55Barry Ritholtz?

  So, so let's talk a little bit about the returns and about the philosophy. Back of the envelope, I, I calculated Davis Advisors has been compounding shareholder wealth at greater than 10% annually since 1969. Does that sound remotely accurate?

• 45:16Speaker 03

  That sounds right. We're, we're still ahead of the market from the beginning.

• 45:20Barry Ritholtz?

  Starting out in 1969, so you're, you know, early days of a horrific bear market. You have managed money through, well, you're in grad school, but your dad during the 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.

• 45:55Speaker 03

  Well, the entire investment process boils down to these two questions. What, what sort of businesses do we want to own and how much do we pay for them? And, you know, the types of business characteristics that are, that we focus, but in the interplay, 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 it, the price is so extreme. But the characteristics that we look for in every business have to do with the durability because we buy businesses thinking we will, our goal is to own it forever. Our goal is

• 46:36Speaker 03

  for the return to be driven by the year, earnings yield on the business over time, not by some change in the valuation and finding an exit strategy. Um, and so those sorts of characteristics are exactly the characteristics you would look for if I said you've got to put a business away for your kids or your grandkids. So, you know, the, the, the nature of the business, the returns on capital, the competitive modes, uh, uh, the, 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. You know, I just came back from the Markel annual meeting. You know, character will, will not show up efficiently, I don't think, in the AI world.

• 47:22Speaker 03

  And boy, does it matter when you think about navigating uh, uh, in unpredictable future, just that ability to be resilient, to adapt, but always to be investing the money as if it's your own. And there, 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 uh, it is understanding uh, uh, 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,

• 48:07Speaker 03

  but it may or may not reflect reality. And so, you know, you put those two things together and we build an, 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.

• 48:25Barry Ritholtz?

  I, 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.

• 48:40Speaker 03

  It's, uh, uh, 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, the signs of short-termism.

• 48:56Speaker 03

  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, right? I watched what it meant for my grandfather to own businesses for 20, 30, 40 years. You know, I look at our own portfolio, I look at companies like, you know, American Express or Wells Fargo or JP Morgan in the financial world. I look at, you know, more recently at companies like Amazon, Texas Instruments. You look at what a business can do, compound over 20, 30 years.

• 49:41Speaker 03

  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 2,000 now. You know, and by the way, they have an activist idiotically saying they should split up the company. It's like, the 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 of that business.

• 50:16Barry Ritholtz?

  You mentioned a number of financials in that list. I'm kind of curious because financials have had some pretty good years, they've had some pretty rough years. Obviously, the financial crisis was devastating, although my pet theory about JP Morgan Chase is when they had their subprime problem, it predated everybody by five years and there was still a bid when they had to get out. So they got a little lucky and they happened to have a particularly talented CEO. But this concentration of financials, I'm curious what led to it.

• 50:58Barry Ritholtz?

  And I'm curious of the relationship between what some people describe as high conviction investing and concentration in a particular sector like financials.

• 51:10Speaker 03

  Well, I think high conviction investing is exactly the right description. And if we end up with a focus on a particular sector, it's not necessarily because of a view of the sector, it's because the individual companies. Financials is one of the most misleading sectors there is because to me what creates a correlation risk is when businesses are tied to the same macroeconomic variables. Financials is a massively broad category. There are financials that have risk if the wind blows in certain parts of the world. There are financials that have risk if interest rates change. Financials that have risks that have to do with recessions, some to capital markets. They are all different.

• 51:53Speaker 03

  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 and P 500.

• 52:05Barry Ritholtz?

  Really?

• 52:05Speaker 03

  And it has outperformed the S and 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, is that you have very, you have businesses, industries that are huge, where companies can grow for a long period of time by simply growing. You know, just this year, Progressive finally passed State Farm.

• 52:47Speaker 03

  Progressive has probably compounded in the high teens for 30 years. And it still is just, just became maybe the largest insurance company in personal auto. To you, 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.

• 53:12Barry Ritholtz?

  Second, right.

• 53:14Speaker 03

  Uh, 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 nine 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.

• 53:58Speaker 03

  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.

• 54:11Barry Ritholtz?

  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, you, 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?

• 54:37Speaker 03

  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 1,200 basis points.

• 55:00Barry Ritholtz?

  Not too shabby.

• 55:01Speaker 03

  Right? It 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 true.

• 55:12Barry Ritholtz?

  They own everything and you own the better companies.

• 55:15Speaker 03

  But they're very concentrated. They're concentrated, the mega-cap banks by and large, and Visa and Mastercard, you know? But we're, 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.

• 55:32Barry Ritholtz?

  Does the gap come from the stock selection or the screening out of what you don't like?

• 55:39Speaker 03

  Well, it really goes back to the culture question. So to bring it full circle to your question about culture, what it is, is that within financials, we are looking for the companies that we feel can be compounding machines. And we're looking for the companies where their culture creates a durable advantage. The reason culture can create an advantage in financials is because in most cases, your cost of goods sold is an estimate. And if you have an aggressive management, they can use accounting to upfront earnings that will, you'll pay the piper three, five, excuse me, 10 years from now. So they can look good

• 56:22Speaker 03

  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?

• 56:53Barry Ritholtz?

  2022, 500 basis points.

• 56:56Speaker 03

  And 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 eight, 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 up cycle, right?

• 57:39Speaker 03

  And that's a different culture. They had a growth culture, but it was, it blew them up. And so, you know, we, we instead looked at companies like, well, JP Moore. Oregon was an outstanding example, Wells Fargo was Capital One, where they didn't reach for the easy money of taking that extra risk on the interest rates. They could have, you know, Jamie Dimon stood up at an analyst meeting and said, "I could add a billion or $2 billion to my profits with a phone call, and I'm not gonna do it."

• 58:12Barry Ritholtz?

  Because of the risk.

• 58:12Speaker 03

  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 the, 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 developed. Look at the duration in the asset portfolio of a bank. Look at the mark-to-market risks that a, 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, in a complex financial, the CEO has to be the chief risk officer." And you can have somebody with that title.

• 58:57Speaker 03

  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.

• 59:02Barry Ritholtz?

  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?

• 59:16Speaker 03

  Well, I mean,

• 59:21Speaker 03

  it would be strange if we ended up different. Of course, I always liked it when we owned it first. So, for example, we were, I think, the largest shareholder of General Re,

• 59:33Speaker 03

  before Berkshire bought it. And, and so, and by the way, we, our research was not so good on that one.

• 59:41Barry Ritholtz?

  Oh, really?

• 59:42Speaker 03

  No. And as you see subsequently, General Re did not perform very well for many years. It was, and I think Warren would say, I mean, I think he has said publicly, I won't put words, I think he's, he said that that was, well, I'll, I'll put it this

• 59:59Barry Ritholtz?

  Not his favorite pick.

• 1:00:00Speaker 03

  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 certificates.

• 1:00:06Barry Ritholtz?

  The Temple of Shame, is that what that is?

• 1:00:09Speaker 03

  Yeah, and Charlie was looking through it and he said, where the hell's your Gen Re? And I said, Gen Re wasn't a mistake. We got Berkshire stock for Gen Re. That was fantastic.

• 1:00:19Barry Ritholtz?

  Did you have anything to do with the transaction? Or they just went out and bought it? And you happen to be a big holder?

• 1:00:25Speaker 03

  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, there's, there's huge differences. I mean, starting with the fact that, you know, Warren has outperformed all investment advisors for 50 years and, and so, but you'd be crazy not to study, you know, if, when Warren owns something or to study Berkshire itself.

• 1:00:59Barry Ritholtz?

  That makes a lot of sense. There's another distinction between the two of you. You say that you are neither deep value nor go-go growth. So what does that leave you? You growth at a reasonable price, somewhere, something adjacent?

• 1:01:19Speaker 03

  Don't you love growth at a reasonable price? Because what are the other guys?

• 1:01:21Barry Ritholtz?

  Who doesn't want growth at a reasonable?

• 1:01:22Speaker 03

  Yeah, growth at unreasonable prices?

• 1:01:24Barry Ritholtz?

  Or unreasonable non-growth.

• 1:01:26Speaker 03

  Growth at silly prices?

• 1:01:27Barry Ritholtz?

  No growth at a reasonable price.

• 1:01:28Speaker 03

  I think what we would say is it's, it's obvious to us that growth is a component of value, right?

• 1:01:34Barry Ritholtz?

  Growth is a component of value, so.

• 1:01:37Speaker 03

  A company that grows profitably is more valuable than one that doesn't grow. Right? I mean, it's, it's, again, think of the business, right? 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.

• 1:02:19Speaker 03

  And so we believe in capitalism and we believe that growth is hard and maintaining growth is hard. So we tend to be more skeptical than the average go-go growth investor. But we tend to be more open to paying a fair price for a company that can grow profitably than the typical value investor. So, so much of our research is about the durability of the growth, the competitive advantages that a business has. So our portfolio currently trades in aggregate. If you took all of our companies at something like 14 times earnings. While the market as a whole is at 20 or 21.

• 1:03:04Speaker 03

  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. It's something like 14% a year. So we feel we have what my dad used to call the value investor's dream. Right. And that's what we

• 1:03:19Barry Ritholtz?

  Low cost, fast growth.

• 1:03:21Speaker 03

  Low, low valuation and durable, sustainable growth.

• 1:03:25Barry Ritholtz?

  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 emotions tend to produce. Discuss.

• 1:03:48Speaker 03

  Well, you know, obviously the, the market is of course a voting machine in the short term. It reflects psychology, a long-term weighing machine and

• 1:04:00Barry Ritholtz?

  That's a great quote. I'm going to write that down. Yeah.

• 1:04:04Speaker 03

  And so psychology and 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 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. And 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.

• 1:04:43Speaker 03

  So I feel this disconnect where I'm simultaneously pessimistic about the market because of the euphoria. There's no skepticism, there's no fear in prices and at the same time, very, feel very comfortable with our portfolio.

• 1:05:01Barry Ritholtz?

  So, so let me push back a little bit, just to hear your reaction. We, 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, especially if earnings growth continues.

• 1:05:45Barry Ritholtz?

  Is, is it the contrarian take that, hey, this market could go another five or 10 years before things get really stupid?

• 1:05:52Speaker 03

  Well, what I'd say is right now, as, as I look out there, I see two types 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.

• 1:06:05Barry Ritholtz?

  A permanently high plateau.

• 1:06:08Speaker 03

  Yes, yes. And, and, and they are all in on the momentum trade, which has worked so well. Now, I'm, I have a really, I am.

• 1:06:22Speaker 03

  Believe that momentum investing, even though it's worked so well, to me is crazy because it's not common sense.

• 1:06:29Barry Ritholtz?

  It works until it stops.

• 1:06:30Speaker 03

  It works until it stops. And when it stops, you really feel foolish that the fact that you are paying an ever higher price, you thought was a good thing.

• 1:06:38Barry Ritholtz?

  What, why does price matter? If it's going up, buy it. If it stops going up, sell.

• 1:06:43Speaker 03

  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, a growth rate in revenue of 20% for more than a decade, like fewer than 3%.

• 1:07:15Barry Ritholtz?

  I mean, that's a huge growth rate for a long period of time.

• 1:07:19Speaker 03

  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 tenths of 1%. But you could check me, it's either, might be 3 tenths, 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.

• 1:07:43Barry Ritholtz?

  Right.

• 1:07:44Speaker 03

  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.

• 1:08:03Barry Ritholtz?

  Which is risky as well.

• 1:08:04Speaker 03

  Really risky. I mean, just since 2000, the purchasing power of a dollar is down something like 55%, right? And in my grandmother's lifetime, I think the purchasing power of a dollar fell like 94, 95%.

• 1:08:18Barry Ritholtz?

  If you sat in dollars for 90 years, right.

• 1:08:23Speaker 03

  So, though, I think these huge crowded sides of the market, the people sitting in cash and the people at the, assuming the extreme growth. Are both taking a lot of risk.

• 1:08:33Barry Ritholtz?

  That's a terrible barbell you've just described.

• 1:08:35Speaker 03

  Yes.

• 1:08:36Barry Ritholtz?

  Like, the extremes are either either inflation's gonna kill them, or speculation's gonna kill.

• 1:08:41Speaker 03

  And where I would say, you know, we land in the middle, is with this idea that there are durable overlooked businesses right now. And there there are business, as I say, we have a portfolio of 25 companies trading at an aggregate portfolio of 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 Foods, some MGM, you know.

• 1:09:07Barry Ritholtz?

  Which portfolio is this?

• 1:09:09Speaker 03

  This is our our flagship portfolio, so this is the Davis York Venture Fund. But really, the the way people are finding us increasingly, 10 years ago, Barry, we launched our ETFs. We were alone for nine years. Like, no, we're the only true active manager running a value ETF. I think our value ETF, which is called DUSA. DUSA 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.

• 1:09:39Barry Ritholtz?

  Although the past year or two, we have seen a lot of flows. Hey, most of the money are going to the passive indexes. But the things that the third or quarter that's not going there, active.

• 1:09:53Speaker 03

  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? We you and I spent our entire careers in a world of falling interest rates, approaching zero, falling inflation, all of the things that fed into that. You know, low wage pressure, de-unionization, globalization, all of that stuff.

• 1:10:34Speaker 03

  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 phenomenon, free money. The second big change is geopolitics. There's no question that for our entire careers, we're 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

• 1:11:15Speaker 03

  that increases risk. So those first two things increase risk. And what's the third? AI. There's this massive technological change that increases risk. It increases the risk of all different types of businesses, and it increases opportunity, but increases risk. So when you have three fundamental shifts going on, all of which have unpredictable outcomes, and yet you have valuations not at all time highs, but elevated highs, certainly relative to the direction of travel of interest rates over time, then I'd say, you know, I like where we are with our 14 per 14 yield, you know, solid growth rate in the businesses, durability, AI as a lens,

• 1:11:59Speaker 03

  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.

• 1:12:12Barry Ritholtz?

  Really interesting. Coming up, we continue our conversation with Chris Davis, portfolio manager at Davis Advisors, discussing the current market environment. I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio.

• 1:12:42Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

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• 1:14:08Barry Ritholtz?

  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.

• 1:14:26Barry Ritholtz?

  Um, 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?

• 1:14:50Speaker 03

  Well, what we're seeing is Amaro's Law in full bloom. And Amaro's Law states that transformative technologies are overestimated in the short term. They're underestimated in the long term. We're in the overestimation hype phase. And what I would say we do is we recognize it as a transformative technology. That is absolutely a baseline assumption. Our other baseline assumption at this stage is that we don't see it as a winner take all. So we see it more a little bit like railroads or something where, uh, uh, or the tele, uh, or electricity, where the users maybe end up making more money than the builders. Um, and so we, we'll talk about hedging that bet. But, um, uh, we do think it increases

• 1:15:34Speaker 03

  the risk environment in terms of terrorism. Uh, it increases, uh, the risk of obsolescence in certain businesses. So, but we start with this idea that it's real. Then what we do is as we do our research, we found every company we look at falls into one of five categories. It's the emerging winners. That's where all the heat is, all the speculation. And there, there's real danger. You and I started very early talking about Cisco and remembering, well, the three obvious winners of the internet were AOL, Yahoo, and Cisco. You know, there, 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. And, uh, but we'd say if you want to look in that space, focus on the businesses that have a real shot

• 1:16:19Speaker 03

  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 we think.

• 1:16:34Barry Ritholtz?

  So not the hyperscalers?

• 1:16:35Speaker 03

  Not the hyperscalers. I think that that is and 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.

• 1:16:48Barry Ritholtz?

  Right.

• 1:16:48Speaker 03

  Because we bought them when they were so out of favor. But if you're going to play in the emerging winners, that's the first. Second category is, okay, who are the enablers of this technology, right? That's the the picks and shovels mindset. They're the ones that that are going to benefit from the spending wave, but will not be penalized if the return on the spending is very low.

• 1:17:08Barry Ritholtz?

  So semiconductors?

• 1:17:09Speaker 03

  So, yeah, I would say there for us, it's been analog chips, Texas Instruments. It's been semiconductor capital equipment. We're a big shareholder of Samsung, you know, which did nothing, nothing, nothing, and then went up

• 1:17:21Barry Ritholtz?

  Explode.

• 1:17:21Speaker 03

  fourfold in in the year.

• 1:17:23Barry Ritholtz?

  They're driving the entire Caspi in Korea returns.

• 1:17:28Speaker 03

  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, Cotera, which is now Devon, ConocoPhillips, Tormeline, you know, our focus is on natural gas and copper. Okay, so those are the enablers. The users, who are going to be the beneficiaries? Well, there you've got to think, uh, 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 to blue collar workers.

• 1:18:11Barry Ritholtz?

  Meaning very much hollow it out?

• 1:18:14Speaker 03

  Hollow it out, hollow it out. The best will still have work. The best will be more valuable. They'll be more productive. But there's going to be a, you know, a lot of unemployed second year lawyers and things like that. And so that that and so healthcare, you know, claims processing, uh, compliance functions, things like that. So there we focus on the banks that are have the scale, the tech stack and the management to do it. So Capital One, number one, I keep Wells Fargo on that list. I think US Bank gets over that, crosses that chasm. Uh, so those, but also

• 1:18:48Barry Ritholtz?

  JP Morgan Chase is part of that group?

• 1:18:49Speaker 03

  JP Morgan Chase has done such a great job, but the valuation has gotten so high.

• 1:18:53Barry Ritholtz?

  And how do you put the MXs and Mastercard visas of the world?

• 1:18:56Speaker 03

  We don't own Visa or Mastercard and we have a very small position in MX. 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.

• 1:19:15Barry Ritholtz?

  That 3% big is a big, big number.

• 1:19:18Speaker 03

  It's a big number.

• 1:19:19Barry Ritholtz?

  This is the first time in my lifetime I have started noticing cash and credit card prices on restaurant menus.

• 1:19:26Speaker 03

  Yeah, absolutely.

• 1:19:27Barry Ritholtz?

  This was never a thing before.

• 1:19:28Speaker 03

  And you really see it when you travel.

• 1:19:30Barry Ritholtz?

  Yeah.

• 1:19:30Speaker 03

  And so I, that we, and again, those are, they're so highly valued at 30 times earnings for Visa, uh, you know, it just seems as 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 them the, the indifferent or the protected, right? So what Jeff Bezos, when he said, people ask me what's going to change, they all ask me what's not going to change. That's a very important question. So there, what do we, you know, Tyson Foods, right? Chicken's not going to change.

• 1:20:00Barry Ritholtz?

  Right. Wait, chickens not going to lose their jobs to AI?

• 1:20:03Speaker 03

  Yeah, yeah, chickens in good shape. Uh, uh, 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, they're cyclical businesses. So you don't want to pay at a, 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 the, call those the protected, the what won't change. The last category is the walking dead. And, and there, you know, you mentioned Visa and Mastercard. I don't know, title insurance.

• 1:20:48Speaker 03

  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 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. And people are saying, why did I lock up my money?

• 1:21:22Barry Ritholtz?

  For seven years.

• 1:21:23Speaker 03

  For seven years, if you're lucky.

• 1:21:24Barry Ritholtz?

  Yeah.

• 1:21:25Speaker 03

  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 and P 500.

• 1:21:40Barry Ritholtz?

  That's amazing.

• 1:21:41Speaker 03

  Isn't that amazing? And it's like 10 million people knew they would never buy a roll of film again. It was dead. And so the advantage, you know, when Japan peaked in the eighties. Every active, every active manager in international.

• 1:21:56Barry Ritholtz?

  Overweight Japan.

• 1:21:57Speaker 03

  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.

• 1:22:05Barry Ritholtz?

  Right.

• 1:22:06Speaker 03

  So I think nimbleness, liquidity, flexibility, and this sort of research lens are going to actually 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.

• 1:22:27Barry Ritholtz?

  So I'm glad you brought up a few things there because when you look at some of the fallout from low-cost indexing, the Vanguard effect, BlackRock, whatever you want to call it. They have all put the fund industry under a lot of pressure. There's fee compression. There's been a move to not just indexing, but to ETFs generally.

• 1:22:55Barry Ritholtz?

  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, 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?

• 1:23:21Speaker 03

  Well, we're lucky because we're, one, we're a very, we charge low fees, right? So we, you know, if you charge two and 20, you know, you're-

• 1:23:31Barry Ritholtz?

  If only I could.

• 1:23:33Speaker 03

  I know, I'm-

• 1:23:34Barry Ritholtz?

  I mean, intellectually, I have a problem with that, but part of me is like, nice work if you-

• 1:23:41Speaker 03

  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."

• 1:23:48Barry Ritholtz?

  Hilarious.

• 1:23:49Speaker 03

  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?

• 1:23:59Barry Ritholtz?

  Or at least a fair price.

• 1:24:00Speaker 03

  Right, and it makes it easier for you to outperform over time. So, so I feel, one, we, two, we're a frugal place. You know, I, 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 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.

• 1:24:41Barry Ritholtz?

  I've said that exact thing, "Hey, if indexing is taking over, doesn't that create all sorts of inefficiencies for a savvy active manager?"

• 1:24:51Speaker 03

  Absolutely, 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, but we lagged the S and P in this momentum market, but that changed- Changed about four years ago. And nobody's talking about it.

• 1:25:08Barry Ritholtz?

  Coming out of the pandemic.

• 1:25:09Speaker 03

  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 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 then then 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.

• 1:25:54Speaker 03

  We're going to be on the other side.

• 1:25:56Barry Ritholtz?

  That's really fascinating. You, 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, the family foundation, you and your partners, the employees, you collectively have more than a few billion dollars in, in the funds. So you are not only aligned with your clients, I, I, I almost feel like skin in the game has become a cliche, but the question I want to ask is being invested that way alongside the clients, how does that affect your decision making process?

• 1:26:37Barry Ritholtz?

  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?

• 1:26:52Speaker 03

  Well, I think it makes us much more rational and much more long term. It means that, you know, I, I once had a, 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 point 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,

• 1:27:36Speaker 03

  the blind monkey pointed at the paper. So when 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 are you 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?

• 1:28:19Speaker 03

  Did they get heavier? Did they get more valuable? And if so, we view our research as working. Sometimes the stocks don't go up. Sometimes they do. But we're focused on the businesses.

• 1:28:30Barry Ritholtz?

  On the process and not just what's going up that day. You know, the blind monkey reminds me of a fascinating quote from Ken French of Dartmouth. Michael Mobison has written a lot about the separation between skill and luck. And French, 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.

• 1:29:14Speaker 03

  Well, and look, Barry, your clients come to you. It's you could say that it's because of your performance. And performance matters.

• 1:29:24Speaker 03

  Well, I was gonna say, what really matters is trust.

• 1:29:26Barry Ritholtz?

  Mm-hmm.

• 1:29:27Speaker 03

  Right? And conviction. And so, one of the things that, that, you know, 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're building wealth for us every year. We don't care, oh, this index went here, or the index went there. We're with you because we have conviction that you'll get us to our retirement, you'll get us to our kids' college funding, you'll help us achieve our goals. And maintaining, that's something you do with your own money. You don't chase the hot dot. But if you're an investment manager, and all of your value comes from the assets under management, you have to chase the hot dot. So, trust i- i- is an undervalued part of the promise and the value that an investment

• 1:30:11Speaker 03

  manager can give to their clients. If they, if your clients trust you, they will get a better return, even if you underperform an index, if you, or if their trust is able to keep them invested through the ups and downs.

• 1:30:25Barry Ritholtz?

  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 important issue is kinda getting overlooked these days?

• 1:30:49Speaker 03

  Well, I think, you know, I, I think there's these three big transitions in the economy are gonna turn a lot of what's become conventional wisdom about investing upside down for a while. So, I think, you know, what hasn't worked? You know, active management hasn't worked. What hasn't worked? Value, price discipline, hasn't worked. Uh, I think you're seeing that.

• 1:31:15Speaker 03

  What, what has worked? Oh, you know, alternatives, you know, illiquidity, that's been great. What, you know, has worked that I think is dangerous? You know, dividend aristocrats.

• 1:31:27Barry Ritholtz?

  Oh, really?

• 1:31:28Speaker 03

  Absolutely. I think that any-

• 1:31:30Barry Ritholtz?

  You think dividend aristocrats are dangerous because?

• 1:31:33Speaker 03

  Because they're- Looking in the rear view mirror and they are not factoring in these big three changes that we talked about.

• 1:31:40Barry Ritholtz?

  Well, isn't that the problem with all models?

• 1:31:42Speaker 03

  Yeah, Kodak was a dividend aristocrat.

• 1:31:44Barry Ritholtz?

  Uh huh.

• 1:31:45Speaker 03

  You know, Xerox was a dividend aristocrat, Polaroid was a dividend, and that's fine unless there is systemic change. Right? And, and when you have a big change like you had coming out of the seventies, you know, and the change into the eighties, nineties, you know, you have these big changes. Uh, and then everything that worked, you know, everything that helped you survive the crash and the depression in nineteen forty-eight. You could say, I'm not greedy. I just want to own bonds. Stocks are too dangerous. And you were wiped out in a generation and bonds became certificates of confiscation. So I think people are underestimating how much these conventional strategies, alternatives, uh, the rear, the, the backward looking models, including even momentum,

• 1:32:31Speaker 03

  uh, indexing and, uh, versus active, and I would even maybe add international. International had underperformed for so long and, you know,

• 1:32:41Barry Ritholtz?

  Just the past two years, starting to look pretty good.

• 1:32:43Speaker 03

  Starting to look pretty good.

• 1:32:45Barry Ritholtz?

  So you like international?

• 1:32:46Speaker 03

  I like international. We run, uh, an international ETF, D I N T. And, uh, it's just like us. It's all stock picking. It's run by my partner, Danton. You know, and our family probably has, you know, always keeps probably fifteen, twenty percent of our 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.

• 1:33:10Barry Ritholtz?

  What's the old joke? Being diversified means there's always something to apologize for in your portfolio.

• 1:33:15Speaker 03

  So true.

• 1:33:16Barry Ritholtz?

  All right. So let me jump to my favorite questions. Uh, 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.

• 1:33:31Barry Ritholtz?

  And the first question I always ask, I kind of know the answer, but I'm going to 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.

• 1:33:44Speaker 03

  Well, you certainly got my dad, my grandfather and Warren and Charlie. I think if I was going to add another one, I would add Tom Gaynor, the CEO of Markel. I just think, you know, that sort of principled stewardship leadership, that servant leadership, a company that is built with an enormous durability and culture of stewardship in mind. You know, he's, you know, we've served on boards together. He's helped me through difficult times. I've done my best to help him through difficult times. It's a great thing to go through life surrounded by people you admire. And of course, I get to work with people I admire, and that's a big plus.

• 1:34:23Barry Ritholtz?

  Huh, really, really interesting. Let's talk about, I know you're a fellow reader. What are some of your favorite books? What are you reading currently?

• 1:34:31Speaker 03

  Well, I have too many favorite books to list, but I-

• 1:34:35Barry Ritholtz?

  Give us three. By the way, people always tell me, oh, that's my favorite question. I'm always looking for something new to read.

• 1:34:41Speaker 03

  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 hysteria 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 book to read right now.

• 1:35:03Barry Ritholtz?

  On marketing and advertising.

• 1:35:05Speaker 03

  It's really on ways in which we maybe fetishize, if I said that right, rationality. And that when you look at human behavior, it's very irrational, but it's often irrational and predictable ways. And the more we say, what's the rational solution to a problem and expect people to obey that, the more we're going to keep getting crazy outcomes. People react in ways that, you know, people react to placebos. Um, but we don't study placebos, right? That's, uh, the example he gives that I love is if you wanted to create a, a really spectacular, uh, uh, competitor to Coca-Cola and you hired McKinsey, they would say, well, you should make

• 1:35:48Speaker 03

  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, uh, uh, and so there's a lot to study in a case like that. How has that worked so well? So, uh, I think alchemy is a useful one now. You know, I, I, I think everybody should read themselves and then have their kids read, uh, uh, Morgan Housel's two best books, which should be read as a single book. Uh, 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 two. It's not a different movie. It's, it's the

• 1:36:30Barry Ritholtz?

  Continuation.

• 1:36:31Speaker 03

  It's the culmination in a way.

• 1:36:33Barry Ritholtz?

  And you could skip three.

• 1:36:35Speaker 03

  Okay, that's a

• 1:36:36Barry Ritholtz?

  Father three just doesn't

• 1:36:38Speaker 03

  Oh, I agree. I agree. I agree. And then, uh, for a third book, I, you know, just the one that immediately comes to mind at the moment is, is Americana. Uh, it, it's a book by, there's two books by the same name. I know because Charlie had told

• 1:36:57Barry Ritholtz?

  Four hundred years

• 1:36:58Speaker 03

  Of American capitalism.

• 1:36:59Barry Ritholtz?

  I love that book. I had him on the podcast years ago.

• 1:37:02Speaker 03

  Bush, Ravana.

• 1:37:03Barry Ritholtz?

  Yes. Spectacular.

• 1:37:04Speaker 03

  Spectacular. And, and it's

• 1:37:06Barry Ritholtz?

  Really, really just, I think people are just so unaware of the history of American capitalism. And that book just does a fantastic job laying out the success.

• 1:37:17Speaker 03

  And it will help you as an investor if you think in chapters of that book. If you think about, okay, AI is unfolding. You know, he, 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 two were the dead men walking, you know, when the car was developed? But there were 3,000 car companies, right? Uh, there were 200, 371 publicly traded internet companies. You know, that's why picking the emerging winners in the early stages is tricky.

• 1:37:59Speaker 03

  But think of the chapter, think of that whole arc and that, that's a terrific book.

• 1:38:04Barry Ritholtz?

  Um, what are you streaming these days? What's keeping you entertained? Either Netflix, podcasts, whatever?

• 1:38:11Speaker 03

  Well, I, you know, anybody who knows me knows that I, I, I, I watch almost nothing. And I particularly don't watch sports. I don't know a lot about sports with one exception. I love ice hockey. And, 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.

• 1:38:34Barry Ritholtz?

  Wait, what?

• 1:38:35Speaker 03

  Yes.

• 1:38:35Barry Ritholtz?

  Your mom's family helped start?

• 1:38:38Speaker 03

  The NHL and, and, and founded the Bruins and we owned the Bruins through my childhood. Can you imagine?

• 1:38:45Barry Ritholtz?

  Come on.

• 1:38:45Speaker 03

  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 name on twice. But I think one of the things that I love about it. Is that my grandfather, in explaining his love for it to me, he said, you know, every sport handicaps the athletes. You know, you can't use your hands. You can't use your feet. You have to dribble, whatever it is. He said hockey accentuates every human ability. And.

• 1:39:23Barry Ritholtz?

  Between the skates and the stick.

• 1:39:24Speaker 03

  The skates, the stick, the pads, the oval rink, the, the ice. I mean, it's just an amazing accelerator of human ability. And I guess the reason I, I think of it right at this moment, of course, it's, we're moving into the Stanley Cup playoffs. I mean, we're in the, the last two rounds and, uh, but it's also because I think there's a way to look at AI as accentuating human ability.

• 1:39:49Barry Ritholtz?

  It's an accelerator for sure.

• 1:39:50Speaker 03

  It's an accelerator and what that could mean for healthcare, what that could mean for healthcare inflation going negative. I mean, there are all sorts of.

• 1:39:57Barry Ritholtz?

  Uh, we're, we're already finding so many new molecules. If anything's gonna find a cure to a lot of cancers, it's gonna be this.

• 1:40:07Speaker 03

  And, and you know, and again, we, we have to recognize that there, of course, like every technology, there are going to be negatives. They're. going to be delays and as people get disillusioned, we could get a big swing the other way. So equanimity, but again, going back to Americana and tying it to ice hockey, think of those long chapters.

• 1:40:26Barry Ritholtz?

  All right, our final two questions, what sort of advice would you give to a recent college grad interested in the career in investing?

• 1:40:35Speaker 03

  Well, I would say, learn everything you can about business and ideally work in business. You know, I met a guy down at Mar- 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. Again, it was compared to, but I just, I, I, I love the value system there. But I met a guy who was an engineer at Altria, which is headquartered in Richmond. He owned a lot of Altria, he owned a lot of PMI, but he started investing for himself about 20, 25 years ago.

• 1:41:17Speaker 03

  He showed me his portfolio, including his cost basis. He's built a wonderful record as an investor. And so, you know, I think, I, 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 has absolutely lost the thread.

• 1:41:39Barry Ritholtz?

  Well, the size, it's just ramped up and

• 1:41:41Speaker 03

  And they're all selling to themselves.

• 1:41:43Barry Ritholtz?

  Right.

• 1:41:44Speaker 03

  And they're trying to get the widows and orphans in there so that they can

• 1:41:49Barry Ritholtz?

  unload?

• 1:41:49Speaker 03

  Some final sale, just like they did with, you know, MLPs and, and the oil and gas partnerships in the eighties. And I really hate it. I, I, I, 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.

• 1:42:11Barry Ritholtz?

  401ks.

• 1:42:13Speaker 03

  401ks and it's going into penthouses and Ferraris. You know, 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.

• 1:42:32Barry Ritholtz?

  Amazing. Final question. What do you know about the world of investing today? Might have been useful back in the late eighties, early nineties, when you were first getting started?

• 1:42:43Speaker 03

  Well, every, every investor, if they're honest, will say that their biggest mistakes were, were what they sold. Uh, and so, you know, I, I, I would say that I've always put all my money in the funds. And I think that's the right alignment. But I realize now, which I didn't realize then, that there's some real differences. Which is that, you know, in the funds, it, 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. Uh, so, you know, all of the, you know, I first bought Amazon in 2002.

• 1:43:28Barry Ritholtz?

  Good timing.

• 1:43:29Speaker 03

  You know, yeah, but I sold it in 2004.

• 1:43:31Barry Ritholtz?

  Bad sale.

• 1:43:32Speaker 03

  Thank you.

• 1:43:33Barry Ritholtz?

  I could, I could tell you the same story with Apple.

• 1:43:35Speaker 03

  Yep.

• 1:43:36Barry Ritholtz?

  It was $15 with 13 cash.

• 1:43:39Speaker 03

  Yep.

• 1:43:39Barry Ritholtz?

  Triple my money. I was a genius. That was like 10,000% ago.

• 1:43:44Speaker 03

  I know. We did the same thing in Apple. And it was, we viewed it as a real estate play. We said, if you mark the real estate to market, uh, and add it to the cash.

• 1:43:52Barry Ritholtz?

  It was, it was crazy.

• 1:43:53Speaker 03

  An 80 cent dollar.

• 1:43:54Barry Ritholtz?

  Yeah.

• 1:43:54Speaker 03

  Uh, and then when it went to $2, we're like, whoa, too rich for our blood. So, um, I do think that I'm trying 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, uh, that I would if it was just, uh, 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.

• 1:44:35Speaker 03

  But God, I, I love the business. And, you know, like my grandfather, if, if I could die at my desk in a very old I am, I do have the best job on earth. I get to study success. I get to work with people I admire. I go and visit companies to focus on that elusive idea of culture. I get to meet the incredible people that have built our society, that have built businesses. And we have a country that loves to tear down the heroes. You know, so we admire the guy on the way up, but once they succeed, we somehow decide they're a villain. I don't think that's constructive. I think it's a strange thing for us to admire athletes and not admire Jeff Bezos for what he created and how it has served all of us.

• 1:45:19Speaker 03

  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.

• 1:45:38Barry Ritholtz?

  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 helps put these conversations together. Each week Alexis Noriega is my video producer. John Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Ritholtz.

• 1:46:23Barry Ritholtz?

  You've been listening to Masters in Business on Bloomberg Radio.

• 1:46:32Speaker 04

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