[music]

Bloomberg Audio Studios podcasts, radio,

news.

This [music] is Masters in Business with

Barry Ritoltz on Bloomberg Radio.

This week on the podcast, strap yourself

in for another banger. Chris Davis chews

up the scenery. He is the [music]

portfolio manager of Davis Advisors.

They've been kicking the S&P's [music]

butt for the past, I don't know, since

1969. $20 billion in client uh assets.

Fascinating conversation.

Uh Charlie Mer was his mentor. He sits

[music] on the board of KO and on

Berkshire Hathaway. I thought this

conversation was spectacular. I think

you will also. With no further ado, my

sitdown with Chris Davis.

>> It's so always good to be with you.

Thank you so much. So before we get into

your career,

master's degree with honors from the

University of St. Andrews in Scotland,

like how did that come about?

>> Well, and 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

that middle step.

>> Did you did you go to an undergraduate

college?

>> Well, what happened is I went to St.

Andrews. I had originally only intended

to go for a year. I I wanted to be a

veterinarian. That's that's a long side

story. And I I had worked at the Bronx

Zoo. I had worked at Humane Society.

>> So, the original plan wasn't dad's a

fund manager. Grandfpa's a grant fund

manager. I guess I'm going to be a go

into the family business. That was not

the plan.

>> Definitely not. But, but I give both of

them credit. they, you know, that they

felt that all of their kids should be

financially literate. And so every kid

worked uh for my father or for my

grandfather at some point and learned

because they just felt like look, you

you'll have money over time. It's not

taught in schools, just the basic

fundamentals of investing. And if you

God help you turn on the TV, you're

going to get a totally distorted view of

what investing is.

>> Of nonsense.

>> 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, do does she she understands

investing. She's very thoughtful in how

she's managed her financial affairs. So

we owed that route. But we all thought

we were going different paths. She was

interested in medicine. I was interested

in veterinary medicine. And so I was

going to go to Cornell. And uh I was

very young for my high school class and

I was very late hitting puberty. I mean

I I was 5t tall my senior year in high

school. That's when I broke five feet.

So 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 prevet program.

>> But the woman that ran it said, "Look,

this is a seven-year program. It's

intense. why don't you take a year off

like a gap year? So I proposed that to

my father. He said we don't do that in

our family. Like you you can go study

but there is no like year off like to go

ski or find yourself.

>> But did you skip a grade or you like me

the back of like October, November,

December. So you're young relative to

the rest.

>> 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 me up for the

>> and [laughter] exact never stopped since

then but anyway so I had this year

period and it [clears throat] 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 uh uh Americans and

that came in that first year and they

had a program where after two years you

could apply into the honors program

which would allow you to concentrate on

just one subject. And I I ended up

picking two. Uh but needless to say,

>> what were the two?

>> It was philosophy and theology.

>> Huh. Very interesting.

>> You know, I had 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. And

>> I love that. That's something I always

in hindsight wish I did. And I started

out um physics and math and switched to

political science and philosophy. So I

got to study some stuff that was fun,

but like mid uh medieval history sounds

like that would be

>> a delightful semester.

>> You use the perfect word fun. I mean I I

had I I I became a good student in high

school. I wasn't a a good student. In

fact, recently I 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 boy school

and uh 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. [laughter]

>> Not living up to his potential.

>> My god, my children.

>> My children found that. My mother gave

it to my children which was a big

problem you can imagine. But anyway, so

I thought I'll just be in Scotland for a

year. I picked subjects I would never

study again. They were so fun. It was

just it was

>> especially in Scotland [clears throat]

studying medieval history

>> in a medieval university and where Hume

had been a professor. I mean, you know,

it was just amazing. And of course, it

was it's also a Presbyterian seminary.

So, uh, 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 organized

their lives around religion. People die

for it. people, you know, I should study

this and and uh but I also there was a

secondary uh reason that I was

interested, which is if you look at

communities that have a religious

institution at their center, whether

they're rural, whether they're urban,

suburban, almost all outcomes are

better. You know, intact families, crime

rates, graduation rates, you know, all

of these sorts of statistics tend to go

better. So to me there was there's I was

lucky that I didn't I was never you know

didn't have one of those childhoods

where it was beaten into me or

something. So it was more this curiosity

about how it seemed to serve communities

to have a shared value system. Anyway, I

picked those subjects. I applied into

this honors program. So I was able to

get the masters at the end but there was

no undergraduate degree along the way.

So

>> and there was no going back to Cornell

to become a vet. No, that the order for

that fa faded.

>> Although because I deferred my admission

freshman year, I still get mailings from

their alumni department uh because I

metriculated but then uh deferred and uh

I'd like to think the development

department has nothing to do with my

them sending me these mailings, but uh

but I lived on a sheep farm in Scotland

and of course that was when I realized I

was confusing loving animals with

wanting to be a vet. And those are very

different things. Yeah, ve very much so.

I I'm always um as we used to foster

dogs um and get them adopted and anytime

I meet someone who was like, "Oh, I

really don't care for dogs." It's like,

>> "Oh, that's a big ex." We weren't

allowed to have dogs when I was a kid,

but uh I grew up right in the city East

84th Street. And uh but my parents from

the time I was in maybe third grade or

so, so what would that be? probably 9

years old or 8 years old, something like

that. Uh uh they said I could walk dog I

could be a dog walker provided I didn't

cross any street. So you know I'd put up

a notice in the elevator in their

building if anybody needed their dog

walk and then I would just walk the dogs

around the block before school and after

school. I can [snorts] still remember

the name of every dog I walked which is

amazing and I loved it. And of course it

actually became seed capital

>> which is unexpected but the reason was

you know I could probably charge 50

cents a walk back then so it was nothing

but I got to be with dogs and I enjoyed

it. It was like a paper

>> and you're running a small business. I

had a paper route and it was just so

formative. so far and this was like a

paper out 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

have to be around 1977 or 78 passed the

pooper scooper law

>> I remember

>> and everything changed because people

had these dogs with they nobody even

knew what to do that they they had

nobody had ever imagined cleaning up

after a dog. There are all sorts of

inventions, you know, a bag. It's not

>> people didn't, you know, people were so

gross. They had carry shovels with them.

>> They changed the diaper on the baby. How

this is ju it's just processed food.

There's no big deal.

>> 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. Uh $60.

That's good. That's good.

>> 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. [laughter]

>> 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 days?

>> Well, it wasn't really my first job. My

first job uh was I uh became a a

pastoral assistant at the American

Cathedral in Paris. So, I lived I moved

from rural Scotland to Paris. Well, that

was like landing in Oz. You know, you

can honest to God, you my eyes lit up.

Uh, 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, uh, you know,

working for the American Cathedral

convinced me I was confusing loving

people uh, with wanting to, you know, be

a priest or something. Uh, so I moved

from there to Boston

>> and I thought about teaching. Uh I

actually even applied to the CIA because

I was very interested in research and

international affairs. I'd lived abroad

then five years and I thought it would

be an amazing thing to be the greatest

expert on let's say Czechoslovakia to

learn the language, the history, the

people, the economics, the business, the

military, the topography. And so I I

didn't want to be a spy but I wanted to

be an analyst. And uh the CIA wisely

turned me down uh having briefly had a

stint in you know sort of the workers

revolutionary party you know and

>> oh so you they they looked at your

history and said this guy's

>> yeah they're like this this needs to

ripen a little more.

>> We don't know if you have [laughter] the

ethical malleability that we're looking

for. But I and so um 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. Um, 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 [clears throat] 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 a real grounding. And of course,

a bank is perfect. And I got I mean, I

interviewed a lot of places. George

Putinham himself turned me down for a

job at Putnham. So, I had a lot of

rejects before uh and State Street Bank

had an a program for entry- levelvel

accountants. And and you know, they had

a wonderful training program. And so I

[snorts] they there 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 uh uh the State Street Institute,

and you could take courses in anything

to do with economics, accounting,

business, and so you took advantage.

>> I took advantage of that. Although, I

will say I was fooled by one course.

They had a course uh in their catalog

that was called the rules of rhythmic

touch. Now, I thought

>> that sounds like massage.

>> That sounds pretty good, right? I I

figured I I circled that one in the

little course catalog. It was It was

only a two nights uh course. And uh I

showed up and it was the how to use a

10punch tape calculator, you know,

without looking at your hands. So, you

know, when you're summing up a column,

right? It's the rules of rhythmic touch.

I would say if you put one on this table

now, I I I would be conf I would bet you

a large sum of money I could run a

column of numbers faster than you. I

[laughter]

>> I I'm going to I'm going to defer on

that one.

>> But so that's so I got the grounding

there. Graham Tanaka uh was somebody I

had met during my summer jobs. Uh he was

a very talented analyst at uh uh

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 a Japanese American

really a very you know driven talented

guy and uh he said he wanted an

apprentice and uh and you know it would

be everything. I would be his first hire

and we would go from there and that was

a terrific experience.

>> How long did you stay at Tanaka?

>> 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

>> uh late 70s, early 80s.

>> This was late 80s now. So we're probably

in ' 89 something like 88. Yeah.

>> Well, but Graham was an 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's 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.

There wasn't a 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.

>> So your father launched Davis Advisors

in 1969.

>> Yeah.

>> And your grandfather was still running

his Davis investing shop.

>> Yeah.

>> Parallel. Did Did they ever end up

merging? What [laughter] what what

happened when you decided, all right,

it's you know it's it's time. 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 $100,000 that he

borrowed from his wife's family.

>> It was 800 million when he died and it

was 2.2 two billion when his wife died.

>> Wow.

>> Uh and she was sort of the successor

trustee and then it all went to charity

after that. He didn't believe in

inheritance and but it was in trust for

her and she lived to be 106.

>> Wow. Although I will tell you I managed

her account and 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 grant 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. And she said you idiot. I'm

98 years old.

>> What do I care about?

>> She said, "I don't buy green bananas and

you're you're telling me I'm down 50%."

And and [laughter] go get back to work.

So, she teased me because of course she

lived long enough to see it all come

back. And but we would all 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 Davidson and

Company. My father built his which in

the beginning was called Davis Palmer

and Bigs. And uh and then the New York

Venture Fund was a client or a a fund

managed by Davis Palmer and Bigs. And um

and when I uh was working at Tanaka, I

went to a meeting. It was Chub

Insurance, you know, analyst day sort of

thing. And there weren't that many

analysts then. And 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 chub, you know, this he was

it was uh and uh and I looked around the

table and both my father and grandfather

were at the same meeting by chance. Mhm.

>> And uh and I thought, "This seems a

little nuts." And uh uh and so, you

know, I spoke to them both uh cuz 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. Your age."

>> Yeah. Hard stop.

>> Mhm.

>> And here was my grandfather at the time

and he was probably in his

>> late 80s,

>> early 80s probably then. and uh and he

said, you know, I 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 uh now

his firm, most of it was his own

capital.

>> And so, in a way, he was just managing

his own, but he loved being in the flow.

He loved in a way my my grandfather

loved being a great man. You know, he

had served as an ambassador. He had was

a co-founder of the Heritage Foundation,

chairman for a long time. He had very

conservative political views, although

that was slightly different organization

25 years ago than it is now.

>> Um, 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 um so he loved the

game and it wouldn't have occurred to

him to stop working. My my father loved

investing but he did not like the

responsibility of the business. He

didn't like boards and clients and you

know employees that was not his thing.

He was much more uh uh 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 uh 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 uh you know, we'll we'll

figure out a way for the three of us to

do it.

>> And how long did it take for that to all

come together?

>> I think my grandfather uh my father

turned 60 in 1997,

1998, somewhere like that. And my

grandfather died

>> 868

something like that, you know. Don't

[laughter] quiz me. And uh uh and then

my grandfather died uh in uh let's see

1994.

So I I have to say he was 86 or 87 when

he died. And um so in a way the timing

all sort of over overlapped beautifully.

And so my grandfather worked almost to

the end. Uh my father helped coach me

through that transition and then he

walked out the door in 1998 and and that

was that. And wow, he's been an

incredible mentor. He's always available

to talk, but as he said, I'm here to

give you advice. I'm not giving any

orders. And he didn't sit on our boards,

didn't, you know, he just he just uh uh

walked out and and just like my

grandfather started giving his money

away. And he he's, you know, he he

created and and overseas the largest

international scholarship program on

earth. Really? Yeah. I I know there's a

foundation. I I haven't read the book,

>> but online there's John Rothschild, who

was I think Peter Lynch's co-author.

Lovely man.

>> The the Davis Dynasty. How

>> 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. H how odd is

it to be part of a book like that? Well,

you know, first it's probably a book

read by dozens of people nationwide

because remember it is the riveting

biography of the dean of insurance

stocks. So, [laughter] it's not, you

know, that's a pretty narrow narrow

pool.

>> Not not a not a hot seller yourself.

>> And uh [laughter] I I do think I

experienced the the writing of that book

as you sort of terrifying, you know,

really. Yeah. Because it was

>> lot to live up to. It's a lot a lot to

live up to and [clears throat] 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 lowp

profofile.

>> 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, uh, at our firm,

we made slim down versions of that book

and called it the Davis discipline

instead, which was much more consistent

with our sort of view of life. Uh,

because, you know, da d d d d d d d d d

d d d d d d d d d d d d d d d d d d d d

d d d d d d d d d d dasty implies sort

of dynastic well it implies inheritance

and there's no inheritance

>> and there was that was there's none of

that

>> which I I would imagine people would be

surprised to learn. Yeah. And it's

funny. It it's it it's not something I'm

quite as fanatic about. Um

>> well, Warren Buffett is a big believer

in, hey, if you give your kids um you

should give your kids enough I know I'm

going to mangle this. Give them enough

money so they could do anything, but not

so much money that they can do nothing.

>> You didn't mangle it. You stuck the

landing. That's exact. And that is

exactly the right philos. And I would

say, you know, my father, my grandfather

sort of believed that. I mean, I I have

siblings that, you know, uh uh where,

you know, they they were helped out and,

you know, I had an aunt, you know, that

uh that my my grandfather left some

money to to ensure that she and her kids

would be all right and so on. So, it

wasn't ruthless. Um 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 earning your way in the

world

>> and um and uh uh I think there's you

know the idea of wanting

well look Barry let's I mean if you look

at the greater world there's a lot of

fear and and fear can be a motivator but

god is it a weight to you know people

live you know one operation away from

bankruptcy or you a a layoff away from

being foreclosed on. That is a 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 the feeling that there

wasn't a safety net. And so, the freedom

from that fear is a huge gift you give

your kids. It was a huge gift that was

given to me. And 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 it's it's like it never occurred

to me that I couldn't leave and and and

uh and so uh I but I think their view

was you know if you raise your kids

with you know the the fortunate thing

was both my dad and and my grandfather

were very frugal and so we didn't live

in hardship but we certainly didn't go

to Southampton and Palm Beach and Aspen

and you know that was all uh you know

they had a very sort of puritanical

sense of that that [clears throat] you

know that sort of view that uh you know

we went out to Fire Island and we had a

house on stilts that I still have a

house out there you know and it's in a

swamp and and uh you know one it's one

storm away from the end and there's no

cars. You take a little berry out there

and and um you know I always think of it

as the anti [clears throat] Hamptons.

Oh,

>> it very much is.

>> Yeah. And so and that's that's what what

I love and and uh and you know my

parents had a a place in Maine, but it

was just you know it was no not a fancy

>> a little cabin not [clears throat] not

bunk.

>> They had a it they had a nice house but

it wasn't it wasn't a Newport mansion.

And they had it because, you know, they

used to call them in the 20s people like

my grandparents were called rusticators.

Isn't that a funny word? And it was

people that were wealthy but would go

and live very simply in the summer, you

know, very uh 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 Shiitakqua movement that I'm

still a supporter of um which basically

said as the bourgeoisi and wealth was

being created. There was this one branch

of wealth creators that decided they

wanted to be English aristocrats and

they built mansions in Newport and they

had yachts and and then there was

another branch that sort of said that's

not the American way and they uh and in

many ways I mean Rockefeller in many

ways embodied a certain amount of that

that sense of sort of stewardship some

were even more extreme in terms of

restraint But uh uh but the Shiakwa

movement sprung up and said uh they

created these uh there's still one left.

It's in upstate New York. But where you

would go with your family for

self-improvement and you would live

simply and there would be lectures,

there would be you would improve your

mind, you'd improve your soul, and you'd

improve your health. And you'd bring

your kids and there would be sort of day

camp for the kids. And there'd be church

on Sunday, but it was a

non-denominational

church that was about service. And and

then there was, you know, there were

lectures. It's where Salman Rushi was

stabbed. If you remember a couple of

years ago, he was in Shiakwa. He was

lecturing at this place that still

exists. People go for a week or two

weeks every year. So that's what the

place I go on fire island was [music]

part of that Shiakwa movement. But the

ethos of it, I think, is something my

[music] parents and grandparents really

subscribe to.

>> Huh. Really, really fascinating. Coming

up, we continue our conversation with

Chris Davis, chairman and portfolio

manager at Davis Advisors, discussing

how he developed his philosophy [music]

and investment process at Davis. I'm

Barry Rick Holtz. You're listening to

Masters in Business on Bloomberg Radio.

>> [music]

[music]

>> I'm Barry Rhaltz. 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 [music] was named Morning Stars

Portfolio Manager of the Year. uh he

helps to oversee $20 billion in client

assets. Uh a healthy chunk of which is

he and his colleagues. We briefly

mentioned Buffett earlier

when when I later on I get to ask people

who their mentors were, but I have to

bring this to this part of the

conversation.

Warren Buffett and Charlie Mer were your

mentors. Is this remotely

>> true? It just seems insane.

>> Oh, I mean I it it started in I want to

say it was 19.

It was might have been 1990

90.

>> So he's already a well-known

investing rock star at that point.

>> Well, the way it really started was with

Charlie. I met Charlie long before

Warren.

>> Oh, really?

>> 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 and he he

had a business called securities lending

and I don't know how well you know that

business uh and

>> anytime you're going to short a stock

you got to borrow somebody and that's

going to cost you a little

>> it's going to cost you a little margin

so my grandfather's view was he had a

portfolio of appreciated stocks that he

was never going to sell and he said if

somebody wants to short the stock

>> and pay me to borrow it fine And you the

number one borrowed stock at th in those

days was Berkshireathway of course

because you couldn't borrow it anywhere

because everybody had the certificates

and you know they weren't

[clears throat]

>> literally had the paper.

>> Yeah. There was no there was very little

Bergkshire that was in street name. It

was in individual PE and therefore you

couldn't borrow it.

>> It was locked away in safe.

>> Yeah. So he had a big holding and and he

he had a a broker dealer. uh Shelby

Column Davis was a registered broker

dealer and so he could lend out the

shares and make a couple hundred basis

points a year extra return on top of the

Berkshire return. So that's how he

started in the securities lending

business. But gradually the guy who was

doing it for him and administering it

said, "Well, you know, we can also help.

We've got all these people that want to

short all sorts of different securities

and we can be act as what was called a

broker finder. We'll go out and find the

securities for these people to short and

we'll make a little a little spread as

they go through." Well, this business

grew and grew and grew and soon there

were, you know, 17 employees in this

securities lending business and it was a

big operation and uh my grandfather by

then was, you know, probably in his 80s

and was nervous because, you know, as I

went through the list of counterparties

with him, there were firms we had never

heard of. There was this one called L uh

TTCM

and he and and I said, "What is this

LTCM? We've got like, you know, 5 $800

million 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 got to get we got to

get rid of this thing." It reminds me,

by the way, of what Jerry signed. Wait,

did he hold on to that business or did

they

>> So I I said to him like we, you know, we

got to get rid of this thing and he

said, "Fine, well, see if you can find

somebody to take it over cuz we do have

17 employees and you know, they made

their careers here. We're not going to

fire everybody." And

>> so we started calling around and I

thought, what 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 AAA

type balance sheet uh and somebody they

can understand. So I thought well

Bergkshire so uh a wonderful uh friend

uh in those days named Bob Lensner uh uh

who was a reporter at Forbes but was

very

>> I recall I I had lunch with him at I

want to say the Harvard uh club. Yeah,

>> I think he was an alum. Is that

>> it could have been his his kids my our

kids were 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 heard his name

around and he said, uh, he mentioned

casually in a conversation that he had

met this brilliant guy, Charlie Mer. And

I said, well, I'm I, you know, I know

who Charlie is, but I'm dying to meet

him. And so Bob arranged for us to have

breakfast and Charlie was in New York

and I went down. It was at the

Millennium Hotel down by the World Trade

Center. And I [snorts] I went down and I

sat down and introduced Mr. Munger.

Pleased to meet you. I'm Chris Davis.

And I said, you know, I'm working with

my grandfather at Shelby Colum Davis

Company. And have I got a business for

you? And I pitched uh our securities

lending business. And Charlie put up his

hand after about 4 minutes and he said,

"I have no intention of buying a

business run by seven guys named

Vinnie." [laughter]

And Barry, it was the perfect

description. I mean, we had Vinnie,

Tony, Mikey, Nikki, you know, and um so

we did end up finding finding a a buyer

eventually just Yeah. And it wasn't

really a buyer. We just did sort of an

earnout. We just wanted everybody we

just wanted them to have jobs. And so

they all got a job at a a broker dealer.

And

>> so beyond the pitch to Munger, how did

your relationship go?

>> Well, so so the pitch ended in 4 and 1/2

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, 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 uh 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 uh

give me a call and I'll make time for

you. And uh so of course I started going

to Los Angeles pretty regularly and uh

and so that was a huge gift in my life

and and and it was a a gift as

professionally but thank God it was a

gift personally. I mean he helped me

through some hard times in my personal

life. I mean he was just a wonderful

mentor in every dimension. 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

in the public materials?

>> Well,

good question, right? I think most

deeply I learned about integrity in the

traditional sense meaning wholeness.

>> Charlie was a whole person. He the the

alignment, what he thought, what he

said, what he did, they were all the

same thing. And he his sense of

uh his own code of being was so

disciplined.

uh and but was filled with this sort of

you know his reputation as a kermagin

may have been cultivated. I never saw

it. He was a truth speaker

>> but he was also in a very profound way a

very loving person, very cheerful, very

committed, profoundly loyal. Uh, and so

it was, you know, I I used to sort of

joke that if I did a ven diagram of the

things that I admire about my father and

the things I admire about Charlie

Munger, there's surprisingly little

overlap. They were both frugal.

>> But my Charlie uh didn't was was an

incredibly broad thinker. My father was

just single-minded about investing.

Charlie was curious in everything. Um

Charlie was very sort of committed to uh

uh to relationship continuity to breth.

My father is very sort of specialized

very narrow. My father is incredibly

uh physically fit and remains to this

day he's very vigorous. You know Charlie

was willfully sedentary.

[laughter]

Uh, 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 [clears throat] and so they

were very different that way.

>> Just imagine if Charlie exercised how

much longer he could have left.

>> I don't know. 99 and three quarters is

pretty good. [laughter]

That's one of the things he said. He

said, "I'm not sure I see the

alignment."

>> [clears throat]

>> So, so let's talk a little bit about the

returns and about the philosophy. Um,

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?

>> That sounds right. We're we're we're

still ahead of the market from the

beginning.

>> Starting out in 1969. So you're, you

know, early days of a horrific bare

market. You have managed money through,

well, you're in grad school, but your

dad during the 87 crash. You're involved

during the dotcom implosion, during the

financial crisis, during the pandemic. I

mean, you have seen lots and lots of

cycles across all of these decades and

all of these different environments.

What key investment principles stand out

as absolutely core, non-negotiable?

This is the heart of what we do.

>> Well, the entire investment 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 and 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. Uh but the

characteristics that we look for in

every business have to do with the

durability because we buy businesses

thinking we will our goal is to own it

forever. Our goal is for the return to

be driven by the y 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

Markeel annual meeting. You know,

character will will not show up

efficiently, I don't think, in the AI

world. And boy does it matter when you

think about navigating uh uh an

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's 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 uh incremental

returns on capital and it's adjusting

the balance sheet, every account on the

balance sheet because of course gap

earnings is a convention, but it may or

may not reflect reality. And so, you

know, you put those two things together

and we build an an IRRa, an internal

rate of return uh 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.

>> 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.

>> It's 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 as dangerous. uh it's one of the

reasons we feel that the the the

activist movement has completely lost

the thread and should be greatly

resisted whereas it was very useful when

it started um and we we could talk about

that later but uh 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 uh you know I look at our

own portfolio I look

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. I mentioned Markeel. You know,

when I first met the now CEO of Markel,

we met in Omaha at the Orpheium Theater

at a Bergkshire 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

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.

>> You you mentioned a number of financials

in that list. Um

I I'm kind of curious because financials

have had some pretty good years. They've

had some pretty rough years. Uh

obviously the financial crisis was, you

know, devastating. Although um my pet

theory about uh JP Morgan Chase is when

they had their subprime problem, it

predated everybody by 5 years and there

was still a a bid when they had to get

out. So, they got a little lucky and

they happen to have a particularly

talented CEO. Um, but this concentration

of financials, I'm curious what led to

it and I'm curious of the relationship

between

uh what some people describe as high

conviction investing and concentration

in a particular sector like financials.

>> Well, I I think high conviction

investing is 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 uh have risk if the wind

blows in certain parts of the world.

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.

And I'll give you a really powerful

example. I I started our financial fund,

I don't know, in something like 1990. Uh

that fund from then to today has

outperformed the S&P 500 really

>> and it has outperformed the S&P 500

quite meaningfully when you compound it

out. uh uh 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

uh uh you have businesses industries

that are huge where companies can grow

for a long period of time uh by simply

growing. You know, just this year,

Progressive finally passed State Farm.

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. So,

you have these massive industries where

you can compound for a long time without

outgrowing your sector. Second

advantage, the business model doesn't

really go obsolete, right? Making a

spread on money is about the oldest

business there is. Maybe maybe the

second oldest. Thank you.

>> 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. 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. This is a theme I have heard

from so many really savvy um uh

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?

>> Well, it's it's it's a perfect question,

but I'll give you the punchline for the

differentiation. Mhm.

>> Last year, our financial fund, which is

95% in large cap financials,

outperformed the S&P financials index

and the XLF, the largest financials ETF

by 1,200 basis points.

>> Not too shabby,

>> right? 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. everything and you own the better

>> 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 uh they you

know 20 or 25 names are probably 80% of

of the index.

>> Does the gap come from the stock

selection or the screening out of what

you don't like? Well, it really goes

back to the culture question. So to

bring it full circle to your question

about culture, what it is is that within

financials, we are looking for the

companies that we feel can be

compounding machines and we're looking

for the companies where their culture

creates a durable advantage. The reason

culture can create an advantage in

financials is because in most cases your

cost of goods sold is an estimate. And

if you have an aggressive

uh 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

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?

>> 2022 500 base.

>> 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 a research report

just internal, just for his own, saying

he's just startled by the amount of risk

Silicon Valley and First Republic are

taking. He said it's sort of amazing.

Look at the duration on their assets.

They're assuming that their liabilities,

their deposits are going to be with them

for 8, 10, 12 years and that they're

uncorrelated. So, you know, we used to

get questions, why don't you own them?

They've been they've had such great

growth records and our view was well

it's been a mistake not to own them in

terms of they've outperformed but we are

not going to own the companies that are

optimized to the upcycle right and

that's a different culture they had a

growth culture but it was it blew them

up and so you know we we instead looked

at companies like well JP Morgan was an

outstanding example wells Fargo was

Capital One where they didn't reach for

the easy money of taking that extra risk

on the interest rates. They could have,

you know, JP Jamie Diamond stood up at

an analyst meeting said, I could add a

billion or two billion dollars to my

profits with a phone call and I'm not

going to do it

>> because of the risk.

>> Because of the risk you guys want, you

know, I could put out my money for five,

seven years and he didn't do it. So when

that you you could see that. So some of

it is quantitative. You identify culture

by accounting choices. Look at how

accidentear reserves develop at

insurance companies. Look how credit

loss develop. Look at the duration uh in

the asset portfolio of a bank. Look at

the marktomarket risks that uh a an

investment bank is taking. So on so you

can uh identify culture quantitatively

in financials. That's a big advantage.

Um but then the next part is

qualitative. And there I think Warren

put it best. He said in a in a complex

financial the CEO has to be the chief

risk officer. And you can have somebody

with that title, but if the CEO doesn't

understand the nature and the complexity

of the risks, they should not be the CEO

of a financial company.

>> 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,

CocaCola, AMX, Wells Fargo. Uh,

coincidence?

Well, I mean it it it would be strange

if we ended up different. Of course, I

always like it when we owned it first.

So, for example, we were I think the

largest shareholder of General Ree

>> uh uh before Bergkshire bought it. And

uh and so and by the way, we our

research was not so good on that one

because Oh, really? No. And as you see

subsequently, uh, Genry did not perform

very well for many years. Uh, it was,

uh, and I think Warren would say, I

mean, I think he has said publicly. I I

won't put words. I think he's, he said

that that was, well, I'll I'll put it

this way.

>> Not his favorite pick. Okay.

>> Yeah. Well, I'll tell you what, Charlie

came to visit us and we have a wall of

mistakes where we frame the stock

certificates of our biggest mistakes.

>> Is that what that is?

>> Yeah. And Charlie was looking through it

and he said, "Where the hell's your Gen

Ree?" And I said, "Jenry wasn't a

mistake. We got Berkshire stock for

Genri." That was fantastic.

>> Did Did you have anything to do with the

transaction or they just went out and

bought it and you happen to be a big

>> No. And our I I you know, we we were big

Geico shareholders. uh uh uh you know so

no it was uh and we over overlapped in

AMX but we uh uh 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 so um but you'd be crazy

not to study you know if if Warren owns

something or to study Bergkshire itself

That makes a lot of sense. There's

another distinction

between the two of you. Uh you say that

you are neither deep value nor go go

growth. So what does that leave you? Are

you growth at a reasonable price

somewhere something?

>> You love growth at a reasonable price

because what are the other guys?

>> Who doesn't want growth at

>> growth at unreasonable prices? or

unreasonable growth silly prices. No

growth at a reasonable price.

>> I think what we would say is it's it's

obvious to us that growth is a component

of value,

>> right?

>> Growth is a component of value. So, so

>> a company that grows profitably is more

valuable than one that doesn't grow,

>> right? I mean, it's it's again, think of

the business, 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't

or one that's capital intensive and

shrinking and so on. So growth is a

component of value and the difference

between us and a typical growth manager

is we tend to believe more deeply based

on experience that high rates of growth

attract competition. Competition lowers

returns. And so we believe in capitalism

and we believe that growth is hard and

maintaining growth is hard. So we tend

to be more skeptical than the average

go-go growth investor. But we tend to be

more open to paying [clears throat]

a a fair price for a company that can

grow profitably than the typical value

investor. So so much of our research is

about the the durability of the growth,

the competitive advantages that a

business hap has. So our portfolio

currently trades in aggregate if you

took all of our companies at something

like 14 times earnings while the market

is at 20 or 21. Uh the value index is at

19 times. And yet we have a portfolio of

companies that has grown their earnings

over the last five years at something

like 14% a year. So we feel we have what

my dad used to call the value investors

dream. Right. And that's what we

>> low cost fast growth.

>> Low low valuation and durable

sustainable growth.

>> Huh. 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 I really

like. Um as human beings we don't

welcome fear and panic but as investors

we welcome the bargain prices that those

amen em emotions tend to produce.

Discuss

>> well

you know obviously the the market is of

course a voting machine in the short

term. It reflects psychology the

long-term a weighing machine and and

that

>> that's a great quote. I'm going to write

that down. [laughter]

>> Yeah. And uh so psychology and uh uh

helps shape prices and what happens we

find is that risk is you know there's

time it's all there's always risk what

varies [clears throat] is people's

perception of it and I think today we're

in a time when people are

underestimating risks

>> uh and therefore prices are generally

high. It's one of the reasons I find it

so amazing that our portfolio is trading

at 14 times earnings. I'm like, you

know, I the market scares me at 21 22

times earnings. Uh but our portfolio

feels like this is below longtime

averages. So I feel this disconnect

where I'm simultaneously pessimistic

about the market because of the

euphoria. There's no skepticism. there's

no fear uh in prices and at the same

time very uh feel very comfortable with

our portfolio.

>> So, so let me um push back a little bit

just to hear your reaction. We we keep

hearing artificial intelligence and

Nvidia and all the semis uh being

compared to the dotcom 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 and

especially if earnings growth continues.

Is is it the contrarian take that hey,

this market could go another five or 10

years before things get really stupid?

>> Well, what I'd say is right now is as I

look out there, I see two types of of of

you know, end investor, right? One is

this sort of belief that we're on a

plateau of permanent prosperity. This

time is different.

>> A permanently high plateau.

>> Yes. Yes. And and uh and they are all in

on the momentum trade which has worked

so well. Now I'm I have [clears throat]

a a really uh I am uh believe that

momentum investing even though it's

worked so well to me is crazy because

it's not common sense. It works until it

stops.

>> It works until it stops. And when it

stops, you really feel foolish that the

fact that you were paying an ever higher

price, uh, you thought was a good thing.

>> Why Why does price matter? If it's going

up, buy it. If it stops going up, sell

it.

>> Yeah. 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%. I

mean that's a huge growth rate for a

long time 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 510 of 1% but you could check me

it's either might be 3/10en 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

>> right

>> 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 uh everything

that's happening AI is going to swallow

our children uh the the world is falling

apart everything that's happening in

Washington and they're sitting in cash

>> which is risky as well

>> really risky I mean just since 2000 the

purchasing power of a dollar is down

something like 55%.

>> Right? In in in my my grandmother's

lifetime, I think the purchasing power

of a dollar fell like 94 95%. So they're

taking

>> you set in dollars for Exactly. So

though I think these huge crowded sides

of the market, the people sitting in

cash and the people at the assuming the

extreme growth are both taking a lot of

risk.

>> That's a terrible barbell you've just

described. Yes. like the extremes are

either either inflation's going to kill

them or speculation's going to kill.

>> 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 a 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 Food, some MGM, you know,

>> which portfolio is this?

>> 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 were the only true active manager

running a value ETF. I think our value

ETF which is called D USA D USA is the

number one active or passive value ETF

for three years but nobody really cares.

It's just you know it's it but that's

all right. We

>> 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 uh the third or

quarter that's not going there active.

>> Exactly. So they're finding our way and

I'm proud that we were so early. I don't

mind being early, you know. And so uh

but what I'd say is that that the the

optimistic case you way uh lay out. 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 had spent our [snorts] entire

careers in a world of falling interest

rates, approaching zero, falling

inflation, uh, all of the things that

fed into that, you know, low wage

pressure, deunization, globalization,

all of that stuff, all of that has

stunningly and permanently, I believe,

come to an end. Uh, we are in a state

where, you know, we are printing so much

money relative uh to what the interest

rates are. I think there's a lot of

risk, but certainly we're not going back

to zero probably ever again. That was a

once in history phenomena, free money.

The second big change is geopolitics.

There's no question that for our entire

career, we are in a world of

globalization. We're in a world of

functional peace. We are in a world of

stability. We're in a world where the

wall fell and markets doubled. All of

these things that is also absolutely

come to an end. And that increases risk.

So those first two things increase risk.

And what's the third? AI. There's this

massive technological change that

increases risk. It increases the risk of

all different types of businesses and it

increases opportunity but increases

risk. So when you have three fundamental

shifts going on, all of which have

unpredictable outcomes and yet you have

valuations not at all-time highs but

elevated [clears throat]

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

globalization as a lens inflation as a

lens. lens, put those things together,

we sit with 25 companies with these

great characteristics in [music] our ETF

or in our funds or SMA or however the

adviser finds us.

>> Really interesting. [music] Coming up,

we continue our conversation with Chris

Davis, portfolio manager at Davis

Advisors, discussing [music] the current

market environment. I'm Barry Rhaltz.

You're listening to Masters in Business

on Bloomberg Radio. [music]

>> [music]

>> I'm Barry Rhaltz. You're listening

[music] to Masters in Business on

Bloomberg Radio. Chris Davis is my extra

special guest. He is the chairman

[music] and portfolio manager of Davis

Advisors. So, I'm glad you mentioned uh

uh as artificial intelligence as one of

those three 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.

>> 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

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 te 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 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 the two don't exist

and one's a fraction of what it was and

so picking the emerging winners in the

early hype phase is risky and uh but

we'd say if you want to look in that

space focus on the businesses that have

a real shot at being emerging winners

but do not have to constantly raise

capital have proven business models

proven leaders and businesses that are

accreted by the investments that they're

making so that they earn more money by

making these investments even if it

takes longer than

>> so not the hyperscalers

>> 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 uh and Amazon we've trimmed

the first two because they were huge

holdings for us because we bought them

when they were so out of favor but if

you're going to play in the emerging

winners that's the first second category

is okay who are the enablers of this

technology, right? That's the 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.

>> So, semiconductors.

>> So, yeah, I would say there for us it's

been analog chips, Texas Instruments,

it's been semiconductor capital

equipment. Uh we are a big shareholder

of Samsung, you know, which did nothing

nothing nothing and then went up

fourfold in in a year. They're driving

the entire CSP uh in Korea. 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

Catera which is now Devon uh Konico

Phillips uh uh Tormolene 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 using

well there you've got to think uh

financials is a great examp 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 bluecollar

workers

>> meaning very much hollow it out

>> hollow it out hollow it out the best

will still have work the best will be

more valuable they'll be more productive

but there's going to be you know a lot

of unemployed secondyear 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 hack and

the management to do it. So, Capital One

number one, I'd keep Wells Fargo on that

list. I think US Bank gets over that,

crosses that chasm. Uh, so those but

also

>> JP Morgan Chase is part of

>> the JP Morgan Chase has done such a

great job, but the valuation is

>> how do you put the MXs and Mastercard

Visas of the world? We don't own Visa or

Mastercard and we have a very small

position in AMX 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 that especially

merchants that would like to figure out

some way to bypass that.

>> That 3% big is a big big number.

>> It's a big number. This is the first

time in my lifetime I have started

noticing cash and credit card prices on

restaurant menu was never a thing.

>> And you really see it when you travel.

Yeah.

>> And so I that we and again those are

they're so highly valued at 30 times

earnings for Visa. You know it just

seems to us there's too much risk there.

I'll own the Capital One at nine times.

So those are the users, right? Then the

next category or what what Jeff Bezos we

call him the the the indifferent or the

protected right so what Jeff Bezos when

he said people ask me what's going to

change they ought to 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 right and

>> wait chicken's not going to lose their

jobs

>> yeah chicken's 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 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 I don't know

there are all sorts of things where it

is really amazing how much money is made

for something that you should be able to

get around we've seen some of the

pressure in the SAS companies and so

that's the lens that we look at uh 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 would why did I

lock up my money

>> uh for seven years?

>> For seven years if you're lucky.

>> Yeah.

>> And it's going to be longer I think. So

I think that wheels are coming off that.

I think that indexes remember Kodak, you

ready for a number? 10 million digital

cameras had been sold when Kodak was

still in the top third of the S&P 500.

>> That's amazing.

>> Isn't that amazing? And 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 80s, every active

every active manager in international

investing 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, right?

>> So I think nimleness, liquidity, uh

flexibility, and this sort of research

lens are going to actually become more

valuable. So I think we could see some

of the time-t tested things that worked

in the last decade, dividend darlings,

momentum, uh private equity, indexing, I

think all of those things could be

challenged given this fast changing

world. So, I'm I'm glad you brought up a

few things um there because when you

look at some of the fallout from lowcost

indexing, the Vanguard effect, Black

Rockck, what 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 to

not just indexing, but to ETFs

generally.

Uh so when your own business you're

you're looking at businesses with moes

and businesses with defendable

um processes and and a good culture

you're running a business with a lot of

employees and and a lot of clients. How

do you respond to this external

pressure? How do you manage not the

investments but the business of

investing when it's just becoming more

competitive and more challenging than

ever? Well, we're we're lucky because

we're one we're a very we we charge low

fees,

>> right? So, we it's you know, if you

charge two and 20, you know, you're

>> if if only I could.

>> I know. I'm je

>> I mean emotion intellectually I have a

problem with that. But part of me is

like nice work if you

>> I know I know I spoke to a guy that

charged two and 20 years ago and I said

why two and 20? What's the business

model? He said I can't get three and 30.

>> [clears throat]

>> So, we've always we've always just run

with this idea, you know, and Charlie

once said to me, Charlie Munger, you

know, what's wrong with giving people a

bargain, right? You know,

>> or at least a fair price,

>> right? And it makes it easier for you to

outperform over time. So, so I feel one,

we two, we're a frugal place.