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Christopher Davis Discusses Smart Value Investing · Masters in Business

• 0:02
  Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.
• 0:07
  Speaker 1: This week on the podcast, I have an extra special guest.
• 0:10
  Speaker 1: His name is Chris Davis, and he is chairman, chief
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  Speaker 1: investment officer, and one of the longest tenured managers at
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  Speaker 1: Davis Advisors. They really are a fascinating company. They run
• 0:22
  Speaker 1: over twenty billion dollars and have been running money for
• 0:25
  Speaker 1: the same families for a long time, and much of
• 0:29
  Speaker 1: the money in those portfolios are their own. They're not
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  Speaker 1: quite a family office. They've been a mutual fund shop
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  Speaker 1: for over fifty years. But it's always nice to talk
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  Speaker 1: to people who eat their own cooking. If you are
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  Speaker 1: at all interested in value investing, but value in a
• 0:47
  Speaker 1: way that doesn't eliminate companies like Amazon or Google or Apple,
• 0:51
  Speaker 1: you're gonna find this to be a fascinating conversation. So,
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  Speaker 1: with no further ado, my discussion with Chris Davis. This
• 1:01
  Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 1:06
  Speaker 1: My extra special guest today is Chris Davis. He is
• 1:09
  Speaker 1: the chairman and CEO of Davis Advisors, launched in nineteen
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  Speaker 1: sixty nine to manage separately managed accounts, eventually moving into
• 1:18
  Speaker 1: mutual funds and now e T f S. Davis Advisors
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  Speaker 1: manages over twenty two billion dollars. Chris is also on
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  Speaker 1: the board of directors of Coca Cola and is the
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  Speaker 1: co vice chairman of the Museum of Natural History, located
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  Speaker 1: here in New York City. Chris Davis, Welcome to Bloomberg.
• 1:36
  Speaker 1: Thanks so much, Barry. It's good to be here. So
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  Speaker 1: let's talk about this industry we're both in. What was
• 1:42
  Speaker 1: the business like when you joined Davis Advisors. Was already
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  Speaker 1: an existing company, wasn't it. Yeah, I mean I feel
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  Speaker 1: in a way I've gone through the full life cycle
• 1:50
  Speaker 1: of the mutual fund industry. I came into it at
• 1:53
  Speaker 1: a time when nobody cared, and then there was a
• 1:55
  Speaker 1: period of time when everybody cared, and now we're back
• 1:57
  Speaker 1: to a period of time when nobody cares. So been
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  Speaker 1: a long cycle. When did you start. I started in
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  Speaker 1: the business in nine as a accountant at State Street Bank,
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  Speaker 1: and then I went to work for a Japanese American firm,
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  Speaker 1: Tanaka Capital Management, and then came into Davis Advisors. What
• 2:16
  Speaker 1: was your role? Well, it's funny I have working at Tanaka.
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  Speaker 1: What I was really passionate about was sn l's and
• 2:24
  Speaker 1: and the reason I was so interested in san El's
• 2:26
  Speaker 1: is if you remember, we were in the midst of
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  Speaker 1: the SNL crisis and I was an analyst, a financial
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  Speaker 1: analyst at this by side firm. And what struck me is,
• 2:34
  Speaker 1: I don't know if you remember the movie It's a
• 2:36
  Speaker 1: Wonderful Life. But I kept thinking, in all of these
• 2:39
  Speaker 1: headlines about the SNL crisis, there must be a few
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  Speaker 1: Bailey building and loans out there, good companies with good
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  Speaker 1: loans that are going to come through this time and
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  Speaker 1: be value creators. So in all the headlines with bank
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  Speaker 1: and New England failing and all of that, I was
• 2:54
  Speaker 1: passionate about it, and I think in my old firm
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  Speaker 1: there wasn't quite as much enthusiasm. And when I spoke
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  Speaker 1: to my father and talked about coming over to Davis,
• 3:02
  Speaker 1: one of the things we decided is because the firms
• 3:05
  Speaker 1: called Davis Advisors, there's a risk that the employer of
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  Speaker 1: last resort for people with the same last name. And
• 3:11
  Speaker 1: so I said, if I come in, I want my
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  Speaker 1: own report card. I'm a bank in financials analyst. How
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  Speaker 1: about if we start a financial fund, and so ine
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  Speaker 1: we started the Davis Financial Fund. Was that a distressed
• 3:21
  Speaker 1: asset fund or just or a hybrid. I would say
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  Speaker 1: we never intended to be distressed investors, but we became
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  Speaker 1: distressed investors from time to time. But no, it was
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  Speaker 1: a straight mutual fund, but with the idea that we
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  Speaker 1: would focus entirely on financial stocks. And my grandfather had
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  Speaker 1: a great phrase. He called good financial companies growth stocks
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  Speaker 1: in disguise. He said that they can compound for generations,
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  Speaker 1: and yet they're often valued as if they have no growth.
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  Speaker 1: And so that was the premise of the fund. I've
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  Speaker 1: been running it for twenty seven or twenty eight years,
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  Speaker 1: but that was the way for me to have my
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  Speaker 1: own report card in a sense, independently of all of
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  Speaker 1: the other fears of being employer lessons. So for people
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  Speaker 1: who might not have been around during the ESML crisis,
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  Speaker 1: thousands of of these esnls went belly up, right, A
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  Speaker 1: lot of babies were thrown out with a lot of bathwater. Well,
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  Speaker 1: you know, one of the great things about starting then
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  Speaker 1: is in a way, the financial crisis was sort of
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  Speaker 1: a significantly amplified version but had a similar shape. There
• 4:20
  Speaker 1: were crazy government policies, but the ESNL crisis was primarily
• 4:24
  Speaker 1: about commercial real estate, And we might come back later
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  Speaker 1: to the fact that often credit cycles have this diurnal
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  Speaker 1: or alternating characteristic, which you hurt you the last time
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  Speaker 1: is usually not what hurts you the next time. And
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  Speaker 1: as it we all know, in the financial crisis, commercial
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  Speaker 1: real estate was sort of a safe place to be.
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  Speaker 1: But back in the eighties you had looked through office buildings,
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  Speaker 1: you had corruptions, you had the key to five, you
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  Speaker 1: had government hearings, and you know a lot of reform
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  Speaker 1: that came out of that. But you're absolutely right, the
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  Speaker 1: fundamental lesson was the business of banking. The business of
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  Speaker 1: making a spread on money, making loans, taking deposit is
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  Speaker 1: maybe the world's second oldest profession, and that doesn't go obsolete.
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  Speaker 1: And in these cycles, what happens is the irrational, irresponsible
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  Speaker 1: players get wiped out, the whole industry valuation tanks. But
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  Speaker 1: what you realize is at a fundamental level, the survivors
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  Speaker 1: are actually advantaged by the crisis because now there's less supply,
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  Speaker 1: less competition, more rational environment. Often the regulatory environment has
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  Speaker 1: raised moats cheaper stocks. So that was what the layout
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  Speaker 1: was when I came in and started our financial fund,
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  Speaker 1: and in a way, it's exactly what I see today.
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  Speaker 1: It was just the financial crisis was an amplified version.
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  Speaker 1: It's taken longer for the sector to regain credibility. But
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  Speaker 1: I think we're looking at the same sort of decade
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  Speaker 1: ahead that we had in the nineties, where these will
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  Speaker 1: really be compounding machines to put a little flesh on
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  Speaker 1: those bones. We're recording this on a morning where JP
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  Speaker 1: Morgan just reported earnings. They literally reported the best use
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  Speaker 1: earnings ever in bank history. Eight billion dollars a quarter.
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  Speaker 1: Is real money, you know, And yet what is the perception?
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  Speaker 1: You know, the perception is, oh my god. You know
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  Speaker 1: the London whale. I mean, you know, this is this
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  Speaker 1: whole thing. This could crumble at any site. You know,
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  Speaker 1: the London whale was was like six weeks worth of earnings.
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  Speaker 1: You know. It's amazing the and and one of the
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  Speaker 1: most interesting things about that, and this is really a
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  Speaker 1: lesson when all banks, all companies, whatever company you own,
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  Speaker 1: if you have a long term time horizon, it's going
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  Speaker 1: to go through a crisis. Right. It might be New Coke,
• 6:37
  Speaker 1: it might be the salad oil scandal, it might be
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  Speaker 1: you know, Microsoft's hearings, and they're gonna go through a crisis,
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  Speaker 1: and one of the things to really look at is
• 6:46
  Speaker 1: what is the management response. So let's get a little
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  Speaker 1: more granuur on that. We've seen Fortress Diamond respond to
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  Speaker 1: a number of crises, whether it was the purchase of
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  Speaker 1: JP Morgan or the London Whale or Libra or any
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  Speaker 1: of those things, and they've managed to come out pretty well.
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  Speaker 1: On the other side of the street, Wells Fargo, they
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  Speaker 1: seemed to be stuck in a rut. One PR nightmare
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  Speaker 1: after another. They can't get out ahead of the fourth
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  Speaker 1: placed insurance and and the phony accounts. And it's just
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  Speaker 1: eleven years after the crisis. They're still fighting, not just
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  Speaker 1: the last battle, the last war. How come they can't
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  Speaker 1: seem to get ahead of what is just an endless
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  Speaker 1: parade of bad PR. Well, you know, Bill Gates famously
• 7:32
  Speaker 1: said success as a lousy teacher, and uh. And of course,
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  Speaker 1: if you look back at Wells Fargo, Wells Fargo was
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  Speaker 1: certainly maybe the best positioned and manage the financial crisis
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  Speaker 1: better than any other institution. It was partly the nature
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  Speaker 1: of their business, but it was partly going all the
• 7:50
  Speaker 1: way back to when we first bought the original Wells
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  Speaker 1: Fargo when I started my financial fund back in the
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  Speaker 1: early nineties. You know, it was a company that had
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  Speaker 1: an outstanding credit culture, a rational discipline around costs, and
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  Speaker 1: a lot of common sense in the place. And they
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  Speaker 1: did the merger with Northwest, which was really the surviving institution,
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  Speaker 1: but that culture sort of persisted. And you know the
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  Speaker 1: old saying is you're get in more trouble with a
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  Speaker 1: good premise than a bad premise. Well, think about Wells
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  Speaker 1: Fargo's premise. It was very plausible. Right, people hate walking
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  Speaker 1: into a bank, they love walking into a store. Why,
• 8:27
  Speaker 1: well people help them. They helped solve their problems. They're
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  Speaker 1: not bureaucratic. And and you know Norwest and then ultimately
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  Speaker 1: Wells took this basic idea of viewing their branches as
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  Speaker 1: stores with salespeople that are there to help you, that
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  Speaker 1: are paid commissions, and they recognize that if customers get
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  Speaker 1: multiple products with one brank, the customers are happier and
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  Speaker 1: the banks are more profitable, the customers are stickier. It's
• 8:52
  Speaker 1: sort of a win for everybody. So that worked for
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  Speaker 1: a long time. It's carried them through the financial crisis.
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  Speaker 1: Really without a blemish. Well, of course, over time they
• 9:02
  Speaker 1: push that model too far right, eventually customers have enough products, right,
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  Speaker 1: they've got three or four accounts, they don't need a fifth. Well,
• 9:11
  Speaker 1: rather than simply accept this, the salesforce that was down
• 9:14
  Speaker 1: in the trench levels in some of the businesses started
• 9:17
  Speaker 1: to cheat. And I would say it would be the
• 9:19
  Speaker 1: equivalent of going into sacks and the commission salesman there
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  Speaker 1: sells you a pair of shoes, but he wants to
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  Speaker 1: sell you to you only want one, So when you leave,
• 9:28
  Speaker 1: he takes your credit card, runs a second pair through,
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  Speaker 1: but instantly refunds you so there's no cost to you.
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  Speaker 1: But what he's done is so deeply wrong, deeply unethical,
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  Speaker 1: especially for God's sakes if you're a bank. So this
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  Speaker 1: was happening because of a botched incentive system, because it
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  Speaker 1: had worked so well. But then, to quote the wonderful
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  Speaker 1: legendary d A of our hometown, Bob Morgan thaw, it's
• 9:51
  Speaker 1: not what you do that gets you in trouble, it's
• 9:53
  Speaker 1: what you do to cover up what you do that
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  Speaker 1: gets you in trouble. And of course what happened is
• 9:57
  Speaker 1: as news of this perked up, well buried it. The
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  Speaker 1: management didn't want to know. They underreacted, and that's put
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  Speaker 1: us where we have. But you contrast JP Morgan in Wells,
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  Speaker 1: and those are two of our largest holdings. And the
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  Speaker 1: reason is right now, JP Morgan can do no wrong,
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  Speaker 1: and in a way, it has taken a long time
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  Speaker 1: for it to build this credibility. Wells Fargo used to
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  Speaker 1: have that credibility. They can do no right. So Wells
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  Speaker 1: Fargo is now one of the cheapest of all the banks. Well,
• 10:25
  Speaker 1: look back ten or fifteen years. Who was in the
• 10:27
  Speaker 1: penalty box, right, Well, we know Bank America City, right,
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  Speaker 1: Those two were two of the best performing banks last year.
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  Speaker 1: So companies, like people, learn from their mistakes. They'll get
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  Speaker 1: it right. They've got new management, and sooner or later
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  Speaker 1: the cloud will lift and you'll get, ultimately the multiple
• 10:46
  Speaker 1: expansion that comes from people instead of viewing it as
• 10:50
  Speaker 1: a below average bank, as viewing it as average. So
• 10:53
  Speaker 1: we've been buyers of Wells through this. We think their
• 10:55
  Speaker 1: behavior was terrible, the reactions were terrible, but we also
• 10:59
  Speaker 1: know that they'll get better. Quite fascinating. Let's talk a
• 11:02
  Speaker 1: little bit about your portfolio construction process. A lot of
• 11:07
  Speaker 1: people these days use a lot of computer power to
• 11:10
  Speaker 1: start out with screens either be very positive or negative.
• 11:14
  Speaker 1: How do you begin the process of creating a portfolio?
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  Speaker 1: You know, I had a meal with Danny Kahneman UH
• 11:23
  Speaker 1: quite a while ago, uh at an investor event, and
• 11:26
  Speaker 1: now he was sitting next to him and we're talking
• 11:28
  Speaker 1: about investing, and he said, well, as far as I
• 11:30
  Speaker 1: can tell, you're in the manufacturing business, right, And I said,
• 11:34
  Speaker 1: we're not. You know, what are you in academic We're
• 11:37
  Speaker 1: not in the manufacturing business. He had not won the
• 11:39
  Speaker 1: Nobel Prize at this point, so uh and uh he said, oh,
• 11:43
  Speaker 1: you're in the manufacturing because I said, well, what do
• 11:45
  Speaker 1: we make? And he said decisions? And he said, if
• 11:49
  Speaker 1: I were you, I would break down the process of
• 11:53
  Speaker 1: making a decision into as many steps and inputs that
• 11:57
  Speaker 1: are measurable as possible, and over time really look at
• 12:01
  Speaker 1: where the value add where the value taken aways. So
• 12:04
  Speaker 1: when we start with thinking about investing, we think about
• 12:07
  Speaker 1: from the point of view of decisions. We break down
• 12:09
  Speaker 1: the process into these big areas. Right, there's the sourcing
• 12:12
  Speaker 1: of ideas. Then there's exactly what you're asking about, the
• 12:16
  Speaker 1: sort of portfolio construction, the investment decisions, and that includes
• 12:20
  Speaker 1: what you sell, what you buy, opportunity cost, relative waitings,
• 12:23
  Speaker 1: and so on. And then there's of course the constant
• 12:26
  Speaker 1: ongoing revaluation of the portfolio in light of changing prices
• 12:30
  Speaker 1: and changing data, right, because you have new inputs every
• 12:33
  Speaker 1: twelve weeks and sometimes more often than that. And so
• 12:38
  Speaker 1: you know, we start with the view that our number
• 12:40
  Speaker 1: one job is to build generational wealth, right. We we
• 12:43
  Speaker 1: really think about you know, the clients that are with us,
• 12:46
  Speaker 1: many of them have been with us for decades, and
• 12:49
  Speaker 1: so we start with the idea that we want to
• 12:51
  Speaker 1: own a business for a long period of time, and
• 12:53
  Speaker 1: therefore the return on the business is not going to
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  Speaker 1: be driven by us trying to predict the future p
• 13:00
  Speaker 1: E ratio or you know, what it will be in
• 13:02
  Speaker 1: a takeout or a breakup. What we're really looking at
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  Speaker 1: is the earnings that business will generate relative to what
• 13:09
  Speaker 1: we paid for it over time, and those earnings will
• 13:12
  Speaker 1: drive our return. So you're not thinking about it in
• 13:14
  Speaker 1: terms of stock or little pieces of paper relative to
• 13:17
  Speaker 1: the company. You're thinking about the underlying business and what
• 13:21
  Speaker 1: that future cash flow. Yeah, I mean, imagine if you
• 13:23
  Speaker 1: bought an apartment building. Let's say you paid ten million
• 13:25
  Speaker 1: dollars for an apartment building, and that apartment building was
• 13:28
  Speaker 1: generating five thousand dollars of cash flow after reinvesting enough
• 13:34
  Speaker 1: to keep the roof and the furnaces and the tenants
• 13:36
  Speaker 1: all happy and so on, and if you bought it
• 13:39
  Speaker 1: that you'd sort of say, well, I guess I'm starting
• 13:41
  Speaker 1: at sort of a five percent earning syield. Now, if
• 13:45
  Speaker 1: ten years from now that apartment building was generating two
• 13:49
  Speaker 1: million dollars of value, you don't need to go out
• 13:52
  Speaker 1: and get the apartment a praise to figure out that
• 13:55
  Speaker 1: you've done quite well right. You're making a lot of money,
• 13:58
  Speaker 1: not just because you're getting a check for two million
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  Speaker 1: dollars a year or twenty percent of what you paid
• 14:02
  Speaker 1: for it, but also should you decide to sell the building,
• 14:06
  Speaker 1: you know that an asset that generates two million dollars
• 14:09
  Speaker 1: a year is way more valuable than one that generates five.
• 14:12
  Speaker 1: People forget because stocks wiggle around and are priced every day,
• 14:16
  Speaker 1: that if they viewed them the way they view that
• 14:18
  Speaker 1: apartment building, they would feel a lot calmer when there's
• 14:22
  Speaker 1: all these gyrations and stock prices going up and down.
• 14:25
  Speaker 1: So we think a lot about earnings yield on cost
• 14:28
  Speaker 1: as sort of the way to build wealth and measure
• 14:31
  Speaker 1: that wealth creation over time. And so when we start
• 14:33
  Speaker 1: the portfolio, we're agnostic about whether we're buying an apartment
• 14:38
  Speaker 1: building or a pizzeria, or a hotel or an office building.
• 14:44
  Speaker 1: We're buying a whole range of different types of businesses,
• 14:48
  Speaker 1: but all with the same mindset. Will the earnings that
• 14:51
  Speaker 1: business produces over time build wealth not over three years
• 14:55
  Speaker 1: or five years, but over ten, twenty thirty years. And
• 14:58
  Speaker 1: that sort of mindset allows us to be open minded
• 15:01
  Speaker 1: whether we're looking at United Technologies or Berkshire Hathaway or
• 15:05
  Speaker 1: Wells Fargo. We can look in a sense at cash
• 15:09
  Speaker 1: across all of those businesses and look at that growth
• 15:11
  Speaker 1: over time as the creator of wealth. And I find
• 15:14
  Speaker 1: it interesting you used an apartment building as a metaphor.
• 15:17
  Speaker 1: I've talked about this in the past. If your house
• 15:20
  Speaker 1: where you live in was priced daily, I think people
• 15:23
  Speaker 1: would lose their mind over the day to day fluctuations.
• 15:27
  Speaker 1: You can ignore it because it's not price daily. It
• 15:30
  Speaker 1: sounds like you approach owning individual equities the same way. Yeah,
• 15:33
  Speaker 1: I mean, if somebody came up to with that you
• 15:35
  Speaker 1: know apartment building. You paid ten million four and it
• 15:38
  Speaker 1: now earning two million, and they said, hey, I'll give
• 15:40
  Speaker 1: you five million dollars for it. You wouldn't be depressed,
• 15:43
  Speaker 1: right you would You just feel like, well that seems
• 15:46
  Speaker 1: a little silly. So I'm not interested. And so in
• 15:49
  Speaker 1: a sense, we start with this mindset of building wealth
• 15:53
  Speaker 1: over the long term. And in this way, we always
• 15:55
  Speaker 1: say we're absolute return investors, right, we view it as
• 15:58
  Speaker 1: if we're buying the entire business. We look for the
• 16:00
  Speaker 1: returns to be driven by the cash the business produces
• 16:04
  Speaker 1: over a long period of time, and that, in a
• 16:06
  Speaker 1: sense quiets things down. And the more clients look at
• 16:10
  Speaker 1: their portfolio and they see these companies even when the
• 16:13
  Speaker 1: prices are gyrating, if they can look through at the
• 16:16
  Speaker 1: underlying business, creates a much greater sense of equanimity in
• 16:20
  Speaker 1: the face of, as you say, gyrating prices. So you
• 16:22
  Speaker 1: begin as an analyst covering finance firms, you're now a
• 16:26
  Speaker 1: portfolio manager. What's the workflow at your office? Like between
• 16:31
  Speaker 1: the analysts that work for Davis Funds and you as
• 16:33
  Speaker 1: a portfolio manager. Well, I mean I learned from the best,
• 16:36
  Speaker 1: because I learned from my father and my father's business
• 16:39
  Speaker 1: card that said analysts and mine would be the same.
• 16:42
  Speaker 1: I mean we have a small team. You know, they're
• 16:45
  Speaker 1: only eight or nine of us. We've been together a
• 16:47
  Speaker 1: long time on average, and what we say is that,
• 16:50
  Speaker 1: you know, the portfolio manager has to be the lead
• 16:54
  Speaker 1: analyst on every company we own. And the reason is
• 16:57
  Speaker 1: I worked at other places, and I worked at places
• 17:00
  Speaker 1: typically had the normal structure. They have junior analysts, senior analysts,
• 17:05
  Speaker 1: they have portfolio managers, they have a strategists, economists, And
• 17:09
  Speaker 1: what I found is the person deciding whether to buy
• 17:12
  Speaker 1: a sell a stock in that structure is often relying
• 17:16
  Speaker 1: on the data provided by the most junior person at
• 17:19
  Speaker 1: the firm. Right the most junior person is doing the
• 17:22
  Speaker 1: leg work. You don't know if they're good or not,
• 17:24
  Speaker 1: and you're making an investment decision on that. So we,
• 17:27
  Speaker 1: in a sense breakdown that distinction. Now on our team,
• 17:31
  Speaker 1: I would say we have people that are traditional analysts.
• 17:35
  Speaker 1: Both to use an unfortunate phrase that goes back to
• 17:38
  Speaker 1: the Cold War, we always say that the portfolio manager
• 17:42
  Speaker 1: has to be a fellow traveler on the research process
• 17:45
  Speaker 1: with the analyst. So we have analysts that do spectacular
• 17:49
  Speaker 1: leg work and are you know, in our sourcing process,
• 17:52
  Speaker 1: we're looking for ideas and they will surface those early
• 17:55
  Speaker 1: and then the portfolio manager along with that analysts work
• 17:58
  Speaker 1: on that idea together and we run concentrated, relatively focused portfolios.
• 18:03
  Speaker 1: So you know, we only buy one out of ten
• 18:06
  Speaker 1: names in the SNP five hundred, right, And I always
• 18:09
  Speaker 1: say like selectivity sort of like like a college or
• 18:12
  Speaker 1: like an employer. If you have the ability to only
• 18:15
  Speaker 1: choose one out of ten of your applicants, you can
• 18:18
  Speaker 1: really look for those sort of extraordinary qualities and you
• 18:21
  Speaker 1: can reject the average or the mediocre or worse. And
• 18:24
  Speaker 1: we think selectivity is a huge advantage in active management,
• 18:28
  Speaker 1: and that's that's something that we really work on. You
• 18:30
  Speaker 1: mentioned opportunity costs and owning a position. How do you
• 18:33
  Speaker 1: decide when to get rid of a position? And is
• 18:37
  Speaker 1: it an owl or nothing to scale out or one
• 18:40
  Speaker 1: something hits a certain target, you sell it and that's
• 18:43
  Speaker 1: the end of the story. Well, you know, I did
• 18:45
  Speaker 1: my master's degree in philosophy actually philosophy and theology, but
• 18:50
  Speaker 1: there was a one that means you just pray for
• 18:52
  Speaker 1: the results. I pray for different things than I used
• 18:55
  Speaker 1: to but but there's still a lot of praying going on.
• 18:58
  Speaker 1: I mean, let's just say Jay Pea Morgan's earnings, you know,
• 19:01
  Speaker 1: for the answer to my prayers. Uh. But the but
• 19:05
  Speaker 1: what I'd say is there is a wonderful uh English
• 19:08
  Speaker 1: philosopher Elizabeth Anscombe and uh, she had this wonderful phrase
• 19:13
  Speaker 1: where she said, the fact of twilight doesn't mean we
• 19:15
  Speaker 1: can't tell day from night. And so when we look
• 19:20
  Speaker 1: and value a business, we don't come out with an
• 19:23
  Speaker 1: estimate that, you know, a company X is worth thirty
• 19:26
  Speaker 1: four dollars a share. That there's just amazing false precision
• 19:31
  Speaker 1: in that you you have an enormous amount of uncertainty
• 19:34
  Speaker 1: that you have to price in. So what we tend
• 19:36
  Speaker 1: to come up with are what we call ranges of
• 19:39
  Speaker 1: fair value. Now we stole this idea from Ben Graham.
• 19:42
  Speaker 1: Ben Graham, in his class at Columbia, did an exercise
• 19:46
  Speaker 1: on a specific company to determine its value. And and
• 19:50
  Speaker 1: I'm doing this from memory, but it's roughly this. He
• 19:53
  Speaker 1: came at the end of the day and he said,
• 19:54
  Speaker 1: this company is worth between twenty and a hundred and
• 19:57
  Speaker 1: twenty dollars a share, and it's quite a range. All
• 20:01
  Speaker 1: the all the students like, oh my god, that's worthless
• 20:04
  Speaker 1: that you know, that's useless. He said, no, no, no, no,
• 20:07
  Speaker 1: it's very, very, very valuable if the stocks below twenty
• 20:10
  Speaker 1: or above. That sort of is our mindset. We recognize
• 20:14
  Speaker 1: we look for a range of fair value for the
• 20:16
  Speaker 1: businesses that we study. All of our portfolio activity happens
• 20:21
  Speaker 1: when companies are below that range or above that range.
• 20:24
  Speaker 1: Within that range, we try not to do so much
• 20:27
  Speaker 1: because turnover has a certain cost and an uncertain benefit,
• 20:31
  Speaker 1: so we don't do a lot of fine tuning. But
• 20:34
  Speaker 1: as things pushed to the high end of that range,
• 20:36
  Speaker 1: they become sources of cash, usually not all at once.
• 20:39
  Speaker 1: Now all at once sale tends to happen because something
• 20:43
  Speaker 1: significant changed. Now what could change is the stock price
• 20:47
  Speaker 1: could go up an enormous amount very suddenly, and that
• 20:50
  Speaker 1: happens once in a while. I remember you probably remember
• 20:53
  Speaker 1: Agilant that was spun out Hewlett Packard. They announced some
• 20:57
  Speaker 1: new product called the Lambda router back into thousand or
• 21:00
  Speaker 1: something like that, and I think the stock went up
• 21:03
  Speaker 1: like a hundred and fifty percent that day. You know,
• 21:06
  Speaker 1: it was some ridiculous It went from thirty to seventy
• 21:09
  Speaker 1: or something like that. That's a good decade in a day. Yeah,
• 21:12
  Speaker 1: and it was. So there could be times when the
• 21:15
  Speaker 1: stock price moves up a lot where it would become
• 21:17
  Speaker 1: a cell very quickly, but that's going to be very rare.
• 21:19
  Speaker 1: What often happens is you get new news that causes
• 21:23
  Speaker 1: you to change your projections of future cash flow. You
• 21:27
  Speaker 1: adjust them down. When you discount them to the present.
• 21:30
  Speaker 1: Even though the stock is the same, or the stock
• 21:32
  Speaker 1: could even have gone down, it may now be above
• 21:35
  Speaker 1: your new range of fair value, so that becomes the sale.
• 21:37
  Speaker 1: So opportunity cost is a key concept. But and so
• 21:41
  Speaker 1: you always have to look at each name relative to
• 21:43
  Speaker 1: the others. You just don't want to imagine that within
• 21:46
  Speaker 1: a tenth of a percent or a Nicola share or
• 21:48
  Speaker 1: even a dollar or share, that you really can have
• 21:51
  Speaker 1: that much precision. Quite interesting. Let's talk a little bit
• 21:55
  Speaker 1: about the changes that have been going on in the industry.
• 22:00
  Speaker 1: What do you make of the shift from active to passive.
• 22:03
  Speaker 1: How has this changed the landscape? Well, I think it's
• 22:07
  Speaker 1: sort of a long term secular shift. Now, of course,
• 22:11
  Speaker 1: passive cannot have a so the debate will really be
• 22:15
  Speaker 1: at what point is passive sort of at the period
• 22:20
  Speaker 1: where there's enough excess return for active management to continue
• 22:24
  Speaker 1: price discovery and so on. Well, that's the theoretical point.
• 22:27
  Speaker 1: I think the practical point is this, people were charging
• 22:31
  Speaker 1: fees for managing a fund that looked a lot like
• 22:33
  Speaker 1: the index, had higher fees, had high turnover, was run
• 22:38
  Speaker 1: by a portfolio manager with no alignment of interest, none
• 22:42
  Speaker 1: of their own skin on the line. You know, high
• 22:44
  Speaker 1: cost look like the index, high turnover, inexperienced no alignment.
• 22:49
  Speaker 1: So part of this is a very healthy evolutionary process, right,
• 22:54
  Speaker 1: there was a lot of mediocrity that needed to be
• 22:56
  Speaker 1: pulled out. Frankly, it's amazing how long so much fat
• 23:01
  Speaker 1: was able to stay in the system. Markets are efficient,
• 23:04
  Speaker 1: just slowly and eventually efficient. Well, you know, a lot
• 23:08
  Speaker 1: of it depends on what the return environment is. You know,
• 23:11
  Speaker 1: when if stocks are compounding at ten twelve percent, nobody
• 23:16
  Speaker 1: much notices a hundred or two hundred basis point fee.
• 23:19
  Speaker 1: If stocks are compounding at six seven, then it becomes
• 23:23
  Speaker 1: much much more material. And so I think part of
• 23:25
  Speaker 1: it is about the normal evolution. You know, if you
• 23:28
  Speaker 1: look in markets like China, uh financial services and markets
• 23:31
  Speaker 1: like that, the fees are still very high. You know,
• 23:34
  Speaker 1: over time they'll come down. If you even look at
• 23:36
  Speaker 1: the traditional mutual fund business back in the fifties, sixties, seventies,
• 23:40
  Speaker 1: you know, it is common to have a six or
• 23:41
  Speaker 1: seven percent load or commission, you know, and it was
• 23:45
  Speaker 1: just part of the backdrop. So the good thing about
• 23:48
  Speaker 1: capitalism is over time things tend to become more efficient,
• 23:52
  Speaker 1: more transparency, and so I think part of what's happening
• 23:55
  Speaker 1: is very healthy. You're getting rid of a lot of
• 23:56
  Speaker 1: overpriced mediocrity. I think part of it is also healthy
• 24:01
  Speaker 1: because one of the biggest determinants of investor return over
• 24:05
  Speaker 1: time is investor behavior. And one of the things that
• 24:09
  Speaker 1: people know is that people's brains go to mush when
• 24:13
  Speaker 1: it comes to managing money. When prices go up, they
• 24:16
  Speaker 1: get more excited and want more. When prices go down,
• 24:19
  Speaker 1: they get depressed and want to sell. And so there's
• 24:21
  Speaker 1: always been a behavior penalty for investing. But with active management,
• 24:26
  Speaker 1: if you are going to be with a successful active manager,
• 24:29
  Speaker 1: they are going to look different from the index. By
• 24:32
  Speaker 1: and large, they'll have pretty low costs, they will have
• 24:35
  Speaker 1: an alignment of interest. Those sorts of things tend to
• 24:38
  Speaker 1: really correlate with successful active management. But one of the
• 24:41
  Speaker 1: important points to know is over a period of outperformance,
• 24:45
  Speaker 1: even if it's a decade, ten twenty years, they will
• 24:48
  Speaker 1: go through real periods of underperformance in there. And for
• 24:51
  Speaker 1: some investors that's just too much. They can't handle it.
• 24:55
  Speaker 1: So for them, for those sorts of investors, passive is
• 24:59
  Speaker 1: maybe the right answer because the're gonna underperform a percent
• 25:01
  Speaker 1: of the time, but just by a tiny little bit,
• 25:04
  Speaker 1: And so it may now there are other investors. At
• 25:08
  Speaker 1: lunch with an old friend yesterday, older older lady just
• 25:12
  Speaker 1: sort of a wonderful, gracious and we were talking about
• 25:15
  Speaker 1: how her adviser had recommended for her to be in
• 25:18
  Speaker 1: passive index view. She said, I don't like that because
• 25:21
  Speaker 1: I want somebody to be in charge. And for her,
• 25:24
  Speaker 1: her behavior was greatly improved by knowing there was a
• 25:28
  Speaker 1: portfolio manager, even if the performance was up or down
• 25:31
  Speaker 1: in any given period, for her, it was important to
• 25:33
  Speaker 1: have that alignment. And so I don't think there's a
• 25:36
  Speaker 1: magic answer. It really means looking through at the end client,
• 25:40
  Speaker 1: looking at their own behavior. But what I would say
• 25:42
  Speaker 1: is the more and more goes passive, the better and
• 25:45
  Speaker 1: better it is for those active managers. Like us that
• 25:48
  Speaker 1: are going to be in the game not just a
• 25:50
  Speaker 1: year from now, but ten years from now, twenty years
• 25:52
  Speaker 1: from now. I mean, we run our place like a
• 25:54
  Speaker 1: family office because we're the largest investor in the funds
• 25:57
  Speaker 1: that we manage. We make a lot more money from
• 25:59
  Speaker 1: ten percent better performance than ten percent more assets to manage.
• 26:03
  Speaker 1: And the danger of this active passive thing is one
• 26:07
  Speaker 1: people are confusing price and value. Right, prices, what you pay,
• 26:11
  Speaker 1: values what you get. You know, if you're a fiduciary,
• 26:15
  Speaker 1: managing for low costs is definitely part of your duty,
• 26:20
  Speaker 1: but it's not your only duty. Right. You could really
• 26:23
  Speaker 1: imagine a world where a client could say, wait a minute,
• 26:26
  Speaker 1: you just automatically bought the most of whatever had gone
• 26:28
  Speaker 1: up the most and whatever was the biggest company that
• 26:31
  Speaker 1: was your strategy, and people feeling like, well, that doesn't
• 26:34
  Speaker 1: feel like I'm necessarily a fiduciary. So costs are part
• 26:37
  Speaker 1: of it, but like risk and volatility, because you can
• 26:41
  Speaker 1: measure costs, you can't measure fiduciary duty. They equate the
• 26:44
  Speaker 1: two Oh, cost equals fiduciary duty in the same way
• 26:48
  Speaker 1: you can't measure risk, which is the possibility of something
• 26:51
  Speaker 1: going terribly wrong. But you can measure volatility, so people
• 26:56
  Speaker 1: equate the two and they aren't the same. Volatility has
• 26:58
  Speaker 1: something to do with risk, but it's not the same
• 27:00
  Speaker 1: as risk. How do you guys benchmark yourself if you're
• 27:03
  Speaker 1: running such focused portfolios that aren't remotely You mentioned, um,
• 27:10
  Speaker 1: the closet indexers, the funds that pretend to be active,
• 27:13
  Speaker 1: but I've low active share and really look like the index.
• 27:16
  Speaker 1: Your funds don't look at anything like the indexes. Well,
• 27:19
  Speaker 1: we we start with a deep truth, which is that
• 27:23
  Speaker 1: if you were to ask the average portfolio manager, would
• 27:26
  Speaker 1: you rather compound at fourteen percent a year and have
• 27:30
  Speaker 1: the market compound at fifteen or would you rather compound
• 27:33
  Speaker 1: at four and have the market compound at three? The
• 27:36
  Speaker 1: vast majority might take the latter choice because they would say, well,
• 27:41
  Speaker 1: my firm will be enormous. We're the opposite. We we
• 27:46
  Speaker 1: would choose a all day Job one is to build
• 27:49
  Speaker 1: wealth where the largest investor in the funds we manage,
• 27:52
  Speaker 1: we would weigh rather compound at fourteen than four, and
• 27:56
  Speaker 1: we think every client we have would agree. So that's
• 27:59
  Speaker 1: job one. But job too is that we have over
• 28:03
  Speaker 1: time in all of our strategies since we started them
• 28:06
  Speaker 1: beating the benchmarks. Now we haven't beaten them in all
• 28:10
  Speaker 1: periods and so on, but since we started them to today,
• 28:13
  Speaker 1: we've outperformed, and we think that over time that's our responsibility.
• 28:18
  Speaker 1: We don't know what that pattern will look like. We
• 28:20
  Speaker 1: don't know how long periods of underperformance will be or not.
• 28:24
  Speaker 1: We would optimize for building wealth first, out performing second,
• 28:28
  Speaker 1: but over time those are joint goals for us. And
• 28:32
  Speaker 1: what we would say is we in a world where
• 28:34
  Speaker 1: indexing continues to gain share. The momentum effects will be large, right,
• 28:40
  Speaker 1: so it can go on a long time. But bury
• 28:43
  Speaker 1: it's as simple as this. If I tell you that
• 28:47
  Speaker 1: there is an investment where paying a higher price would
• 28:50
  Speaker 1: increase your future return, you'd say, that doesn't make any sense.
• 28:54
  Speaker 1: The price I pay is a determinant of my return, right,
• 28:57
  Speaker 1: whatever the return will be. The lower the price I pay,
• 29:00
  Speaker 1: the higher my return. Right, it makes sense. Yet momentum
• 29:05
  Speaker 1: ignores that. Momentum says the opposite. The more it's gone up,
• 29:08
  Speaker 1: the more attractive it is. Our view is we're going
• 29:11
  Speaker 1: to choose common sense over whatever effects are fashionable and
• 29:15
  Speaker 1: working today, because if the wheels come off that effect.
• 29:18
  Speaker 1: It's going to feel pretty silly to say that, well,
• 29:20
  Speaker 1: I bought it because it broke the fifty day moving
• 29:22
  Speaker 1: average and had gone up a lot, so it became
• 29:25
  Speaker 1: more attractive to me. So you know, our view is, look,
• 29:28
  Speaker 1: the fundamentals over time will out. We have a strategy
• 29:32
  Speaker 1: that we think has added value over the index over time,
• 29:35
  Speaker 1: and really all of our strategies, and and that's sort
• 29:38
  Speaker 1: of what we come to work to do. But that
• 29:41
  Speaker 1: is a byproduct of the primary job, which is we
• 29:44
  Speaker 1: want to buy businesses that are compounding machines. We want
• 29:47
  Speaker 1: to build wealth for a generation, and and that relative
• 29:51
  Speaker 1: performance will essentially wash out from that focus on the
• 29:54
  Speaker 1: primary goal. Let's talk about the state of the markets today.
• 29:59
  Speaker 1: You're a value investor. This has been a pretty rough
• 30:03
  Speaker 1: decade for value. It's been all growth almost straight through
• 30:08
  Speaker 1: maybe the fourth quarter of so value reassert itself. Why
• 30:13
  Speaker 1: is value such a laggard this go round? Well, of course,
• 30:18
  Speaker 1: I'm gonna take umbrage with the classifications. It is a
• 30:22
  Speaker 1: really broad classification. What we describe as value, or what
• 30:26
  Speaker 1: some people describe as value is using quite a broad
• 30:30
  Speaker 1: brush debate with well, and of course, what counts is value,
• 30:33
  Speaker 1: and what counts is growth keeps shifting. Growth is a
• 30:36
  Speaker 1: component of value, right, Companies that grow profitably are more valuable.
• 30:40
  Speaker 1: So when we model the future cash flows of a business,
• 30:44
  Speaker 1: if we have a business that we can buy for
• 30:46
  Speaker 1: you know, like that apartment building for ten million dollars,
• 30:49
  Speaker 1: it's going to produce a million dollar coupon in perpetuity. Well,
• 30:52
  Speaker 1: there's no mystery what our return is. It's ten but
• 30:57
  Speaker 1: there's no growth. That's okay, returns ten per cent. Now
• 31:00
  Speaker 1: we buy another business for ten million, but it only
• 31:02
  Speaker 1: earns five hundred thousand. But that five hundred thousand is
• 31:06
  Speaker 1: able to be reinvested at incremental return on equity. Well,
• 31:10
  Speaker 1: the next year it's six hundred thousand, then it's seven
• 31:13
  Speaker 1: twenty thousand, then it's eight fifty. That business will end
• 31:16
  Speaker 1: up being a lot more valuable, even though you started
• 31:20
  Speaker 1: with a lower earnings yielder. To put it in terms
• 31:22
  Speaker 1: of stocks, a high PE stock could be a much
• 31:25
  Speaker 1: better value than a low PE stock depending on what
• 31:28
  Speaker 1: the earnings will do over time. So I think where
• 31:31
  Speaker 1: value investors that category has been a misnomer. Is some
• 31:35
  Speaker 1: of the greatest value stocks of the last twenty years
• 31:39
  Speaker 1: have been companies like Google. Google came public at I
• 31:43
  Speaker 1: think it was eight or nine times what it earned
• 31:46
  Speaker 1: three years out. So if Google was trading at eight
• 31:49
  Speaker 1: times earnings, you would say it's a great value stock. Right, Well,
• 31:54
  Speaker 1: it was trading at eight times earnings three years out,
• 31:56
  Speaker 1: so it grew into that and then blew by it.
• 31:59
  Speaker 1: So I think one of the problems that value investors
• 32:02
  Speaker 1: have had historically and need to get over. And by
• 32:05
  Speaker 1: the way, to get over it, they should just follow
• 32:08
  Speaker 1: the greatest of all, right, they should follow Warren Buffett,
• 32:11
  Speaker 1: the value investors who say I determined value based on
• 32:15
  Speaker 1: a predetermined set of business characteristics or industries, and I
• 32:20
  Speaker 1: won't look at technology. So you mentioned Google, which is
• 32:24
  Speaker 1: just a money machine. The advertising business just throws off
• 32:29
  Speaker 1: a ridiculous amount of cash. One buffets investment in Apple.
• 32:32
  Speaker 1: Just Apple continues to not only dominate phones, every time
• 32:37
  Speaker 1: they introduce a new product. I don't love the air buds,
• 32:40
  Speaker 1: but if it was a standalone company, it'd be like
• 32:42
  Speaker 1: a six or an eight billion dollar revenue company. Their
• 32:45
  Speaker 1: services are blowing up. I could see how you can
• 32:48
  Speaker 1: make the argument Google is a value play. Apple's value
• 32:51
  Speaker 1: play in your top holdings. Is also Amazon fast growing,
• 32:56
  Speaker 1: not a lot of profits. How do you make Amazon
• 33:00
  Speaker 1: value plan? Well, of course this is you know my
• 33:02
  Speaker 1: my background. As I said, I started as an accountant
• 33:05
  Speaker 1: and I was not a c p A. But I
• 33:07
  Speaker 1: was a fund accountant. But you know, accounting is the
• 33:09
  Speaker 1: language of business, and gap accounting in particular can have
• 33:14
  Speaker 1: all sorts of distortions. And we always say what we're
• 33:18
  Speaker 1: looking for is not reported earnings. We're not looking at
• 33:21
  Speaker 1: statutory earnings. We're looking at owner earnings. In other words,
• 33:24
  Speaker 1: if you owned a business, how much would you say
• 33:27
  Speaker 1: that business was earnings? And what I mean by that
• 33:30
  Speaker 1: is that when a company reports its earnings to the
• 33:33
  Speaker 1: tax authorities, it chooses accounting policies that minimize current reportable income,
• 33:37
  Speaker 1: accelerate appreciation, expense, things you could capitalize, you know, defer revenue,
• 33:42
  Speaker 1: whatever it is. And often when they report their earnings
• 33:44
  Speaker 1: to investors, they do the opposite. They choose accounting policies
• 33:48
  Speaker 1: that maximize current reportable income. Well, we're trying to get
• 33:51
  Speaker 1: it owner earnings, which is often between those two. So
• 33:53
  Speaker 1: Amazon maybe the best example, because if you were to
• 33:57
  Speaker 1: imagine a company that said, well, we have a very
• 34:00
  Speaker 1: very profitable business. In fact, I'll use a familiar name, Geico. Now,
• 34:04
  Speaker 1: if Geico says, well, insurance policies that have been on
• 34:08
  Speaker 1: our books more than a year or two are very
• 34:10
  Speaker 1: very profitable, and they stay with us for a long time.
• 34:13
  Speaker 1: So we're willing to spend a lot of money to
• 34:15
  Speaker 1: get new policies. Now, if they could grow their policies
• 34:20
  Speaker 1: twenty percent a year but earned zero in the first year,
• 34:24
  Speaker 1: they would do it. And if they could do it
• 34:25
  Speaker 1: a second year, they'd earned zero in the second year,
• 34:27
  Speaker 1: and a third year, they'd earned zero in the third year.
• 34:30
  Speaker 1: In other words, if they're investing for growth but the
• 34:33
  Speaker 1: core business is very profitable, then the accounting can be
• 34:36
  Speaker 1: in a sense distorted. Now, I'll give you real numbers
• 34:39
  Speaker 1: on Amazon. So when we bought Amazon, we were comparing
• 34:42
  Speaker 1: it to Walmart. Now, Walmart grew sales. This is sort
• 34:46
  Speaker 1: of an amazing thing to think about. Over a seventeen
• 34:49
  Speaker 1: year period, they grew sales from about a billion dollars
• 34:54
  Speaker 1: to about seventy billion dollars. This is wal Walmart over seven.
• 34:59
  Speaker 1: This would have been nine eighty to like seven or
• 35:02
  Speaker 1: somewhere in their right around there. Now, over a seventeen
• 35:07
  Speaker 1: year period in its history, Amazon grew sales from a
• 35:11
  Speaker 1: billion to about a hundred billion, so roughly the same
• 35:14
  Speaker 1: rate of growth, right, those would be roughly the same
• 35:17
  Speaker 1: over seventeen years. Now, during the seventeen years that Walmart
• 35:21
  Speaker 1: grew from a billion in sales to seventy billion in sales,
• 35:27
  Speaker 1: how much free cash flow do you think they generated.
• 35:29
  Speaker 1: They reported a lot of earnings, so there's lots of
• 35:32
  Speaker 1: net income. But if you owned the business, right at
• 35:36
  Speaker 1: the end of the day, how much cash did you have?
• 35:39
  Speaker 1: I gotta think a few billion dollars? Right? It was negative,
• 35:42
  Speaker 1: really negative free cash flow for seventeen years cumulatively. Well,
• 35:46
  Speaker 1: those stores are expensive. You gotta buy the land, you
• 35:49
  Speaker 1: gotta buy the facilities, so it's not a zero cost
• 35:53
  Speaker 1: of construction, all right, But why do they do that?
• 35:55
  Speaker 1: Because they're going to get a good return on the
• 35:57
  Speaker 1: money that they spent. Now, the account and treatment for
• 36:00
  Speaker 1: that is that you capitalize it, you call it capital spending,
• 36:04
  Speaker 1: and you depreciate it over time. So there's lots of
• 36:07
  Speaker 1: net income, but if you go to the cash flow statement,
• 36:10
  Speaker 1: there's no cash. In fact, there was negative. They had
• 36:12
  Speaker 1: to borrow some money during that period of time to
• 36:15
  Speaker 1: finance that growth. Now, during the same period of time,
• 36:18
  Speaker 1: when Amazon grew sales from a billion to just about
• 36:21
  Speaker 1: a hundred billion gross merchandise value, what was their cumulative
• 36:25
  Speaker 1: free cash flow? They reported no earnings, no profits at all.
• 36:28
  Speaker 1: It's got to be tens of billions of dollars. The
• 36:30
  Speaker 1: cash it was about seven billion dollars. I think of cumulators.
• 36:33
  Speaker 1: So if you own the business, you had seven billion
• 36:35
  Speaker 1: dollars in the bank at the end of seventeen years.
• 36:38
  Speaker 1: You grew sales from a billion to a hundred billion,
• 36:40
  Speaker 1: but you reported no earnings, which is better. I'll take
• 36:43
  Speaker 1: the ladder. Take the ladder. So our view was that's
• 36:48
  Speaker 1: but but what was interesting is then you get to valuation,
• 36:52
  Speaker 1: and when we bought Amazon, it was trading at about
• 36:55
  Speaker 1: one time sales. Walmart in that period of that seventeen
• 36:59
  Speaker 1: years growth was trading between one and two time sales
• 37:02
  Speaker 1: that whole period. They both have the same gross margin.
• 37:05
  Speaker 1: They're both making money selling stuff. It's just the net
• 37:08
  Speaker 1: margin wasn't there. So what it required as a value
• 37:12
  Speaker 1: investor to buy Amazon was one adjusting the core business
• 37:17
  Speaker 1: and saying if they chose not to grow, just like Walmart.
• 37:21
  Speaker 1: When Walmart's growth slowed, by the way, it just gushed cash. Oh,
• 37:26
  Speaker 1: I mean the cash places to physically store and the
• 37:30
  Speaker 1: way the tsunami behind them, of all of this cash,
• 37:34
  Speaker 1: of all of those maturing stores just poured in. So
• 37:37
  Speaker 1: cash flow at Walmart went through the roof in the
• 37:40
  Speaker 1: next fifteen years. So the first thing you have to
• 37:42
  Speaker 1: do is you had to look at that second, you
• 37:44
  Speaker 1: had to say, okay, for every dollar. Now, we assumed
• 37:48
  Speaker 1: that Amazon could have a five percent margin on sales
• 37:50
  Speaker 1: about Walmart, and we looked at bundles of goods, and
• 37:53
  Speaker 1: but what you would say is, well, for every dollar
• 37:56
  Speaker 1: that Amazon is choosing not to report as net income
• 38:00
  Speaker 1: that they are reinvesting on our behalf, do we have
• 38:02
  Speaker 1: confidence like Walmart that they're earning a decent return. I
• 38:06
  Speaker 1: think Walmart got about fifteen percent or fourteen percent or
• 38:09
  Speaker 1: maybe as high as seventeen at one point of every
• 38:11
  Speaker 1: dollar they retained and reinvested, that was their return on
• 38:14
  Speaker 1: that increment. So are we confident that Jeff Bezos and
• 38:17
  Speaker 1: Amazon is getting a good return on the money that
• 38:20
  Speaker 1: they are not? And you know, the answers look at
• 38:23
  Speaker 1: the data and this is when we bought it, you know,
• 38:25
  Speaker 1: whether it was pushing into prime, whether it was pushing
• 38:28
  Speaker 1: into video, whether it was wonderful creating a WS. They
• 38:33
  Speaker 1: have gotten huge returns, huge returns on the dollar. You
• 38:37
  Speaker 1: have one of the great capital allocators reinvesting. So split
• 38:40
  Speaker 1: the business into those now with a WS, we say,
• 38:42
  Speaker 1: really they're three components. You value AWS as if it
• 38:45
  Speaker 1: was a standalone business, value the retail business, and then
• 38:50
  Speaker 1: estimate what you think would be the return on the
• 38:52
  Speaker 1: incremental capital they're spending. And ends up Amazon was a
• 38:56
  Speaker 1: terrific value stock. And so we don't use new math,
• 39:00
  Speaker 1: we don't use pops, we don't use eyeballs or clicks.
• 39:04
  Speaker 1: We really just look at the cash that that business
• 39:06
  Speaker 1: will produce. And it's funny because one of the great
• 39:09
  Speaker 1: things about looking across industries is the more time you
• 39:12
  Speaker 1: spend with Jamie Diamond, the more you see that somebody
• 39:15
  Speaker 1: like Jeff Bezos, they speak the same language. You know,
• 39:18
  Speaker 1: it doesn't matter that one's in banking and ones in finance.
• 39:21
  Speaker 1: It's interesting they almost work together. I think it's been
• 39:23
  Speaker 1: reported that Jeff tried to hire Jamie, but when Jamie
• 39:27
  Speaker 1: went to Bank one to be his number two at Amazon,
• 39:30
  Speaker 1: isn't that amazing, That's quite fascinating. And they did that
• 39:33
  Speaker 1: joint project on healthcare with its Amazon, JP Morgan and
• 39:38
  Speaker 1: uh Berkshire Hathaway that we still haven't heard anything about that.
• 39:42
  Speaker 1: And when you look at Amazon, you have to wonder
• 39:45
  Speaker 1: they keep finding these new industries to invest in. What
• 39:50
  Speaker 1: would happen if they push into finance, What would happen
• 39:52
  Speaker 1: if they push into healthcare? Those are two of the
• 39:55
  Speaker 1: biggest industries in the country. I know, I don't want
• 39:58
  Speaker 1: to bet against Jeff b so Us if he rolls
• 40:00
  Speaker 1: something out like that. Well there, it's a hyper rational
• 40:03
  Speaker 1: company that makes decisions for the long term. You know,
• 40:07
  Speaker 1: one thing I would recommend every listener does, if they
• 40:09
  Speaker 1: haven't done it, they should read Jamie Diamonds and your
• 40:13
  Speaker 1: reports every year, and they should read Jeff bezos is
• 40:15
  Speaker 1: in your reports every year. Both men write their own
• 40:17
  Speaker 1: annual reports, which alone tells you something about the culture
• 40:21
  Speaker 1: of the place. For sure, they're both hyperrational, they're modest,
• 40:25
  Speaker 1: they're driven, they have smart people around them. And you know,
• 40:29
  Speaker 1: in the case of Amazon, you know, Amazon is still
• 40:32
  Speaker 1: smaller in retailer than Walmart. Retail is a ten trillion
• 40:36
  Speaker 1: dollar business. So there's enormous, enormous room to go in
• 40:40
  Speaker 1: terms of what they can do, and AWS is probably
• 40:43
  Speaker 1: a bigger business than retail when you look sort of
• 40:45
  Speaker 1: globally how that will unfold. So I just would say
• 40:49
  Speaker 1: that it is at the higher end of our estimate
• 40:51
  Speaker 1: of fair value. But the determination is for how long
• 40:55
  Speaker 1: they will be able to invest at these high rates
• 40:57
  Speaker 1: of return and and so we have sold some over
• 41:00
  Speaker 1: the years, and of course that's been a terrible mistake,
• 41:03
  Speaker 1: but we do have a value discipline. So there's a
• 41:06
  Speaker 1: price where our math doesn't work with Amazon. It's pushed
• 41:09
  Speaker 1: up towards that end, and we've trimmed some. But honest
• 41:12
  Speaker 1: to God, if I said to my mother my mother
• 41:14
  Speaker 1: owned Amazon, uh, she bought a little because she liked
• 41:18
  Speaker 1: this story in the very beginning, and I've told her
• 41:19
  Speaker 1: it's a big percentage of your portfolio, I wouldn't lose
• 41:22
  Speaker 1: a lot of sleep over it. There you go, Can
• 41:24
  Speaker 1: you stick around a little bit? I have a ton
• 41:25
  Speaker 1: more questions. Absolutely. We have been speaking with Chris Davis.
• 41:28
  Speaker 1: He is the chairman and chief investment officer at Davis Advisors.
• 41:33
  Speaker 1: If you enjoy this conversation, be sure and check out
• 41:35
  Speaker 1: the podcast extras, where we keep the tape rolling and
• 41:38
  Speaker 1: continue discussing all things value investing. You can find that
• 41:42
  Speaker 1: at iTunes, Spotify, Google Podcast, wherever your finder podcasts are sold.
• 41:48
  Speaker 1: We love your comments, feedback and suggestions right to us
• 41:51
  Speaker 1: at m IB podcast at Bloomberg dot net. Give us
• 41:54
  Speaker 1: a review on Apple iTunes. You can check out my
• 41:57
  Speaker 1: weekly column on Bloomberg dot um slash Opinion. Follow me
• 42:02
  Speaker 1: on Twitter at ridlts. I'm Barry Hults. You're listening to
• 42:05
  Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast, Chris.
• 42:12
  Speaker 1: Thank you so much for doing this. I have been
• 42:14
  Speaker 1: chasing you down for a while. We have a uh
• 42:18
  Speaker 1: mutual colleague, Tucker Us, who first brought your name up
• 42:23
  Speaker 1: to me, I don't know a year ago, and I
• 42:25
  Speaker 1: started doing some research and said, hey, these guys really interesting.
• 42:29
  Speaker 1: Let's let's get them into the studio and have a conversation.
• 42:32
  Speaker 1: So I'm I'm glad we finally hunted you down. You're
• 42:36
  Speaker 1: your New York based right, New York born, bread and based,
• 42:40
  Speaker 1: so so you're here, so we're not taking you too far,
• 42:43
  Speaker 1: um out of your way. There were a couple of
• 42:46
  Speaker 1: um things I mentioned in your intro that we skipped
• 42:50
  Speaker 1: by on the regular questions. I have to ask you,
• 42:53
  Speaker 1: how did you end up on the board of directors
• 42:56
  Speaker 1: of Coca Cola. Well, that's a very good question. I
• 43:00
  Speaker 1: remember I was once has to be on the board
• 43:02
  Speaker 1: of a wonderful think tank in Santa Fe called the
• 43:04
  Speaker 1: Santa Fe Institute, And uh, you know is founded by
• 43:08
  Speaker 1: Murray Galman, who is a Nobel Prize physicist and wonderful
• 43:12
  Speaker 1: scientists and incredible innovative work they do there, and and
• 43:16
  Speaker 1: Murray asked me to be on the board and I said, well,
• 43:19
  Speaker 1: you know, I'm not going to give you any more
• 43:21
  Speaker 1: money than I give you already, and and I love
• 43:23
  Speaker 1: the place, but I don't really think I would contribute much.
• 43:26
  Speaker 1: He said, no, We've we've studied decision making in complex
• 43:29
  Speaker 1: situations and it ends up it's really important to have diversity.
• 43:33
  Speaker 1: And I said, well, you know, I'm a white male
• 43:36
  Speaker 1: from New York City. I don't know what you mean, like,
• 43:39
  Speaker 1: what sort of he said, Oh, I Q diversity. He said,
• 43:42
  Speaker 1: we're all geniuses, we need somebody like you to sort
• 43:46
  Speaker 1: of round it out. So I don't know if that
• 43:49
  Speaker 1: he's serious. He was actually quite serious. We need some dummies,
• 43:54
  Speaker 1: we need somebody listen. Six that we looked down on
• 43:58
  Speaker 1: that group, you know, in that group, it was it
• 44:01
  Speaker 1: was probably not an insult, but but he you know,
• 44:04
  Speaker 1: he also of course meant, you know, somebody that wasn't
• 44:07
  Speaker 1: of a science background and so on. But but no,
• 44:10
  Speaker 1: you know, I think that uh, you know, I would
• 44:13
  Speaker 1: say that Coca Cola is maybe the pre eminent international
• 44:17
  Speaker 1: global company. And so from my point of view, the
• 44:20
  Speaker 1: opportunity uh, to serve sort of that icon, to learn, uh,
• 44:25
  Speaker 1: to work with, you know, some of the terrific directors
• 44:29
  Speaker 1: that are there, and and at a time that the
• 44:31
  Speaker 1: company may face challenges in terms of you know, uh
• 44:34
  Speaker 1: perceptions and and reinventing the model and beverages for life,
• 44:39
  Speaker 1: it's an exciting time to be in. They clearly have.
• 44:43
  Speaker 1: At one point in time, sugar beverages was their whole business.
• 44:47
  Speaker 1: It's a really much smaller part of what they do.
• 44:51
  Speaker 1: Water and fruit juice and and all sorts of other
• 44:53
  Speaker 1: stuff has has really taken over. Yeah, they really are,
• 44:57
  Speaker 1: you know, in their heart there beverages company, and sugar
• 45:01
  Speaker 1: was part of that. Historically, it doesn't need to be
• 45:03
  Speaker 1: and it has not been the same part of it.
• 45:05
  Speaker 1: Although although I will tell you, whenever I travel to
• 45:08
  Speaker 1: the Caribbean and there's a local bottle of coca cola
• 45:12
  Speaker 1: bottling plant, that cane sugar coca cola is not like
• 45:16
  Speaker 1: anything you get well, and of course they sell it
• 45:18
  Speaker 1: in New York, Mexican coke they call it, and it
• 45:22
  Speaker 1: really it reminds you of the romance of the brand
• 45:24
  Speaker 1: and boy on your kid. Anyway, a hot day sitting
• 45:27
  Speaker 1: on a Caribbean island and somebody brings out that that
• 45:30
  Speaker 1: ice cold glass bottle of coke, You're you're absolutely right,
• 45:35
  Speaker 1: and now it takes you back. I wouldn't promise that
• 45:37
  Speaker 1: I could identify them in a blind taste test, but
• 45:41
  Speaker 1: everything around that is just so so unique and special. Um.
• 45:45
  Speaker 1: The other thing you're a board member of is the
• 45:48
  Speaker 1: Museum of Natural History, one of my favorite places in
• 45:51
  Speaker 1: the city. How did how did that come about? Well,
• 45:54
  Speaker 1: you know, I think I've always felt a passion about
• 45:57
  Speaker 1: understanding more about science. I mentioned the same of a
• 46:00
  Speaker 1: institute with that same sort of mindset. You know, it
• 46:03
  Speaker 1: is partly because it's my my grandmother, who was sort
• 46:07
  Speaker 1: of an icon to me, an amazing woman, and she
• 46:09
  Speaker 1: died at a hundred and six. She was kayaking at
• 46:11
  Speaker 1: a hundred and five. So she really lived a full life,
• 46:14
  Speaker 1: and she had a PhD in international relations. She was
• 46:17
  Speaker 1: enormously well read, but she felt very insecure because she
• 46:21
  Speaker 1: never studied science. And we talked a lot about it
• 46:25
  Speaker 1: late in her life, and she said, you know, I
• 46:28
  Speaker 1: realized now that the reason was the name science scared me.
• 46:31
  Speaker 1: It took me back to high school biology and feeling
• 46:34
  Speaker 1: overwhelmed and not knowing what was going on. She said,
• 46:37
  Speaker 1: I wish they would simply call science how things work
• 46:41
  Speaker 1: and why things happen, because then everybody's interested in it.
• 46:46
  Speaker 1: And I would say the Museum of Natural History is
• 46:49
  Speaker 1: maybe the pre eminent institution for delighting people with the
• 46:54
  Speaker 1: ideas of science. In other words, it makes them accessible,
• 46:57
  Speaker 1: it makes people curious, It estou you. And so I
• 47:01
  Speaker 1: felt like, in that sense, thinking of my grandmother, who
• 47:05
  Speaker 1: became a supporter of the museum late in her life,
• 47:07
  Speaker 1: that idea of sort of recognizing that scientific literacy it
• 47:12
  Speaker 1: should be a lifelong pursuit because it's just so fascinating.
• 47:16
  Speaker 1: Let alone that it's good for policy, it's good for
• 47:18
  Speaker 1: the electorate, it's good for people to understand the basic
• 47:22
  Speaker 1: fundamentals of the scientific method and why things happen and
• 47:26
  Speaker 1: how things work, And what New York area school kid
• 47:30
  Speaker 1: does not have a vivid recollection of the first time
• 47:35
  Speaker 1: you see the Torhinosaurus rex or the blue whale hanging
• 47:40
  Speaker 1: from the ceiling, or if you get to go to
• 47:42
  Speaker 1: the planetarium, and every one of those experiences five six,
• 47:47
  Speaker 1: seven years old, that stays with you for the rest
• 47:49
  Speaker 1: of your know. Even that Hall of North American Mammals,
• 47:52
  Speaker 1: you know, the giant bears standing there, and you can
• 47:54
  Speaker 1: almost those dioramas, you almost feel them twitching. You know,
• 47:58
  Speaker 1: it is I absolutely agree, and I think for like
• 48:02
  Speaker 1: most New York City parents, you know, there are a
• 48:04
  Speaker 1: lot of weekends that you spend just wandering down those halls.
• 48:08
  Speaker 1: And the best thing about the museum is to go
• 48:10
  Speaker 1: with no agenda, to just wander. And you know, they're
• 48:12
  Speaker 1: doing this spectacular new edition the Guilder Center, which is
• 48:16
  Speaker 1: one of the big changes will be how it will
• 48:18
  Speaker 1: affect circulation, and that I you know right now, when
• 48:21
  Speaker 1: you wander the museum, you get to a lot of
• 48:22
  Speaker 1: dead ends. One of the exciting things about the new
• 48:26
  Speaker 1: plan is you really will be able to wander sort
• 48:29
  Speaker 1: of almost endlessly. It it'll be delightful and it is
• 48:32
  Speaker 1: you know, it is a place that people should just
• 48:35
  Speaker 1: go and revisit and revisit because on every topic they
• 48:39
  Speaker 1: have a thoughtful, knowledgeable, uh and accessible approach to learning
• 48:45
  Speaker 1: about the world that we live in. When does that reopen?
• 48:48
  Speaker 1: When does the new edition go live? I think it
• 48:50
  Speaker 1: will be twenty one, so coming up quite soon. It's
• 48:54
  Speaker 1: uh Gene Gang from Studio Gang is the architects. She's
• 48:58
  Speaker 1: a spectacular architect. The that entrance will be on Columbus Avenue,
• 49:03
  Speaker 1: so you'll enter from the other side. It's just it'll
• 49:06
  Speaker 1: be fantastic. People forget I think the museum has something
• 49:09
  Speaker 1: like twenty six buildings. Uh, you don't think of it
• 49:13
  Speaker 1: is a giant and it's just I mean it's a
• 49:16
  Speaker 1: wonderful place. So you know, I I like going to
• 49:19
  Speaker 1: an art museum or the operas, but just the next guy,
• 49:21
  Speaker 1: which probably isn't all that much, but but going there
• 49:26
  Speaker 1: it's always energizing and you know, it's run. One of
• 49:29
  Speaker 1: the amazing things I'll just say as an a side
• 49:31
  Speaker 1: about the museum is it's had the same you know,
• 49:33
  Speaker 1: when we invest in companies Berry. We love when you
• 49:36
  Speaker 1: can have a run with an executive like Jeff Bezos
• 49:39
  Speaker 1: or or Larry Page or Jamie Diamond. You know, where
• 49:43
  Speaker 1: you can have twenty thirty years of you know, you
• 49:46
  Speaker 1: gained conviction early, and then you have the conviction to
• 49:50
  Speaker 1: ride through the downturns by more. And in a way,
• 49:53
  Speaker 1: the Museum of Natural History embodies that because it's had
• 49:56
  Speaker 1: the same executive director. I don't want to make up
• 50:00
  Speaker 1: the number, but it's it's a decade, maybe thirty thirty
• 50:04
  Speaker 1: or by the end of her career maybe forty years almost,
• 50:07
  Speaker 1: and she is just a force of nature, Ellen futter
• 50:11
  Speaker 1: And and so it's also excited to be part of
• 50:13
  Speaker 1: an institution that has been so shaped by the long
• 50:16
  Speaker 1: term vision of a leader, and to be in a
• 50:19
  Speaker 1: sense get to spend time with the team that she's built.
• 50:22
  Speaker 1: It's one of the best managed institutions. I know. It's
• 50:25
  Speaker 1: funny you mentioned the the ability to wander and not
• 50:28
  Speaker 1: hit dead ends. My wife is now retired, but she
• 50:32
  Speaker 1: taught fashion, illustration and design, and so I've been dragged
• 50:35
  Speaker 1: to every museum in the world. We just went to
• 50:38
  Speaker 1: the reopened MoMA here in New York and they did
• 50:42
  Speaker 1: exactly what you describe there. Really everything is a loop.
• 50:46
  Speaker 1: There are no more dead ends. You walk into uhum
• 50:51
  Speaker 1: a gallery and there's an exit that takes you to
• 50:54
  Speaker 1: the next gallery. It's not like the old days where
• 50:57
  Speaker 1: it was a perplexing series of dead end. I do
• 51:01
  Speaker 1: wonder if it's almost hardwired in us to be wanderers.
• 51:04
  Speaker 1: It is amazing, and it's it's something that I think.
• 51:07
  Speaker 1: You know, New York has lots of problems, and I
• 51:09
  Speaker 1: travel all over the country and all over the world,
• 51:12
  Speaker 1: and I can see the pluses and minuses. But one
• 51:14
  Speaker 1: of the wonderful things about New York is that it
• 51:16
  Speaker 1: is a walking city. And you really don't have that
• 51:19
  Speaker 1: when I visit Los Angeles, and you know, and and
• 51:22
  Speaker 1: other cities, small cities Midwestern Akron, Toledo, uh Cleveland. You
• 51:28
  Speaker 1: just that that sense of being able to walk to work,
• 51:30
  Speaker 1: walk through the park, walk around. But I do think
• 51:33
  Speaker 1: there is something in us that that enjoys wandering, and
• 51:36
  Speaker 1: it is wonderful when these institutions reconfigure to allow that.
• 51:39
  Speaker 1: And and of course, intellectually, like investing, one of the
• 51:43
  Speaker 1: great things about investing is it's wonderful to be able
• 51:45
  Speaker 1: to intellectually wander. You know, one of the things my
• 51:48
  Speaker 1: grandfather was a passionate investor. He called it the best
• 51:51
  Speaker 1: game in town. And he said, because everything is relevant
• 51:54
  Speaker 1: in the moment you get to an end on a thread,
• 51:57
  Speaker 1: you can just move in a different direction. But you
• 51:59
  Speaker 1: in a sense, it's not like if you were making
• 52:02
  Speaker 1: chairs for a living. You know, you sort of make
• 52:04
  Speaker 1: the chair out, it goes, you make another chair out,
• 52:06
  Speaker 1: it goes. There's something about this constant learning, constant improvement,
• 52:11
  Speaker 1: constant wandering process that's really delightful about it. I totally agree.
• 52:15
  Speaker 1: I want to get to some questions that we skipped
• 52:18
  Speaker 1: over um during the broadcast portion, and really the first
• 52:24
  Speaker 1: thing we have to talk about is Davis Advisors is
• 52:28
  Speaker 1: relatively new to the worlds of ETFs. Uh. This is
• 52:33
  Speaker 1: something like that, you guys added a couple of ETFs
• 52:37
  Speaker 1: which have all accumulated a decent amount of assets under management.
• 52:42
  Speaker 1: Given your fifty year history and mutual funds, what made
• 52:45
  Speaker 1: you say, hey, let's try these new fangal dtfs on.
• 52:48
  Speaker 1: For some it's such a great question, Barre, and you're
• 52:50
  Speaker 1: gonna love the answer because it's such an interesting story.
• 52:53
  Speaker 1: You know, we didn't start as a mutual fund company.
• 52:55
  Speaker 1: We started as an institutional advisor, that pension advisor. You know,
• 52:59
  Speaker 1: this was the sort of uh in the early nineteen sixties.
• 53:04
  Speaker 1: My father started that business. You know, he managed money
• 53:07
  Speaker 1: for people like you know, Allied Signal or you know,
• 53:09
  Speaker 1: foundations and so on, and uh, very reputable and uh.
• 53:15
  Speaker 1: One of the consultants that had worked with his firm
• 53:18
  Speaker 1: came to him and said, you know, would you be
• 53:20
  Speaker 1: interested in starting a mutual fund And my father said, well, well,
• 53:24
  Speaker 1: don't you need to go to a mutual fund shop
• 53:27
  Speaker 1: where an institutional advisor Mutual funds is something else. And
• 53:31
  Speaker 1: happily this advisor said, well, I don't think so, because
• 53:34
  Speaker 1: I want you for your money management approach, your money
• 53:37
  Speaker 1: management philosophy, and I have clients for whom a large,
• 53:41
  Speaker 1: separate institutional account is not suitable but a mutual fund
• 53:44
  Speaker 1: would be. Well, happily my father saw that fifty years
• 53:47
  Speaker 1: ago and started the mutual funds. We started the managing
• 53:50
  Speaker 1: the mutual funds. Then, well, the same thing happened Barry
• 53:53
  Speaker 1: with et s. So what happened was we had a
• 53:56
  Speaker 1: long most of our clients come to us through financial
• 53:58
  Speaker 1: advisor sort of trust advisers. They've had a long relationship
• 54:02
  Speaker 1: with an advisor that we had done business with for
• 54:04
  Speaker 1: twenty or thirty years came and said, you know, I'm
• 54:07
  Speaker 1: curious if you could start an E T F and I,
• 54:10
  Speaker 1: like my father, said, well, E T S. Don't you
• 54:12
  Speaker 1: need to go to an E T F shop? Aren't
• 54:13
  Speaker 1: they passive? Aren't they index based? He said, well, lots
• 54:17
  Speaker 1: of indexes have higher turnover than you have. UM, so
• 54:21
  Speaker 1: you know, there's great tax efficiency, there's ease of transactions.
• 54:24
  Speaker 1: They really are suitable for some clients. So we looked
• 54:27
  Speaker 1: at it and we launched UH four actively managed ETFs
• 54:30
  Speaker 1: based on the four strategies that we thought had the
• 54:33
  Speaker 1: most promise in today's market where we see the biggest
• 54:36
  Speaker 1: So it's a concentrated U S strategy called d U
• 54:39
  Speaker 1: S A Davis Select US. So that is a really
• 54:43
  Speaker 1: UH sort of focused U S strategy UH Davis International
• 54:47
  Speaker 1: d I N T and that's non US international again
• 54:52
  Speaker 1: very focused. So it's not you know, the international indexes
• 54:56
  Speaker 1: are just a mess. You know, I think we've outperformed
• 54:58
  Speaker 1: the international indexes and sort of all periods. It's and
• 55:01
  Speaker 1: a lot of active managers have So if you want
• 55:03
  Speaker 1: to invest internationally, being active is usually the way to go,
• 55:06
  Speaker 1: but there weren't some great active ets. So d A
• 55:09
  Speaker 1: global that combines both. I always say, if somebody's coming
• 55:12
  Speaker 1: does with just wants one fund Global is probably the
• 55:15
  Speaker 1: best because it's the least constraint. D w L D
• 55:18
  Speaker 1: Davis Worldwide and then financial where I started my We
• 55:21
  Speaker 1: started d F n L because the financial e t
• 55:24
  Speaker 1: F s. Do you know the financial e t F
• 55:26
  Speaker 1: the largest financial ETF has almost in five stocks. I
• 55:32
  Speaker 1: mean that's a little scary, you know, aping the s. Yeah,
• 55:37
  Speaker 1: and so they have huge concentration risk in a single subsector.
• 55:40
  Speaker 1: So we we launched those. They're actively managed, We run
• 55:44
  Speaker 1: them with the same discipline, the same philosophy, the same team.
• 55:48
  Speaker 1: And I thought, well, this will be the beginning of
• 55:50
  Speaker 1: the wave, like everybody will do it now. But it
• 55:52
  Speaker 1: hasn't happened. And I think the reason is is that
• 55:55
  Speaker 1: are we're large enough to have credibility to be able
• 55:59
  Speaker 1: to offer it, to make the investments and operational excellence
• 56:02
  Speaker 1: to do it, but we're small enough that we don't
• 56:04
  Speaker 1: have to worry about liquidity and front running. And you know,
• 56:07
  Speaker 1: if we're buying Google, I don't have to worry about,
• 56:09
  Speaker 1: you know, somebody trying to jump in front of us
• 56:11
  Speaker 1: or that. Uh. We have a culture of transparency. We're
• 56:15
  Speaker 1: already low cost. You know, all of our actively managed
• 56:18
  Speaker 1: funds have below average fees, and so we didn't have
• 56:20
  Speaker 1: to worry about some fee arbitrage and uh. And so
• 56:24
  Speaker 1: we we sort of set out with fully transparent, you know,
• 56:27
  Speaker 1: true ETFs. We put a lot of our own money
• 56:30
  Speaker 1: in them because there is a lot of tax efficiency
• 56:32
  Speaker 1: uh in them in this environment and and uh and
• 56:35
  Speaker 1: what we found surprisingly very is there a few traditional
• 56:38
  Speaker 1: et F advisors that have come to us and said, hey,
• 56:40
  Speaker 1: I'm mostly passive, but I've looked at the data and
• 56:43
  Speaker 1: there are periods of time where even the average active
• 56:46
  Speaker 1: manager outperforms for five years. Maybe I should reserve a
• 56:49
  Speaker 1: place in my portfolio for real active management. And so
• 56:52
  Speaker 1: we saw at first globally international, but we're even seeing
• 56:55
  Speaker 1: in the US. Now you mentioned the tax efficiency. I
• 56:58
  Speaker 1: know this has been said jokingly, maybe it's only half jokingly,
• 57:02
  Speaker 1: but it's true. If they were introduced as a new
• 57:05
  Speaker 1: product today, mutual funds might have a harder time finding
• 57:10
  Speaker 1: an audience, whereas the e t F s because of
• 57:13
  Speaker 1: the way they're structured. What happens internally doesn't generate a
• 57:17
  Speaker 1: tax bill until you send sell them. Are we seeing
• 57:21
  Speaker 1: that transition from mutual funds to e T F or
• 57:24
  Speaker 1: is it still too much of a niche product and
• 57:27
  Speaker 1: mutual funds are gonna be around for another century of
• 57:30
  Speaker 1: so well, I mean, we started the e T s
• 57:32
  Speaker 1: because we saw the advantages. They are not advantaged in
• 57:35
  Speaker 1: every environment. Right, A traditional mutual fund with steady inflows
• 57:39
  Speaker 1: has enormous advantages because it can in a sense reposition
• 57:44
  Speaker 1: the portfolio without generating any gains and so on. An
• 57:46
  Speaker 1: ETF does not have that advantage. And et F is
• 57:50
  Speaker 1: very much like an s M A right, it's a
• 57:52
  Speaker 1: separately managed to count in essence um. So there are advantages.
• 57:57
  Speaker 1: There are environments where you could imagine the mean, but
• 58:00
  Speaker 1: by and large, I would say, if I had to predict,
• 58:03
  Speaker 1: I could definitely see the It would be hard for
• 58:06
  Speaker 1: me to understand why et F wouldn't continue to gain
• 58:09
  Speaker 1: traction because of the relative ease of transactions and so on,
• 58:13
  Speaker 1: and so I you know, I think in a sense,
• 58:16
  Speaker 1: you know, they have the the some of the advantages
• 58:19
  Speaker 1: of mutual funds in terms of governance and co mingled accounts,
• 58:22
  Speaker 1: but the ease of transaction of individual stocks. You could
• 58:25
  Speaker 1: sort of see how that could have a long way
• 58:27
  Speaker 1: to go, And we certainly wanted to put a marker
• 58:29
  Speaker 1: in the sand and be really the leader in true
• 58:32
  Speaker 1: active management with any everybody focuses on low cost and passive,
• 58:38
  Speaker 1: but the tax benefits are just so spectacular. I'm surprised
• 58:42
  Speaker 1: we haven't seen more mutual funds roll out some for
• 58:46
  Speaker 1: the form of an ETF based version of their active funds. Well,
• 58:51
  Speaker 1: I think that they have a number of barriers that
• 58:53
  Speaker 1: we were comfortable, uh stepping over that stand in their way.
• 58:57
  Speaker 1: Some are too large and they worry about the liquidity
• 58:59
  Speaker 1: of effects. Some have fees that are too high. So
• 59:03
  Speaker 1: if you're charging one percent on a mutual fund, it's
• 59:07
  Speaker 1: hard to offer a low cost e t f uh
• 59:11
  Speaker 1: and without creating the opportunity for fee arbitrage and so on.
• 59:14
  Speaker 1: You mentioned that, meaning I recall when PIMCO first rolled
• 59:18
  Speaker 1: out their ETFs, they had them at a higher price
• 59:22
  Speaker 1: point than their mutual funds. Was that the concern the arbitrage? Well, yes,
• 59:26
  Speaker 1: I think so. I mean I think that you you
• 59:29
  Speaker 1: don't want to create a situation where somebody could buy
• 59:33
  Speaker 1: the underlying stocks, uh and in a sense short the
• 59:37
  Speaker 1: E t F and make a guaranteed return that would
• 59:42
  Speaker 1: be reasonable. Uh So, if that guaranteed return is you know,
• 59:46
  Speaker 1: thirty basis points or sixty basis points, that's gonna be
• 59:50
  Speaker 1: tough to make a lot of money on because you're
• 59:52
  Speaker 1: taking single event risk and things like that, so you'd
• 59:55
  Speaker 1: have deliver it so high. But you know, if you're
• 59:57
  Speaker 1: charging one or one and a half percent, then you
• 1:00:00
  Speaker 1: somebody could say, well, I'll just buy those stocks short
• 1:00:02
  Speaker 1: the t F. I make an extra one and a
• 1:00:04
  Speaker 1: half percent doing that. Um So, you know, it's a
• 1:00:08
  Speaker 1: little bit like iTunes. I mean, one of the things
• 1:00:11
  Speaker 1: that I would say is that, you know, music was free,
• 1:00:14
  Speaker 1: you could rip it off on the internet. And I
• 1:00:17
  Speaker 1: think Apple's philosophy was if you make it easy for
• 1:00:20
  Speaker 1: people to do the right thing, they'll do the right thing.
• 1:00:23
  Speaker 1: And and that's what and I feel that way about
• 1:00:26
  Speaker 1: the E t f s. You know, if you make
• 1:00:27
  Speaker 1: it easy for somebody to do the right thing to
• 1:00:31
  Speaker 1: invest with you at a reasonable fee, uh, then I
• 1:00:34
  Speaker 1: think they'll do it. You know, could can somebody open
• 1:00:36
  Speaker 1: a separate account and mimic what you're doing, you know,
• 1:00:39
  Speaker 1: you know, of course they can. People see the confirms,
• 1:00:42
  Speaker 1: they can see the trades that you're doing for an account,
• 1:00:44
  Speaker 1: and they can mimic those for other accounts on which
• 1:00:47
  Speaker 1: they're not paying you a fee. But I think that
• 1:00:50
  Speaker 1: if you make it easy for people to do the
• 1:00:52
  Speaker 1: right thing, they do the right thing. You know, I've
• 1:00:54
  Speaker 1: I've heard people talk about that. But let's say someone
• 1:00:57
  Speaker 1: were to open an s m A and then they
• 1:00:59
  Speaker 1: would shane a different account to that s m A.
• 1:01:03
  Speaker 1: That that seems like it's far too much work to
• 1:01:07
  Speaker 1: actually do to save fifty or seventy five basis points,
• 1:01:11
  Speaker 1: unless it was hundreds of millions of dollars, in which
• 1:01:14
  Speaker 1: case it would be really easy to identify, um, who
• 1:01:18
  Speaker 1: is piggybacking on all your trades. There was a wonderful
• 1:01:22
  Speaker 1: story but real mentor of mine early was a man
• 1:01:25
  Speaker 1: named Bob Kirby, and he worked at Capital Group, and
• 1:01:28
  Speaker 1: he was just a legend wonderful, wonderful investor in a
• 1:01:31
  Speaker 1: wonderful human being. And uh he tells the story about
• 1:01:35
  Speaker 1: how he was managing an account for an older lady
• 1:01:39
  Speaker 1: and uh, she came in one day and she said,
• 1:01:42
  Speaker 1: you know, my husband has died, and would you take
• 1:01:44
  Speaker 1: on managing his account. He always wanted to do it himself,
• 1:01:47
  Speaker 1: but now that he's dead, I'd like you to take
• 1:01:50
  Speaker 1: it on. And Kirby looked at the account and realized
• 1:01:53
  Speaker 1: that this, uh, this husband had been free riding on
• 1:01:57
  Speaker 1: all his trades, and every time Bob bought a stock
• 1:02:01
  Speaker 1: for the wife, the confirm would be sent home. The
• 1:02:03
  Speaker 1: husband would take a portion of his paycheck at the
• 1:02:06
  Speaker 1: end of the month and buy the same stock. But
• 1:02:08
  Speaker 1: here's the punchline. What was amazing is that the husband's
• 1:02:12
  Speaker 1: account had meaningfully outperformed. Why well, because the husband never
• 1:02:17
  Speaker 1: sold anything, and because he was buying it out of
• 1:02:21
  Speaker 1: income every month, whereas Bob, managing this closed account, was
• 1:02:25
  Speaker 1: constantly selling things and and so what he was doing
• 1:02:28
  Speaker 1: what we call cutting the flowers and watering the weeds. Right,
• 1:02:31
  Speaker 1: what I've done with Amazon for a decade, Right, I'm
• 1:02:34
  Speaker 1: constantly trimming it, uh, you know, to add to something
• 1:02:37
  Speaker 1: that hasn't gone up. And and over time, any honest investor,
• 1:02:41
  Speaker 1: and especially any honest value investor, will tell you that
• 1:02:44
  Speaker 1: their biggest mistakes were what they sold what they bought.
• 1:02:48
  Speaker 1: Quite quite interesting, I know I only have you here
• 1:02:50
  Speaker 1: for a finite amount of time. So let me get
• 1:02:53
  Speaker 1: to my favorite questions that I asked all my guests.
• 1:02:59
  Speaker 1: Lets These are usually pretty revealing about who you are
• 1:03:01
  Speaker 1: and what you're about. Let's start with, UM, you mentioned
• 1:03:05
  Speaker 1: Amazon Prime. What are you streaming these days? Give us
• 1:03:08
  Speaker 1: your favorite Netflix Amazon Prime podcasts? Uh programs. Well, this
• 1:03:15
  Speaker 1: is a very disappointing question because I am I. I
• 1:03:19
  Speaker 1: find that I watched things so infrequently. I I feel
• 1:03:23
  Speaker 1: there were two decisions I made when I was in
• 1:03:25
  Speaker 1: my early twenties. As I said, I'm not going to
• 1:03:28
  Speaker 1: become a sports fan because it's three to five hours
• 1:03:32
  Speaker 1: a week at least least at least and uh, I
• 1:03:35
  Speaker 1: don't understand who is home every Sunday watching football for
• 1:03:39
  Speaker 1: twenty weeks a year. I don't care. And you know,
• 1:03:42
  Speaker 1: and golf is the same way. It's an enormous commitment
• 1:03:45
  Speaker 1: of time. And what I felt when Netflix came out
• 1:03:48
  Speaker 1: and people could binge watch a series, what I said,
• 1:03:50
  Speaker 1: as well, you know, like May West, I I can
• 1:03:53
  Speaker 1: resist anything but temptation, So why get on that trolley?
• 1:03:57
  Speaker 1: So I simply said, I'm not going to subscribe because
• 1:04:00
  Speaker 1: I don't want to see these. I don't want to
• 1:04:01
  Speaker 1: get addicted to some series. So I would say, you know,
• 1:04:05
  Speaker 1: I watched films, I read a lot, uh, but I
• 1:04:08
  Speaker 1: don't watch a lot of you know, I've I've seen
• 1:04:10
  Speaker 1: some of the big ones, the Breaking Bad and so on.
• 1:04:13
  Speaker 1: But but I also find if you don't watch for
• 1:04:15
  Speaker 1: a long time and then you put it on, you're
• 1:04:16
  Speaker 1: so shocked by violence and things like that, You're like,
• 1:04:20
  Speaker 1: this may not be for me. So I'm hopelessly out
• 1:04:23
  Speaker 1: of sync with pop. We'll get two books in a minute.
• 1:04:25
  Speaker 1: But that's fascinating. So I was gonna the next question
• 1:04:28
  Speaker 1: is tell us the most important thing people don't know
• 1:04:31
  Speaker 1: about you? But but that might be it is there
• 1:04:35
  Speaker 1: is there something else that I think. I think people
• 1:04:37
  Speaker 1: that know me assume I'm pretty square, so I think
• 1:04:39
  Speaker 1: that they wouldn't be surprised by that. I I don't
• 1:04:42
  Speaker 1: you know. I would say that it in in many
• 1:04:45
  Speaker 1: ways that I find very reassuring. I'm very very conventional. Um.
• 1:04:49
  Speaker 1: People may not know. I was in seminary, uh when
• 1:04:53
  Speaker 1: I did a master's degree in theology, and I went
• 1:04:56
  Speaker 1: to work for the Episcopal Church, which is really a
• 1:04:59
  Speaker 1: repository of decency. Within Christianity. It's sort of enormously modest, thoughtful, restrained, uh,
• 1:05:07
  Speaker 1: sect of the faith. And I'm fairly agnostic, uh, but
• 1:05:12
  Speaker 1: I my my view was I thought that it did
• 1:05:15
  Speaker 1: a lot of good in the world. But anyway, going
• 1:05:18
  Speaker 1: to work for the church for a year convinced me
• 1:05:20
  Speaker 1: that that wasn't for me. And and so that might
• 1:05:21
  Speaker 1: be signing people don't know. I have a buddy who's
• 1:05:24
  Speaker 1: a deacon in the Episcopal Church, and when we've discussed
• 1:05:30
  Speaker 1: not just faith but religion, and he laid out what
• 1:05:34
  Speaker 1: the precepts of that faith is. It was really quite
• 1:05:38
  Speaker 1: fascinating because it's such a different premise in terms of
• 1:05:43
  Speaker 1: perceiving knowledge and responsibility, and it's very different than what
• 1:05:48
  Speaker 1: you think of as versus a traditional religious belief. Well,
• 1:05:53
  Speaker 1: of course, yeah, religion has got a bad rap as
• 1:05:56
  Speaker 1: a result. But but I will give you something that
• 1:05:58
  Speaker 1: ties to investing, which is one of my favorite teachers
• 1:06:01
  Speaker 1: at that time. It was a bishop of Newark, and
• 1:06:03
  Speaker 1: he episcopal Bishop of Newark. And he once asked me
• 1:06:06
  Speaker 1: what's the opposite of faith? And I said doubt And
• 1:06:11
  Speaker 1: he said no certainty. He said, if you doubt and
• 1:06:16
  Speaker 1: faith are required of you. You need doubt to have
• 1:06:19
  Speaker 1: faith in the same way you need fear to have courage. Right.
• 1:06:23
  Speaker 1: If you don't have any fear, you don't have any courage,
• 1:06:26
  Speaker 1: right You. You may be you may do things that
• 1:06:28
  Speaker 1: appear to be courageous, but you don't have any courage.
• 1:06:31
  Speaker 1: You need fear in order to be courageous. You need
• 1:06:33
  Speaker 1: doubt in order to that faith. Certainty is the opposite
• 1:06:35
  Speaker 1: of faith. That's so interesting you said that because I
• 1:06:37
  Speaker 1: have a friend who always asks what's the opposite of love?
• 1:06:41
  Speaker 1: And the answer is, it's not hate, it's different, and
• 1:06:44
  Speaker 1: it's the same philosophical Well, in this political time, it's
• 1:06:48
  Speaker 1: a good phrase to bear in mind because, as I said,
• 1:06:51
  Speaker 1: I I have time for people whose politics are on
• 1:06:53
  Speaker 1: either side of this divide, provided they think it's a
• 1:06:57
  Speaker 1: difficult choice. Well, when somebody thinks that obvious and easy,
• 1:07:01
  Speaker 1: that's when I get a little nervous for sure, and
• 1:07:03
  Speaker 1: and it never is. Um. So let's talk about mentors.
• 1:07:06
  Speaker 1: Who were some of the mentors that guided your career
• 1:07:09
  Speaker 1: and helped influence the way you think about uh investing. Well,
• 1:07:13
  Speaker 1: I mean I I grew up with two at at
• 1:07:16
  Speaker 1: the dining room table, so you know, I had, you
• 1:07:18
  Speaker 1: know father, that is, my father is a spectacular teacher
• 1:07:22
  Speaker 1: about investing. It's just he very early. It was about
• 1:07:26
  Speaker 1: the businesses, not the pieces of paper. It was visiting
• 1:07:30
  Speaker 1: companies with him, seeing the people, as he would always say,
• 1:07:32
  Speaker 1: people and ideas. Uh. He would uh we could buy stocks.
• 1:07:37
  Speaker 1: He would finance them if we wrote a report and
• 1:07:40
  Speaker 1: called the company. Uh and uh. It was just he
• 1:07:44
  Speaker 1: made it. So, you know, I used to say, when
• 1:07:45
  Speaker 1: the train pulled in at night, uh in uh. He
• 1:07:48
  Speaker 1: lived out in Tuxedo. Uh. And the commuters get off
• 1:07:51
  Speaker 1: the train and they all looked gray and sort of
• 1:07:53
  Speaker 1: ashen with their briefcase and you know, their sack suits,
• 1:07:57
  Speaker 1: and and my dad would get off and he was
• 1:07:59
  Speaker 1: just exuber you know. He just loved the ideas. And
• 1:08:02
  Speaker 1: of course he learned from his father, who was the
• 1:08:04
  Speaker 1: same way. The best game in town. And he only
• 1:08:06
  Speaker 1: invested in financials. That was his specialty. But he just
• 1:08:10
  Speaker 1: loved them. So those two. But but outside of them,
• 1:08:13
  Speaker 1: it would have to be Charlie Munger. I mean, he is,
• 1:08:16
  Speaker 1: he came into my life at a wonderful stage. I
• 1:08:19
  Speaker 1: admire him more than almost anybody. I know, his intellect,
• 1:08:24
  Speaker 1: his character, his wisdom, his thoughtfulness, his decency, and he's
• 1:08:28
  Speaker 1: just one of the great human beings I've ever know.
• 1:08:30
  Speaker 1: How did Charlie Munger come into your life? Well, that's
• 1:08:33
  Speaker 1: a good question. Uh. You know, my grandfather had a
• 1:08:37
  Speaker 1: long history and my father investing in Berkshire, So we
• 1:08:40
  Speaker 1: had gone to annual meetings. And you know, for many
• 1:08:42
  Speaker 1: years my board was actually my father was actually on
• 1:08:45
  Speaker 1: the board of Geico. Uh, I mean my grandfather was
• 1:08:48
  Speaker 1: on the board of Geico. So there had been overlaps
• 1:08:50
  Speaker 1: that way. But I met Charlie through a mutual friend, uh,
• 1:08:55
  Speaker 1: when I was interested in trying to sell a business
• 1:08:58
  Speaker 1: that my grandfather had, which was a curities lending business.
• 1:09:01
  Speaker 1: And I won't bore you with all of the details
• 1:09:03
  Speaker 1: of that business, but uh it basically as my grandfather.
• 1:09:07
  Speaker 1: When my grandfather died, he gave a hundred percent of
• 1:09:10
  Speaker 1: his estate to charity and uh, and so he had
• 1:09:14
  Speaker 1: asked me to try to wrap up his business while
• 1:09:16
  Speaker 1: he was still alive, so that when he died, people
• 1:09:18
  Speaker 1: wouldn't be out on the streets. And so I was
• 1:09:20
  Speaker 1: looking for a home for this securities lending operation, and
• 1:09:23
  Speaker 1: and I thought Berkshire could be They had obviously a
• 1:09:26
  Speaker 1: great balance sheet, they had a big equity portfolio and
• 1:09:28
  Speaker 1: and maybe they would take this operation. And I arranged
• 1:09:31
  Speaker 1: this breakfast with Charlie Munger. I pitched it to him
• 1:09:34
  Speaker 1: between eight and eight oh seven in the morning. At
• 1:09:37
  Speaker 1: eight oh seven, he said, I have no interest in
• 1:09:39
  Speaker 1: the business that's you know, uh, you know ten guys
• 1:09:43
  Speaker 1: named Tony and you know, back office business where we
• 1:09:46
  Speaker 1: don't understand, you know. But he said, I'm interested in
• 1:09:48
  Speaker 1: why you picked Berkshire. And so I talked to him
• 1:09:51
  Speaker 1: about the balance sheet and the security and he said,
• 1:09:53
  Speaker 1: well that's it. And then we got and we didn't
• 1:09:55
  Speaker 1: leave the table until lunchtime, and it was you know,
• 1:09:59
  Speaker 1: I would define it as, you know, the big most
• 1:10:02
  Speaker 1: significant change, uh in not just my professional but really
• 1:10:06
  Speaker 1: my professional and personal life in terms of the direction
• 1:10:09
  Speaker 1: of my life. That breakfast was an enormous change. And
• 1:10:12
  Speaker 1: I've always been grateful to him, and I try to
• 1:10:14
  Speaker 1: see him whenever I can and and uh uh he
• 1:10:18
  Speaker 1: probably wouldn't mind, I say. I. I asked about his
• 1:10:20
  Speaker 1: birthday what he wanted for his birthday, and he said,
• 1:10:24
  Speaker 1: a paternity suit. Yeah, that sounds like him. That's hilarious. Um,
• 1:10:29
  Speaker 1: let's talk about books you mentioned um, uh, you enjoy reading.
• 1:10:33
  Speaker 1: I know Monger and Buffett do spend half their day reading.
• 1:10:37
  Speaker 1: What are some of your favorite books? What are you
• 1:10:38
  Speaker 1: reading these days? Fiction, nonfiction, whatever? Well, you know, it's
• 1:10:42
  Speaker 1: funny the waves that you go through. I find I
• 1:10:44
  Speaker 1: find myself in periods of time where I'm reading too
• 1:10:47
  Speaker 1: much fiction and I need to force back in nonfiction,
• 1:10:50
  Speaker 1: and then the opposite. I've been in the opposite phase.
• 1:10:53
  Speaker 1: More recently, it's much more nonfiction. I think it's part
• 1:10:56
  Speaker 1: of getting older is that you just become more You
• 1:10:59
  Speaker 1: just you see more wonder in the reality, and you've
• 1:11:03
  Speaker 1: lived enough that a lot of the stories in fiction
• 1:11:05
  Speaker 1: begin to feel you know, you know, well we've we've
• 1:11:07
  Speaker 1: seen that story before. The old joke about um fiction
• 1:11:11
  Speaker 1: versus nonfiction fiction has to make sense, Yes, exact nonfiction
• 1:11:15
  Speaker 1: could be completely and perfectly said. So well, I mean,
• 1:11:18
  Speaker 1: of course, everybody should read the what I call the
• 1:11:21
  Speaker 1: three scandal books, uh, you know of last year. You know,
• 1:11:24
  Speaker 1: the Paronos book, uh Blood, Bad Blood, the unbelievable book
• 1:11:31
  Speaker 1: on one MDB on the Malaysian Front. It's called the
• 1:11:35
  Speaker 1: Billion Dollar Wail. It's a terrible title, but just a
• 1:11:37
  Speaker 1: spectacular story. And uh, and then everybody should read Bill
• 1:11:41
  Speaker 1: Browner read capital you know that is, you know, just
• 1:11:45
  Speaker 1: the the corruption that went on under Putin in Russia.
• 1:11:48
  Speaker 1: So that was and is ongoing and is ongoing. Um.
• 1:11:51
  Speaker 1: But I would say the best book that I read
• 1:11:53
  Speaker 1: last year, uh was I'm going to mispronounce his name.
• 1:11:56
  Speaker 1: I'm sad to say it's Boo Trevanissan. I think B
• 1:12:00
  Speaker 1: h U and then S R and V and a
• 1:12:03
  Speaker 1: bunch of consonants. Uh. But it was a book called Americana.
• 1:12:07
  Speaker 1: And you have to be careful because when it was
• 1:12:09
  Speaker 1: first recommended to me, I went and bought a book
• 1:12:11
  Speaker 1: called Americana, which was about a Nigerian refugee and hair
• 1:12:15
  Speaker 1: dressing and a few other things. And I thought, I
• 1:12:18
  Speaker 1: was very surprised that my friend recommended this. But it
• 1:12:21
  Speaker 1: was a good novel, but clearly it was the wrong one.
• 1:12:24
  Speaker 1: Americana is a history of American capitalism, but it's divided
• 1:12:29
  Speaker 1: into chapters where each chapter stands on its own as
• 1:12:33
  Speaker 1: the history of a specific industry in this country and
• 1:12:36
  Speaker 1: not just the people that started it, the ideas how
• 1:12:40
  Speaker 1: it caught traction, but importantly how it was financed. You know,
• 1:12:44
  Speaker 1: who financed the Mayflower, Who financed you know, the cotton
• 1:12:49
  Speaker 1: gin who financed Ford versus General motors, who financed the
• 1:12:53
  Speaker 1: telegraph or the canals, the microprocessor and resist transistor. You know.
• 1:13:00
  Speaker 1: So you really have this sweeping account, beginning with the
• 1:13:03
  Speaker 1: Mayflower and ending with the Internet, of how these industries
• 1:13:08
  Speaker 1: developed with a real focus on specific companies and people,
• 1:13:11
  Speaker 1: but also how did the capital flow in? Who owned them,
• 1:13:14
  Speaker 1: how did they raise the money? Wonderful, wonderful book that
• 1:13:17
  Speaker 1: sounds fascinating. I'm gonna make a book recommendation to you
• 1:13:21
  Speaker 1: only because you describe that trilogy of um fraud books.
• 1:13:27
  Speaker 1: If you haven't read The Spider Network, I think it
• 1:13:30
  Speaker 1: was by David Enrich. It's about the library manipulation. If
• 1:13:35
  Speaker 1: you liked the Bad Blood book, this is the same thing.
• 1:13:38
  Speaker 1: It reads like a thriller straight through. Really quite fascinating.
• 1:13:42
  Speaker 1: I love. I have to say, I think financial journalists
• 1:13:44
  Speaker 1: don't get enough credit when they do expose these things.
• 1:13:47
  Speaker 1: And it's funny, you know, we all know Sarah Nos
• 1:13:49
  Speaker 1: but tharahs was tiny compared to one m dB, I
• 1:13:52
  Speaker 1: mean one MDB. Somehow a young man stole nine billion
• 1:13:57
  Speaker 1: dollars and is still at large and it's almost you know,
• 1:14:01
  Speaker 1: whatever you say about Elizabeth and Paraos, you know, Uh,
• 1:14:06
  Speaker 1: she was a believer and went down with the ship.
• 1:14:08
  Speaker 1: I mean it is so money went in, but billions
• 1:14:12
  Speaker 1: wasn't lost. You know. Here nine billion dollars just poof. Uh.
• 1:14:16
  Speaker 1: It's a spectacular story. So I if you're interested in
• 1:14:21
  Speaker 1: financial it's it's it's a good one. I'm definitely gonna
• 1:14:24
  Speaker 1: check that out. Um, tell us about a time you
• 1:14:27
  Speaker 1: failed and what you learned from the experience. Well, you know,
• 1:14:32
  Speaker 1: I said earlier success as a lousy teacher. Uh. You know,
• 1:14:36
  Speaker 1: the culture of our firm is so based on trust
• 1:14:40
  Speaker 1: between the team of us that worked together. And the
• 1:14:44
  Speaker 1: reason that we feel trust is so important is because
• 1:14:47
  Speaker 1: admitting and learning from your mistakes is such a critical
• 1:14:50
  Speaker 1: part of getting better. And so we actually in our
• 1:14:54
  Speaker 1: the center of our research department, we have a wall
• 1:14:56
  Speaker 1: with the frame stock certificates of our biggest mistakes and
• 1:15:00
  Speaker 1: uh that goes back twenty or twenty five years and
• 1:15:04
  Speaker 1: it keeps growing, unfortunately, my son said, starting to look
• 1:15:08
  Speaker 1: like a mural and uh. And each certificate has a
• 1:15:11
  Speaker 1: plaque on the bottom with the transferable lesson learned and
• 1:15:15
  Speaker 1: some are mistakes like quantification. Some are mistakes of qualification judgment. Uh.
• 1:15:21
  Speaker 1: Some are mistakes of omission, things that we failed to
• 1:15:24
  Speaker 1: do that we ought to have done. Some our mistakes
• 1:15:26
  Speaker 1: of comission. Some companies are on there twice. Uh. And
• 1:15:30
  Speaker 1: they can be on there twice because you bought them
• 1:15:32
  Speaker 1: wrong and you sold them wrong. Uh so uh, you
• 1:15:37
  Speaker 1: know there were Uh. The mistakes of quantification are the
• 1:15:42
  Speaker 1: easiest to fix because like that manufacturing process earlier when
• 1:15:45
  Speaker 1: we talked about Danny Kahneman, you know, you constantly feed
• 1:15:49
  Speaker 1: those back into the process. All Right, we have to
• 1:15:51
  Speaker 1: reconcile the cash flow from operating section with the cash
• 1:15:54
  Speaker 1: flow from investing section and make sure those tied to
• 1:15:56
  Speaker 1: the income statement. Because that's how Enron or Loo sent
• 1:16:00
  Speaker 1: most dramatically, was manipulating their their cash flow statement, their
• 1:16:04
  Speaker 1: income statement through their cash flow statements. On mistakes of quantification. Uh, maintenance,
• 1:16:10
  Speaker 1: capital versus appreciation, those are valuable lessons because you put
• 1:16:13
  Speaker 1: them back in the system, you don't make them again.
• 1:16:15
  Speaker 1: The firm gets better judgments a little tougher because each
• 1:16:18
  Speaker 1: one looks a little different, like Tolstoy's unhappy families. Um.
• 1:16:21
  Speaker 1: And you don't want to learn so broad a lesson
• 1:16:24
  Speaker 1: that you miss a real uh, you miss an opportunity.
• 1:16:27
  Speaker 1: The other way, the mistakes of omission, those are enormously valuable.
• 1:16:31
  Speaker 1: I mentioned Google earlier Google's on our wall because I
• 1:16:34
  Speaker 1: did all the work. I met Google five or six
• 1:16:37
  Speaker 1: times before they came public. You know, we are large
• 1:16:40
  Speaker 1: shareholders in three newspaper companies. We understood the advertising business,
• 1:16:45
  Speaker 1: and yet we didn't understand how effective Google ads were.
• 1:16:48
  Speaker 1: For one simple reason, we never called an advertiser. If
• 1:16:53
  Speaker 1: we had called Geico or Progressive, who were two of
• 1:16:55
  Speaker 1: the largest advertisers on Google before they came public, we
• 1:16:58
  Speaker 1: would have learned that to get a lead through Google
• 1:17:02
  Speaker 1: was costing them something like two dollars. Their next nearest
• 1:17:06
  Speaker 1: customer acquisition vehicle, which I think was late night cable television,
• 1:17:10
  Speaker 1: was thirty dollars. It was so valuable. So anyway, those
• 1:17:14
  Speaker 1: are mistakes. So I would say, you know, we've been
• 1:17:17
  Speaker 1: guided by failure, uh and UM. We really try to
• 1:17:21
  Speaker 1: have a culture of embracing it and learning from it
• 1:17:24
  Speaker 1: and and earning a subsequent return on the past mistakes
• 1:17:28
  Speaker 1: we've made. It's interesting you guys do that via wall
• 1:17:31
  Speaker 1: all of the I shouldn't say all. Many of the
• 1:17:35
  Speaker 1: prominent venture capitalists hold out there. Some people call it
• 1:17:39
  Speaker 1: their anti portfolio, either the things they said no to,
• 1:17:45
  Speaker 1: like Apple or Amazon, or some of the more spectacular
• 1:17:49
  Speaker 1: failures they've said yes to. And I don't want to
• 1:17:52
  Speaker 1: call it a badge of honor, but it does reflect
• 1:17:55
  Speaker 1: a certain degree of humility and willingness to learn from mistakes.
• 1:17:59
  Speaker 1: You don't see it in many of the companies that
• 1:18:02
  Speaker 1: manage public funds. So it's interesting to hear that you
• 1:18:06
  Speaker 1: guys do something similar to what the vcs do. Well,
• 1:18:09
  Speaker 1: it's my my grandfather's You don't learn from mistakes if
• 1:18:12
  Speaker 1: you don't admit you make them. And and you know,
• 1:18:15
  Speaker 1: we're in a dynamic business. What what what helped us
• 1:18:18
  Speaker 1: succeed in the nineteen seventies was different than the eighties
• 1:18:21
  Speaker 1: or in the eighties didn't work in the nineties. So
• 1:18:23
  Speaker 1: this process of evolution. That's why, going back to your
• 1:18:25
  Speaker 1: very early question about value and growth, that's why I
• 1:18:28
  Speaker 1: get so mad when people say I won't look at something,
• 1:18:31
  Speaker 1: because if you won't look at biotech because you're a
• 1:18:34
  Speaker 1: value investor, you're gonna miss an enormous change in society.
• 1:18:40
  Speaker 1: In the economy that may or may not unfold, but
• 1:18:43
  Speaker 1: when it does, it will have real economic consequences. And
• 1:18:46
  Speaker 1: you might not look at it in order to buy
• 1:18:48
  Speaker 1: a biotech company, but you might look at it in
• 1:18:51
  Speaker 1: terms of what it will mean for healthcare costs, or
• 1:18:53
  Speaker 1: what it which is your in your insurance portfolio, or
• 1:18:57
  Speaker 1: what it might mean for you know, life expectancy. And
• 1:18:59
  Speaker 1: so we just we have a curious mindset, but we
• 1:19:03
  Speaker 1: also think that the idea of not looking at things
• 1:19:06
  Speaker 1: is very, very dangerous. Why why didn't you invest in
• 1:19:08
  Speaker 1: the company that cured cancer? Well, they didn't have any
• 1:19:11
  Speaker 1: earnings the first two quartersactly, just a crazy You know,
• 1:19:14
  Speaker 1: we made a lot of money investing in Cable, and
• 1:19:16
  Speaker 1: you know Cable had no earnings for twenty five years.
• 1:19:20
  Speaker 1: Isn't that really? I think? So, you know, it's all
• 1:19:23
  Speaker 1: cash flow. I don't think they went to earnings until
• 1:19:25
  Speaker 1: about fifteen ten or fifteen years ago, and Cable started
• 1:19:29
  Speaker 1: in the seventies, so I would yeah, I would say
• 1:19:31
  Speaker 1: it would have been twenty five years with no no
• 1:19:34
  Speaker 1: reported earnings. But again going back to accounting, lots of
• 1:19:37
  Speaker 1: cash flow. So what do you do for fun? What
• 1:19:40
  Speaker 1: do you do when you're not in the office or
• 1:19:42
  Speaker 1: when you're not reading. Well, Uh, that's a good question.
• 1:19:47
  Speaker 1: I mean, I you know, we we always say, you know,
• 1:19:50
  Speaker 1: it's hard to find investors that successful investors that had
• 1:19:54
  Speaker 1: a history playing team sports. I always say it's sort
• 1:19:58
  Speaker 1: of the mindset you te to end up with runners, swimmers,
• 1:20:03
  Speaker 1: case link offers, but you don't get a lot of
• 1:20:06
  Speaker 1: uh in the type of long term sort of value investing.
• 1:20:09
  Speaker 1: I think partly it's because I think investing successful investing.
• 1:20:14
  Speaker 1: Value investing requires you to think differently than the the others,
• 1:20:18
  Speaker 1: to set yourself apart, and that mindset tends to lend
• 1:20:21
  Speaker 1: itself more to quiet pursuits, you know, individual things rather
• 1:20:26
  Speaker 1: than being part of the team. You have to have
• 1:20:28
  Speaker 1: lower emotional intelligence things like that. Um so I do
• 1:20:31
  Speaker 1: you know, I enjoy things like running and swimming. Uh.
• 1:20:34
  Speaker 1: But but I would say the one thing I do
• 1:20:36
  Speaker 1: that's a little bit unusual is I have I have
• 1:20:38
  Speaker 1: had for twenty years or so a very very old
• 1:20:42
  Speaker 1: wooden sail boat feeling and I h it was built
• 1:20:48
  Speaker 1: fifty two years ago, fifty three years ago, went down
• 1:20:51
  Speaker 1: the ramp the same month I did. And uh, it's
• 1:20:54
  Speaker 1: not a fancy boat. And it's uh, but it's a
• 1:20:57
  Speaker 1: very well built, sort of hearty boat. And and I
• 1:21:00
  Speaker 1: love sailing that wherever I can. And so we've been
• 1:21:02
  Speaker 1: up to Scandinavia, or up to Nova Scotia, or down
• 1:21:06
  Speaker 1: to the Caribbean. And what I love about the metaphor
• 1:21:09
  Speaker 1: of sailing is that, you know, people say golf is
• 1:21:12
  Speaker 1: like life. I don't think golfs like life. I mean,
• 1:21:14
  Speaker 1: people say you play against yourself and so on. But
• 1:21:16
  Speaker 1: but in golf, the small stuff counts the same as
• 1:21:18
  Speaker 1: the big stuff, and I don't think that's like life.
• 1:21:21
  Speaker 1: I don't think the six inch pot counts the same
• 1:21:23
  Speaker 1: as the hundred yard drive in life, or I guess
• 1:21:26
  Speaker 1: two hundred yards. I don't know how far people drive
• 1:21:28
  Speaker 1: a golf ball. But but sailing, I think is very
• 1:21:31
  Speaker 1: metaphorically powerful, especially for investing, because you can't change the
• 1:21:36
  Speaker 1: direction of the wind. You have to adapt. But if
• 1:21:39
  Speaker 1: you want to make progress, you can continue to make progress,
• 1:21:43
  Speaker 1: but in an indirect way against the way. Yeah. And
• 1:21:45
  Speaker 1: when we come back to investing, you know what we
• 1:21:48
  Speaker 1: say is we know we're going to go through periods
• 1:21:49
  Speaker 1: of bad weather and storms. We want to run our
• 1:21:52
  Speaker 1: portfolio like a ship to survive all different kinds of
• 1:21:55
  Speaker 1: weather to continue to make progress. But we don't want to,
• 1:21:58
  Speaker 1: in a sense expose ourselves to the risk that when
• 1:22:00
  Speaker 1: the storm comes, will founder. But we also want to
• 1:22:03
  Speaker 1: make sure that we're making progress, so we have to
• 1:22:06
  Speaker 1: move forward. So that sort of balance of adaptation, response, thoughtfulness,
• 1:22:11
  Speaker 1: you know, the inability to predict the short term, you
• 1:22:14
  Speaker 1: know that those things all matter. So two things. First,
• 1:22:17
  Speaker 1: I'm gonna have to send you something. I'm gonna make
• 1:22:19
  Speaker 1: a note to email you something about that exact topic
• 1:22:22
  Speaker 1: because it's so fascinating. But second, so I have a small,
• 1:22:26
  Speaker 1: little runabout little power boat, but I got into boating
• 1:22:30
  Speaker 1: through a friends sailboat, and to me, there is nothing
• 1:22:35
  Speaker 1: more relaxing than just being out on the water with
• 1:22:38
  Speaker 1: no engine noise, just the wind and the sails. There's
• 1:22:42
  Speaker 1: something about it that is unique in the world of
• 1:22:47
  Speaker 1: um leisure activities. Well, we talked about being wandering and
• 1:22:51
  Speaker 1: that maybe a genetic predisposition to be wanderers, to be explorers,
• 1:22:55
  Speaker 1: as having served our species over time, and and I
• 1:22:58
  Speaker 1: agree that there's something about sailing and the silence, the harmony,
• 1:23:02
  Speaker 1: the balance. UM. I also particularly love navigating, and so
• 1:23:06
  Speaker 1: you know, I do a little celestial navigation. I have
• 1:23:09
  Speaker 1: a GPS as everyone's got to go there. But you know,
• 1:23:14
  Speaker 1: there's something about being in that moment that I find.
• 1:23:17
  Speaker 1: And of course it's my favorite way to be with
• 1:23:19
  Speaker 1: my family because it's there's no TV, there's no cable
• 1:23:24
  Speaker 1: and and uh, you know, a friend of mine once
• 1:23:27
  Speaker 1: referred to it as a wasp Winnebago. I didn't love,
• 1:23:31
  Speaker 1: but but boy it is. It is a beautiful way
• 1:23:33
  Speaker 1: to to see the world. So, speaking about, um, how
• 1:23:38
  Speaker 1: we see the world, what are you most optimistic about
• 1:23:41
  Speaker 1: in the world of investing and what are you most
• 1:23:43
  Speaker 1: pessimistic about these days? Well, I'm most optimistic about ingenuity.
• 1:23:50
  Speaker 1: You know, it just uh the you know, we're we're
• 1:23:54
  Speaker 1: not uh you know, we we aren't sort of a
• 1:23:57
  Speaker 1: mindless optimists, you know, we don't. But you know the
• 1:24:00
  Speaker 1: fact that that on average, the world gets better, the
• 1:24:03
  Speaker 1: world gets safer, the world gets cleaner. Uh. We address
• 1:24:07
  Speaker 1: problems in part because we worry about them so much. Um,
• 1:24:11
  Speaker 1: when I look at what's happening in AI, in biotech, uh,
• 1:24:15
  Speaker 1: you know, the innovation, what's happened in China was just
• 1:24:18
  Speaker 1: back from China. I mean, you know, look at those people,
• 1:24:20
  Speaker 1: you know, a billion people who when we were kids, uh,
• 1:24:24
  Speaker 1: they were starving and uh, you know, it's just the
• 1:24:28
  Speaker 1: progress of the civilization in the last thirty years is
• 1:24:31
  Speaker 1: just breath taking. So I would say I am excited
• 1:24:34
  Speaker 1: and optimistic because when we talk about black swans, we
• 1:24:37
  Speaker 1: forget we assume that black swans are negative. Right, A large,
• 1:24:41
  Speaker 1: unexpected event, unpredictable with huge economic consequences. We assume that's negative. No,
• 1:24:48
  Speaker 1: I mean you end up with a you know, a
• 1:24:50
  Speaker 1: pharmaceutical or you know, biotech cure for diabetes, Alzheimer's and
• 1:24:56
  Speaker 1: uh a l S and you know, maybe a couple
• 1:24:59
  Speaker 1: of others, and you have medical deflation for the next
• 1:25:02
  Speaker 1: fifty years. Just just look at the recent data on
• 1:25:05
  Speaker 1: cancer death and it's amazing. So so I love the innovation.
• 1:25:09
  Speaker 1: It's one of the things I love about my job
• 1:25:11
  Speaker 1: is meeting in vendors. I meet with a lot of
• 1:25:13
  Speaker 1: firms that are still private, that are have great ideas,
• 1:25:16
  Speaker 1: simply because it's energizing. We don't invest in a lot
• 1:25:19
  Speaker 1: because of the risk reward tradeoff is too great. But
• 1:25:22
  Speaker 1: we love living in the future. That part of it
• 1:25:24
  Speaker 1: is great. My grandmother was once asked what's her favorite day?
• 1:25:27
  Speaker 1: You know, she was five when they were She was
• 1:25:29
  Speaker 1: asked that, she said tomorrow, And so I love that. Uh,
• 1:25:33
  Speaker 1: you know, I think the pessimism is the things that
• 1:25:36
  Speaker 1: can disrupt that. I mean, obviously it's amazing to look
• 1:25:40
  Speaker 1: at what capitalism has done to build uh wealth in
• 1:25:45
  Speaker 1: in China and India, how well it works. Um. I
• 1:25:49
  Speaker 1: lived in in Europe for five years. I went across
• 1:25:52
  Speaker 1: the Berlin Wall and into Czechoslovakia and the eighties. I mean,
• 1:25:57
  Speaker 1: you do not want to go back there. So I
• 1:25:59
  Speaker 1: get a little bit worried about. You know, I would
• 1:26:03
  Speaker 1: say the promises that people politicians can make that can't
• 1:26:07
  Speaker 1: be kept without bankrupting the civilization. It's true of our
• 1:26:11
  Speaker 1: social security, our healthcare promises. So you know, the fact
• 1:26:14
  Speaker 1: that the policy cycle is longer than the political cycle
• 1:26:17
  Speaker 1: is a deep systemic problem. Um. I think we'll muddle through.
• 1:26:21
  Speaker 1: But that that's the one that gives me pause, quite
• 1:26:25
  Speaker 1: quite intriguing. Um. What sort of advice would you give
• 1:26:28
  Speaker 1: to a recent college graduate who was thinking about a
• 1:26:31
  Speaker 1: career in finance. Well, I'd start with the idea that,
• 1:26:36
  Speaker 1: you know, I think you better do it because there's
• 1:26:38
  Speaker 1: something about it that you find meaningful rather than because
• 1:26:41
  Speaker 1: you think you're gonna make a lot of money. I mean,
• 1:26:43
  Speaker 1: one of the great things about what's happening in the
• 1:26:45
  Speaker 1: financial services sector generally is that a lot of uh,
• 1:26:50
  Speaker 1: you know, a lot of excess pay is being squeezed
• 1:26:54
  Speaker 1: out uh and that's probably a healthy development that count reduction.
• 1:27:00
  Speaker 1: So yeah, exactly if people are interested in it because
• 1:27:03
  Speaker 1: of stewardship, if they're interested in it because they're excited
• 1:27:07
  Speaker 1: about the puzzles. You know, one thing I would say
• 1:27:10
  Speaker 1: to all this is millennials I have I have. I
• 1:27:12
  Speaker 1: have four children, and all of who I'm very, very
• 1:27:15
  Speaker 1: proud of right now what they're doing. But is that
• 1:27:18
  Speaker 1: don't imagine that just because something doesn't sound interesting that
• 1:27:23
  Speaker 1: it's not interesting. I think that there's an enormous amount
• 1:27:26
  Speaker 1: of pressure on kids when they come out of college
• 1:27:28
  Speaker 1: to do something that sounds cool, that sounds woke, that
• 1:27:31
  Speaker 1: sounds connected, that sounds and they cheat themselves out of
• 1:27:34
  Speaker 1: learning about things that might not sound that interesting that
• 1:27:39
  Speaker 1: are actually fascinating. So choose your boss. You know, It's
• 1:27:42
  Speaker 1: like in college, don't don't study courses that have cool descriptions.
• 1:27:46
  Speaker 1: Ask your friends what the best teacher they had was
• 1:27:48
  Speaker 1: and that it doesn't matter if they're teaching chemistry or
• 1:27:50
  Speaker 1: they're teaching politics, it'll be a great course. And too
• 1:27:54
  Speaker 1: many people uh study, you know, are drawn to the
• 1:27:56
  Speaker 1: description instead of the teacher. It sounds like good advice.
• 1:28:00
  Speaker 1: And our final question, what do you know about the
• 1:28:02
  Speaker 1: world of investing today that you wish you knew thirty
• 1:28:06
  Speaker 1: years ago when you were first getting started. Well, that's
• 1:28:11
  Speaker 1: a good question, I would say. Um, I am struck
• 1:28:16
  Speaker 1: by resilience. I'm struck by how my time horizon continues
• 1:28:20
  Speaker 1: to Lengthen, you know, my my grandfather, uh, you know,
• 1:28:24
  Speaker 1: there's an apoc a story that was true when I
• 1:28:28
  Speaker 1: was a kid of trying to borrow a dollar from
• 1:28:30
  Speaker 1: him to buy a hot dog, and he said that
• 1:28:32
  Speaker 1: if I invested the dollar and earned his returns and
• 1:28:34
  Speaker 1: lived as long as he would, it would be worth
• 1:28:36
  Speaker 1: a thousand dollars by the time I was his age.
• 1:28:38
  Speaker 1: And he said, it's a hot dog worth a thousand dollars.
• 1:28:41
  Speaker 1: And you know the power of compounding, the resiliency of
• 1:28:46
  Speaker 1: the economy and of businesses. You know, if I told
• 1:28:49
  Speaker 1: you what was going to happen in Italy between nineteen
• 1:28:51
  Speaker 1: fifty and two thousand and seventeen, you'd have, I don't
• 1:28:54
  Speaker 1: know what fifty three governments, you'd have the Lira ago
• 1:28:58
  Speaker 1: from you know, tend to three thousand, you'd have, you know,
• 1:29:02
  Speaker 1: the euro crisis, you'd have corruption all. You know, you
• 1:29:06
  Speaker 1: would have been terrified to have a business in Italy,
• 1:29:08
  Speaker 1: and yet if you own Ferrari, you did pretty well,
• 1:29:10
  Speaker 1: did pretty well. And so the ability for businesses to adapt,
• 1:29:14
  Speaker 1: to respond, uh, to change. I wish I had really
• 1:29:18
  Speaker 1: deeply understood that. And God, I wish there were a
• 1:29:20
  Speaker 1: lot of businesses I owned along the way that I
• 1:29:22
  Speaker 1: had just held on too, uh, not been not been
• 1:29:26
  Speaker 1: so worried about next year's results, but really focused on
• 1:29:29
  Speaker 1: the next decade. Quite fascinating. Chris Davis, thank you so
• 1:29:33
  Speaker 1: much for being so generous with your time. We have
• 1:29:36
  Speaker 1: been speaking with Chris Davis, Chairman, chief investment officer at
• 1:29:40
  Speaker 1: Davis Advisors. If you enjoy this conversation, well be sure
• 1:29:44
  Speaker 1: and look up and intro down an inch on Apple
• 1:29:46
  Speaker 1: iTunes and you could see any of the previous three
• 1:29:49
  Speaker 1: hundred such conversations we've had over the past five and
• 1:29:52
  Speaker 1: a half years. Uh. We love your comments, feedback and
• 1:29:56
  Speaker 1: suggestions right to us at m IB podcast that Bloomberg
• 1:30:00
  Speaker 1: dot net. Give us a review on Apple iTunes podcast section.
• 1:30:05
  Speaker 1: You can check out my daily read column on ritalts
• 1:30:08
  Speaker 1: dot com, follow me on Twitter at Ritalts. See my
• 1:30:12
  Speaker 1: weekly column on Bloomberg dot com. I would be remiss
• 1:30:16
  Speaker 1: if I did not thank the crack staff that helps
• 1:30:18
  Speaker 1: put these conversations together each week. Mark sin Ascuce is
• 1:30:23
  Speaker 1: my audio engineer. Tracy Walsh is my producer. Michael Batnick
• 1:30:28
  Speaker 1: is my head of research. I'm Barry Ritolts. You've been
• 1:30:31
  Speaker 1: listening to Masters in Business on Bloomberg Radio.