WEBVTT - Christopher Davis Discusses Smart Value Investing 0:00:02.240 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Boomberg Radio. 0:00:07.360 --> 0:00:10.120 This week on the podcast, I have an extra special guest. 0:00:10.440 --> 0:00:14.120 His name is Chris Davis, and he is chairman, chief 0:00:14.200 --> 0:00:19.000 investment officer, and one of the longest tenured managers at 0:00:19.120 --> 0:00:22.919 Davis Advisors. They really are a fascinating company. They run 0:00:22.920 --> 0:00:25.680 over twenty billion dollars and have been running money for 0:00:25.760 --> 0:00:29.440 the same families for a long time, and much of 0:00:29.800 --> 0:00:33.519 the money in those portfolios are their own. They're not 0:00:33.600 --> 0:00:36.520 quite a family office. They've been a mutual fund shop 0:00:36.600 --> 0:00:40.040 for over fifty years. But it's always nice to talk 0:00:40.159 --> 0:00:42.559 to people who eat their own cooking. If you are 0:00:42.560 --> 0:00:47.400 at all interested in value investing, but value in a 0:00:47.479 --> 0:00:51.320 way that doesn't eliminate companies like Amazon or Google or Apple, 0:00:51.680 --> 0:00:54.600 you're gonna find this to be a fascinating conversation. So, 0:00:54.920 --> 0:01:01.120 with no further ado, my discussion with Chris Davis. This 0:01:01.560 --> 0:01:05.640 is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:01:06.040 --> 0:01:09.480 My extra special guest today is Chris Davis. He is 0:01:09.520 --> 0:01:13.600 the chairman and CEO of Davis Advisors, launched in nineteen 0:01:13.720 --> 0:01:18.360 sixty nine to manage separately managed accounts, eventually moving into 0:01:18.440 --> 0:01:22.520 mutual funds and now e T f S. Davis Advisors 0:01:22.520 --> 0:01:26.080 manages over twenty two billion dollars. Chris is also on 0:01:26.120 --> 0:01:29.039 the board of directors of Coca Cola and is the 0:01:29.200 --> 0:01:33.000 co vice chairman of the Museum of Natural History, located 0:01:33.040 --> 0:01:36.280 here in New York City. Chris Davis, Welcome to Bloomberg. 0:01:36.360 --> 0:01:38.319 Thanks so much, Barry. It's good to be here. So 0:01:38.640 --> 0:01:42.280 let's talk about this industry we're both in. What was 0:01:42.319 --> 0:01:46.040 the business like when you joined Davis Advisors. Was already 0:01:46.040 --> 0:01:48.559 an existing company, wasn't it. Yeah, I mean I feel 0:01:48.600 --> 0:01:50.840 in a way I've gone through the full life cycle 0:01:50.880 --> 0:01:53.200 of the mutual fund industry. I came into it at 0:01:53.240 --> 0:01:55.480 a time when nobody cared, and then there was a 0:01:55.480 --> 0:01:57.640 period of time when everybody cared, and now we're back 0:01:57.680 --> 0:02:00.160 to a period of time when nobody cares. So been 0:02:00.520 --> 0:02:03.440 a long cycle. When did you start. I started in 0:02:03.480 --> 0:02:07.760 the business in nine as a accountant at State Street Bank, 0:02:08.280 --> 0:02:11.520 and then I went to work for a Japanese American firm, 0:02:11.520 --> 0:02:16.080 Tanaka Capital Management, and then came into Davis Advisors. What 0:02:16.160 --> 0:02:20.560 was your role? Well, it's funny I have working at Tanaka. 0:02:20.639 --> 0:02:24.400 What I was really passionate about was sn l's and 0:02:24.400 --> 0:02:26.320 and the reason I was so interested in san El's 0:02:26.400 --> 0:02:28.000 is if you remember, we were in the midst of 0:02:28.000 --> 0:02:30.800 the SNL crisis and I was an analyst, a financial 0:02:30.840 --> 0:02:34.800 analyst at this by side firm. And what struck me is, 0:02:34.840 --> 0:02:36.440 I don't know if you remember the movie It's a 0:02:36.440 --> 0:02:39.560 Wonderful Life. But I kept thinking, in all of these 0:02:39.600 --> 0:02:42.600 headlines about the SNL crisis, there must be a few 0:02:42.639 --> 0:02:45.760 Bailey building and loans out there, good companies with good 0:02:45.800 --> 0:02:48.640 loans that are going to come through this time and 0:02:48.720 --> 0:02:51.280 be value creators. So in all the headlines with bank 0:02:51.280 --> 0:02:54.120 and New England failing and all of that, I was 0:02:54.160 --> 0:02:56.440 passionate about it, and I think in my old firm 0:02:56.440 --> 0:02:59.840 there wasn't quite as much enthusiasm. And when I spoke 0:02:59.840 --> 0:03:02.639 to my father and talked about coming over to Davis, 0:03:02.680 --> 0:03:05.160 one of the things we decided is because the firms 0:03:05.200 --> 0:03:07.840 called Davis Advisors, there's a risk that the employer of 0:03:07.960 --> 0:03:11.040 last resort for people with the same last name. And 0:03:11.160 --> 0:03:12.680 so I said, if I come in, I want my 0:03:12.680 --> 0:03:15.520 own report card. I'm a bank in financials analyst. How 0:03:15.520 --> 0:03:19.040 about if we start a financial fund, and so ine 0:03:19.120 --> 0:03:21.960 we started the Davis Financial Fund. Was that a distressed 0:03:21.960 --> 0:03:25.799 asset fund or just or a hybrid. I would say 0:03:25.800 --> 0:03:28.600 we never intended to be distressed investors, but we became 0:03:28.639 --> 0:03:31.120 distressed investors from time to time. But no, it was 0:03:31.160 --> 0:03:34.120 a straight mutual fund, but with the idea that we 0:03:34.120 --> 0:03:38.160 would focus entirely on financial stocks. And my grandfather had 0:03:38.160 --> 0:03:41.400 a great phrase. He called good financial companies growth stocks 0:03:41.440 --> 0:03:45.360 in disguise. He said that they can compound for generations, 0:03:45.600 --> 0:03:48.360 and yet they're often valued as if they have no growth. 0:03:48.640 --> 0:03:51.000 And so that was the premise of the fund. I've 0:03:51.000 --> 0:03:53.360 been running it for twenty seven or twenty eight years, 0:03:53.600 --> 0:03:55.280 but that was the way for me to have my 0:03:55.360 --> 0:03:58.600 own report card in a sense, independently of all of 0:03:58.600 --> 0:04:01.160 the other fears of being employer lessons. So for people 0:04:01.200 --> 0:04:03.640 who might not have been around during the ESML crisis, 0:04:03.920 --> 0:04:07.320 thousands of of these esnls went belly up, right, A 0:04:07.360 --> 0:04:10.160 lot of babies were thrown out with a lot of bathwater. Well, 0:04:10.200 --> 0:04:12.440 you know, one of the great things about starting then 0:04:12.960 --> 0:04:16.160 is in a way, the financial crisis was sort of 0:04:16.200 --> 0:04:20.920 a significantly amplified version but had a similar shape. There 0:04:20.920 --> 0:04:24.480 were crazy government policies, but the ESNL crisis was primarily 0:04:24.520 --> 0:04:27.560 about commercial real estate, And we might come back later 0:04:27.680 --> 0:04:31.360 to the fact that often credit cycles have this diurnal 0:04:31.480 --> 0:04:34.279 or alternating characteristic, which you hurt you the last time 0:04:34.560 --> 0:04:36.360 is usually not what hurts you the next time. And 0:04:36.400 --> 0:04:39.280 as it we all know, in the financial crisis, commercial 0:04:39.320 --> 0:04:41.240 real estate was sort of a safe place to be. 0:04:41.600 --> 0:04:44.400 But back in the eighties you had looked through office buildings, 0:04:44.400 --> 0:04:46.719 you had corruptions, you had the key to five, you 0:04:46.760 --> 0:04:49.520 had government hearings, and you know a lot of reform 0:04:49.600 --> 0:04:52.520 that came out of that. But you're absolutely right, the 0:04:52.560 --> 0:04:56.560 fundamental lesson was the business of banking. The business of 0:04:56.600 --> 0:04:59.840 making a spread on money, making loans, taking deposit is 0:05:00.120 --> 0:05:04.800 maybe the world's second oldest profession, and that doesn't go obsolete. 0:05:04.839 --> 0:05:09.600 And in these cycles, what happens is the irrational, irresponsible 0:05:09.600 --> 0:05:14.359 players get wiped out, the whole industry valuation tanks. But 0:05:14.440 --> 0:05:18.039 what you realize is at a fundamental level, the survivors 0:05:18.400 --> 0:05:22.560 are actually advantaged by the crisis because now there's less supply, 0:05:23.080 --> 0:05:28.080 less competition, more rational environment. Often the regulatory environment has 0:05:28.200 --> 0:05:32.440 raised moats cheaper stocks. So that was what the layout 0:05:32.600 --> 0:05:36.600 was when I came in and started our financial fund, 0:05:36.600 --> 0:05:39.720 and in a way, it's exactly what I see today. 0:05:39.760 --> 0:05:42.880 It was just the financial crisis was an amplified version. 0:05:43.080 --> 0:05:46.960 It's taken longer for the sector to regain credibility. But 0:05:47.040 --> 0:05:49.080 I think we're looking at the same sort of decade 0:05:49.120 --> 0:05:51.520 ahead that we had in the nineties, where these will 0:05:51.560 --> 0:05:54.320 really be compounding machines to put a little flesh on 0:05:54.360 --> 0:05:57.839 those bones. We're recording this on a morning where JP 0:05:58.040 --> 0:06:03.120 Morgan just reported earnings. They literally reported the best use 0:06:03.240 --> 0:06:07.960 earnings ever in bank history. Eight billion dollars a quarter. 0:06:08.080 --> 0:06:11.440 Is real money, you know, And yet what is the perception? 0:06:11.920 --> 0:06:14.160 You know, the perception is, oh my god. You know 0:06:14.440 --> 0:06:17.280 the London whale. I mean, you know, this is this 0:06:17.320 --> 0:06:19.479 whole thing. This could crumble at any site. You know, 0:06:19.560 --> 0:06:22.480 the London whale was was like six weeks worth of earnings. 0:06:22.880 --> 0:06:25.440 You know. It's amazing the and and one of the 0:06:25.480 --> 0:06:28.200 most interesting things about that, and this is really a 0:06:28.279 --> 0:06:32.360 lesson when all banks, all companies, whatever company you own, 0:06:32.720 --> 0:06:34.800 if you have a long term time horizon, it's going 0:06:34.839 --> 0:06:37.559 to go through a crisis. Right. It might be New Coke, 0:06:37.640 --> 0:06:40.240 it might be the salad oil scandal, it might be 0:06:40.440 --> 0:06:43.960 you know, Microsoft's hearings, and they're gonna go through a crisis, 0:06:44.360 --> 0:06:46.760 and one of the things to really look at is 0:06:46.839 --> 0:06:49.600 what is the management response. So let's get a little 0:06:49.600 --> 0:06:53.440 more granuur on that. We've seen Fortress Diamond respond to 0:06:53.480 --> 0:06:56.080 a number of crises, whether it was the purchase of 0:06:56.160 --> 0:06:59.360 JP Morgan or the London Whale or Libra or any 0:06:59.400 --> 0:07:02.640 of those things, and they've managed to come out pretty well. 0:07:02.680 --> 0:07:06.720 On the other side of the street, Wells Fargo, they 0:07:06.760 --> 0:07:10.760 seemed to be stuck in a rut. One PR nightmare 0:07:10.800 --> 0:07:13.600 after another. They can't get out ahead of the fourth 0:07:13.640 --> 0:07:17.240 placed insurance and and the phony accounts. And it's just 0:07:17.840 --> 0:07:22.080 eleven years after the crisis. They're still fighting, not just 0:07:22.160 --> 0:07:25.240 the last battle, the last war. How come they can't 0:07:25.280 --> 0:07:29.040 seem to get ahead of what is just an endless 0:07:29.040 --> 0:07:32.400 parade of bad PR. Well, you know, Bill Gates famously 0:07:32.440 --> 0:07:36.440 said success as a lousy teacher, and uh. And of course, 0:07:36.680 --> 0:07:40.320 if you look back at Wells Fargo, Wells Fargo was 0:07:40.600 --> 0:07:45.560 certainly maybe the best positioned and manage the financial crisis 0:07:45.560 --> 0:07:48.200 better than any other institution. It was partly the nature 0:07:48.200 --> 0:07:50.800 of their business, but it was partly going all the 0:07:50.800 --> 0:07:53.240 way back to when we first bought the original Wells 0:07:53.280 --> 0:07:56.120 Fargo when I started my financial fund back in the 0:07:56.240 --> 0:08:00.160 early nineties. You know, it was a company that had 0:08:00.200 --> 0:08:05.040 an outstanding credit culture, a rational discipline around costs, and 0:08:05.080 --> 0:08:07.840 a lot of common sense in the place. And they 0:08:07.840 --> 0:08:11.120 did the merger with Northwest, which was really the surviving institution, 0:08:11.440 --> 0:08:14.160 but that culture sort of persisted. And you know the 0:08:14.200 --> 0:08:15.800 old saying is you're get in more trouble with a 0:08:15.840 --> 0:08:18.680 good premise than a bad premise. Well, think about Wells 0:08:18.720 --> 0:08:23.160 Fargo's premise. It was very plausible. Right, people hate walking 0:08:23.200 --> 0:08:27.240 into a bank, they love walking into a store. Why, 0:08:27.360 --> 0:08:30.000 well people help them. They helped solve their problems. They're 0:08:30.040 --> 0:08:34.079 not bureaucratic. And and you know Norwest and then ultimately 0:08:34.120 --> 0:08:37.439 Wells took this basic idea of viewing their branches as 0:08:37.559 --> 0:08:40.680 stores with salespeople that are there to help you, that 0:08:40.720 --> 0:08:44.680 are paid commissions, and they recognize that if customers get 0:08:44.760 --> 0:08:49.520 multiple products with one brank, the customers are happier and 0:08:49.559 --> 0:08:52.960 the banks are more profitable, the customers are stickier. It's 0:08:52.960 --> 0:08:55.760 sort of a win for everybody. So that worked for 0:08:55.800 --> 0:08:58.720 a long time. It's carried them through the financial crisis. 0:08:58.800 --> 0:09:02.719 Really without a blemish. Well, of course, over time they 0:09:02.760 --> 0:09:07.640 push that model too far right, eventually customers have enough products, right, 0:09:07.679 --> 0:09:11.360 they've got three or four accounts, they don't need a fifth. Well, 0:09:11.520 --> 0:09:14.640 rather than simply accept this, the salesforce that was down 0:09:14.679 --> 0:09:17.679 in the trench levels in some of the businesses started 0:09:17.679 --> 0:09:19.679 to cheat. And I would say it would be the 0:09:19.760 --> 0:09:23.440 equivalent of going into sacks and the commission salesman there 0:09:23.480 --> 0:09:25.920 sells you a pair of shoes, but he wants to 0:09:25.920 --> 0:09:28.160 sell you to you only want one, So when you leave, 0:09:28.200 --> 0:09:31.200 he takes your credit card, runs a second pair through, 0:09:31.480 --> 0:09:34.480 but instantly refunds you so there's no cost to you. 0:09:34.880 --> 0:09:38.480 But what he's done is so deeply wrong, deeply unethical, 0:09:38.640 --> 0:09:41.360 especially for God's sakes if you're a bank. So this 0:09:41.480 --> 0:09:44.240 was happening because of a botched incentive system, because it 0:09:44.280 --> 0:09:47.119 had worked so well. But then, to quote the wonderful 0:09:47.520 --> 0:09:50.960 legendary d A of our hometown, Bob Morgan thaw, it's 0:09:51.000 --> 0:09:53.600 not what you do that gets you in trouble, it's 0:09:53.600 --> 0:09:55.200 what you do to cover up what you do that 0:09:55.200 --> 0:09:57.760 gets you in trouble. And of course what happened is 0:09:57.800 --> 0:10:01.080 as news of this perked up, well buried it. The 0:10:01.160 --> 0:10:04.679 management didn't want to know. They underreacted, and that's put 0:10:04.760 --> 0:10:07.800 us where we have. But you contrast JP Morgan in Wells, 0:10:07.840 --> 0:10:10.560 and those are two of our largest holdings. And the 0:10:10.640 --> 0:10:13.440 reason is right now, JP Morgan can do no wrong, 0:10:13.960 --> 0:10:16.600 and in a way, it has taken a long time 0:10:16.679 --> 0:10:19.480 for it to build this credibility. Wells Fargo used to 0:10:19.520 --> 0:10:22.120 have that credibility. They can do no right. So Wells 0:10:22.120 --> 0:10:24.840 Fargo is now one of the cheapest of all the banks. Well, 0:10:25.360 --> 0:10:27.400 look back ten or fifteen years. Who was in the 0:10:27.400 --> 0:10:32.360 penalty box, right, Well, we know Bank America City, right, 0:10:32.559 --> 0:10:35.240 Those two were two of the best performing banks last year. 0:10:35.720 --> 0:10:39.839 So companies, like people, learn from their mistakes. They'll get 0:10:39.880 --> 0:10:42.880 it right. They've got new management, and sooner or later 0:10:42.960 --> 0:10:46.840 the cloud will lift and you'll get, ultimately the multiple 0:10:46.920 --> 0:10:50.040 expansion that comes from people instead of viewing it as 0:10:50.040 --> 0:10:53.240 a below average bank, as viewing it as average. So 0:10:53.280 --> 0:10:55.920 we've been buyers of Wells through this. We think their 0:10:55.960 --> 0:10:59.120 behavior was terrible, the reactions were terrible, but we also 0:10:59.200 --> 0:11:02.000 know that they'll get better. Quite fascinating. Let's talk a 0:11:02.040 --> 0:11:07.520 little bit about your portfolio construction process. A lot of 0:11:07.559 --> 0:11:10.640 people these days use a lot of computer power to 0:11:10.760 --> 0:11:14.360 start out with screens either be very positive or negative. 0:11:14.640 --> 0:11:18.120 How do you begin the process of creating a portfolio? 0:11:18.800 --> 0:11:23.480 You know, I had a meal with Danny Kahneman UH 0:11:23.640 --> 0:11:26.679 quite a while ago, uh at an investor event, and 0:11:26.679 --> 0:11:28.319 now he was sitting next to him and we're talking 0:11:28.320 --> 0:11:30.760 about investing, and he said, well, as far as I 0:11:30.800 --> 0:11:34.480 can tell, you're in the manufacturing business, right, And I said, 0:11:34.520 --> 0:11:37.199 we're not. You know, what are you in academic We're 0:11:37.240 --> 0:11:39.680 not in the manufacturing business. He had not won the 0:11:39.720 --> 0:11:43.400 Nobel Prize at this point, so uh and uh he said, oh, 0:11:43.480 --> 0:11:45.240 you're in the manufacturing because I said, well, what do 0:11:45.280 --> 0:11:48.959 we make? And he said decisions? And he said, if 0:11:49.040 --> 0:11:53.559 I were you, I would break down the process of 0:11:53.600 --> 0:11:57.000 making a decision into as many steps and inputs that 0:11:57.040 --> 0:12:01.480 are measurable as possible, and over time really look at 0:12:01.520 --> 0:12:04.000 where the value add where the value taken aways. So 0:12:04.240 --> 0:12:06.959 when we start with thinking about investing, we think about 0:12:07.040 --> 0:12:09.440 from the point of view of decisions. We break down 0:12:09.440 --> 0:12:12.520 the process into these big areas. Right, there's the sourcing 0:12:12.960 --> 0:12:16.160 of ideas. Then there's exactly what you're asking about, the 0:12:16.200 --> 0:12:19.960 sort of portfolio construction, the investment decisions, and that includes 0:12:20.000 --> 0:12:23.560 what you sell, what you buy, opportunity cost, relative waitings, 0:12:23.559 --> 0:12:26.320 and so on. And then there's of course the constant 0:12:26.400 --> 0:12:30.640 ongoing revaluation of the portfolio in light of changing prices 0:12:30.679 --> 0:12:33.960 and changing data, right, because you have new inputs every 0:12:33.960 --> 0:12:37.720 twelve weeks and sometimes more often than that. And so 0:12:38.080 --> 0:12:40.400 you know, we start with the view that our number 0:12:40.440 --> 0:12:43.760 one job is to build generational wealth, right. We we 0:12:43.840 --> 0:12:46.120 really think about you know, the clients that are with us, 0:12:46.160 --> 0:12:49.040 many of them have been with us for decades, and 0:12:49.120 --> 0:12:51.320 so we start with the idea that we want to 0:12:51.360 --> 0:12:53.760 own a business for a long period of time, and 0:12:53.800 --> 0:12:56.960 therefore the return on the business is not going to 0:12:57.000 --> 0:12:59.760 be driven by us trying to predict the future p 0:13:00.080 --> 0:13:02.880 E ratio or you know, what it will be in 0:13:02.920 --> 0:13:05.959 a takeout or a breakup. What we're really looking at 0:13:06.280 --> 0:13:09.679 is the earnings that business will generate relative to what 0:13:09.720 --> 0:13:12.120 we paid for it over time, and those earnings will 0:13:12.200 --> 0:13:14.200 drive our return. So you're not thinking about it in 0:13:14.320 --> 0:13:17.760 terms of stock or little pieces of paper relative to 0:13:17.760 --> 0:13:21.080 the company. You're thinking about the underlying business and what 0:13:21.120 --> 0:13:23.240 that future cash flow. Yeah, I mean, imagine if you 0:13:23.240 --> 0:13:25.800 bought an apartment building. Let's say you paid ten million 0:13:25.800 --> 0:13:28.880 dollars for an apartment building, and that apartment building was 0:13:28.920 --> 0:13:34.240 generating five thousand dollars of cash flow after reinvesting enough 0:13:34.320 --> 0:13:36.679 to keep the roof and the furnaces and the tenants 0:13:36.720 --> 0:13:39.560 all happy and so on, and if you bought it 0:13:39.640 --> 0:13:41.480 that you'd sort of say, well, I guess I'm starting 0:13:41.480 --> 0:13:45.120 at sort of a five percent earning syield. Now, if 0:13:45.440 --> 0:13:49.240 ten years from now that apartment building was generating two 0:13:49.280 --> 0:13:52.800 million dollars of value, you don't need to go out 0:13:52.880 --> 0:13:55.160 and get the apartment a praise to figure out that 0:13:55.200 --> 0:13:58.640 you've done quite well right. You're making a lot of money, 0:13:58.640 --> 0:14:00.720 not just because you're getting a check for two million 0:14:00.800 --> 0:14:02.880 dollars a year or twenty percent of what you paid 0:14:02.880 --> 0:14:06.360 for it, but also should you decide to sell the building, 0:14:06.400 --> 0:14:09.240 you know that an asset that generates two million dollars 0:14:09.280 --> 0:14:11.719 a year is way more valuable than one that generates five. 0:14:12.800 --> 0:14:16.600 People forget because stocks wiggle around and are priced every day, 0:14:16.600 --> 0:14:18.400 that if they viewed them the way they view that 0:14:18.440 --> 0:14:22.560 apartment building, they would feel a lot calmer when there's 0:14:22.600 --> 0:14:25.560 all these gyrations and stock prices going up and down. 0:14:25.600 --> 0:14:28.320 So we think a lot about earnings yield on cost 0:14:28.720 --> 0:14:31.200 as sort of the way to build wealth and measure 0:14:31.440 --> 0:14:33.920 that wealth creation over time. And so when we start 0:14:33.960 --> 0:14:38.880 the portfolio, we're agnostic about whether we're buying an apartment 0:14:38.960 --> 0:14:43.880 building or a pizzeria, or a hotel or an office building. 0:14:44.160 --> 0:14:47.880 We're buying a whole range of different types of businesses, 0:14:48.160 --> 0:14:51.360 but all with the same mindset. Will the earnings that 0:14:51.440 --> 0:14:55.400 business produces over time build wealth not over three years 0:14:55.480 --> 0:14:58.200 or five years, but over ten, twenty thirty years. And 0:14:58.280 --> 0:15:01.200 that sort of mindset allows us to be open minded 0:15:01.240 --> 0:15:05.400 whether we're looking at United Technologies or Berkshire Hathaway or 0:15:05.480 --> 0:15:09.000 Wells Fargo. We can look in a sense at cash 0:15:09.080 --> 0:15:11.800 across all of those businesses and look at that growth 0:15:11.840 --> 0:15:14.160 over time as the creator of wealth. And I find 0:15:14.160 --> 0:15:17.240 it interesting you used an apartment building as a metaphor. 0:15:17.640 --> 0:15:20.560 I've talked about this in the past. If your house 0:15:20.640 --> 0:15:23.720 where you live in was priced daily, I think people 0:15:23.760 --> 0:15:26.800 would lose their mind over the day to day fluctuations. 0:15:27.000 --> 0:15:30.120 You can ignore it because it's not price daily. It 0:15:30.160 --> 0:15:33.400 sounds like you approach owning individual equities the same way. Yeah, 0:15:33.440 --> 0:15:35.400 I mean, if somebody came up to with that you 0:15:35.440 --> 0:15:37.840 know apartment building. You paid ten million four and it 0:15:38.080 --> 0:15:40.560 now earning two million, and they said, hey, I'll give 0:15:40.560 --> 0:15:43.440 you five million dollars for it. You wouldn't be depressed, 0:15:43.840 --> 0:15:46.520 right you would You just feel like, well that seems 0:15:46.560 --> 0:15:49.880 a little silly. So I'm not interested. And so in 0:15:49.920 --> 0:15:53.360 a sense, we start with this mindset of building wealth 0:15:53.480 --> 0:15:55.200 over the long term. And in this way, we always 0:15:55.200 --> 0:15:58.720 say we're absolute return investors, right, we view it as 0:15:58.760 --> 0:16:00.840 if we're buying the entire business. We look for the 0:16:00.880 --> 0:16:04.120 returns to be driven by the cash the business produces 0:16:04.240 --> 0:16:06.560 over a long period of time, and that, in a 0:16:06.640 --> 0:16:10.600 sense quiets things down. And the more clients look at 0:16:10.600 --> 0:16:13.520 their portfolio and they see these companies even when the 0:16:13.560 --> 0:16:16.560 prices are gyrating, if they can look through at the 0:16:16.640 --> 0:16:19.960 underlying business, creates a much greater sense of equanimity in 0:16:20.000 --> 0:16:22.840 the face of, as you say, gyrating prices. So you 0:16:22.920 --> 0:16:26.800 begin as an analyst covering finance firms, you're now a 0:16:26.880 --> 0:16:31.359 portfolio manager. What's the workflow at your office? Like between 0:16:31.640 --> 0:16:33.920 the analysts that work for Davis Funds and you as 0:16:33.960 --> 0:16:36.960 a portfolio manager. Well, I mean I learned from the best, 0:16:36.960 --> 0:16:39.680 because I learned from my father and my father's business 0:16:39.720 --> 0:16:42.240 card that said analysts and mine would be the same. 0:16:42.280 --> 0:16:45.080 I mean we have a small team. You know, they're 0:16:45.080 --> 0:16:47.400 only eight or nine of us. We've been together a 0:16:47.440 --> 0:16:50.400 long time on average, and what we say is that, 0:16:50.560 --> 0:16:54.440 you know, the portfolio manager has to be the lead 0:16:54.480 --> 0:16:57.160 analyst on every company we own. And the reason is 0:16:57.240 --> 0:16:59.880 I worked at other places, and I worked at places 0:17:00.120 --> 0:17:05.200 typically had the normal structure. They have junior analysts, senior analysts, 0:17:05.440 --> 0:17:09.600 they have portfolio managers, they have a strategists, economists, And 0:17:09.720 --> 0:17:12.480 what I found is the person deciding whether to buy 0:17:12.560 --> 0:17:16.520 a sell a stock in that structure is often relying 0:17:16.560 --> 0:17:19.639 on the data provided by the most junior person at 0:17:19.640 --> 0:17:22.480 the firm. Right the most junior person is doing the 0:17:22.560 --> 0:17:24.639 leg work. You don't know if they're good or not, 0:17:24.760 --> 0:17:27.399 and you're making an investment decision on that. So we, 0:17:27.520 --> 0:17:31.240 in a sense breakdown that distinction. Now on our team, 0:17:31.640 --> 0:17:35.280 I would say we have people that are traditional analysts. 0:17:35.600 --> 0:17:38.600 Both to use an unfortunate phrase that goes back to 0:17:38.640 --> 0:17:42.080 the Cold War, we always say that the portfolio manager 0:17:42.240 --> 0:17:45.600 has to be a fellow traveler on the research process 0:17:45.680 --> 0:17:49.080 with the analyst. So we have analysts that do spectacular 0:17:49.160 --> 0:17:52.000 leg work and are you know, in our sourcing process, 0:17:52.000 --> 0:17:55.359 we're looking for ideas and they will surface those early 0:17:55.760 --> 0:17:58.880 and then the portfolio manager along with that analysts work 0:17:58.960 --> 0:18:03.440 on that idea together and we run concentrated, relatively focused portfolios. 0:18:03.760 --> 0:18:06.600 So you know, we only buy one out of ten 0:18:06.720 --> 0:18:09.480 names in the SNP five hundred, right, And I always 0:18:09.520 --> 0:18:12.560 say like selectivity sort of like like a college or 0:18:12.600 --> 0:18:15.680 like an employer. If you have the ability to only 0:18:15.800 --> 0:18:18.760 choose one out of ten of your applicants, you can 0:18:18.840 --> 0:18:21.439 really look for those sort of extraordinary qualities and you 0:18:21.480 --> 0:18:24.040 can reject the average or the mediocre or worse. And 0:18:24.320 --> 0:18:28.119 we think selectivity is a huge advantage in active management, 0:18:28.119 --> 0:18:30.359 and that's that's something that we really work on. You 0:18:30.440 --> 0:18:33.800 mentioned opportunity costs and owning a position. How do you 0:18:33.880 --> 0:18:37.720 decide when to get rid of a position? And is 0:18:37.760 --> 0:18:40.600 it an owl or nothing to scale out or one 0:18:40.720 --> 0:18:43.800 something hits a certain target, you sell it and that's 0:18:43.800 --> 0:18:45.920 the end of the story. Well, you know, I did 0:18:45.960 --> 0:18:50.720 my master's degree in philosophy actually philosophy and theology, but 0:18:50.840 --> 0:18:52.920 there was a one that means you just pray for 0:18:52.960 --> 0:18:55.800 the results. I pray for different things than I used 0:18:55.840 --> 0:18:58.159 to but but there's still a lot of praying going on. 0:18:58.200 --> 0:19:01.199 I mean, let's just say Jay Pea Morgan's earnings, you know, 0:19:01.400 --> 0:19:05.560 for the answer to my prayers. Uh. But the but 0:19:05.680 --> 0:19:08.800 what I'd say is there is a wonderful uh English 0:19:08.840 --> 0:19:13.080 philosopher Elizabeth Anscombe and uh, she had this wonderful phrase 0:19:13.080 --> 0:19:15.719 where she said, the fact of twilight doesn't mean we 0:19:15.760 --> 0:19:19.960 can't tell day from night. And so when we look 0:19:20.080 --> 0:19:23.080 and value a business, we don't come out with an 0:19:23.200 --> 0:19:26.639 estimate that, you know, a company X is worth thirty 0:19:26.680 --> 0:19:31.320 four dollars a share. That there's just amazing false precision 0:19:31.320 --> 0:19:34.320 in that you you have an enormous amount of uncertainty 0:19:34.359 --> 0:19:36.640 that you have to price in. So what we tend 0:19:36.680 --> 0:19:39.280 to come up with are what we call ranges of 0:19:39.359 --> 0:19:42.560 fair value. Now we stole this idea from Ben Graham. 0:19:42.800 --> 0:19:46.200 Ben Graham, in his class at Columbia, did an exercise 0:19:46.359 --> 0:19:50.000 on a specific company to determine its value. And and 0:19:50.040 --> 0:19:53.040 I'm doing this from memory, but it's roughly this. He 0:19:53.080 --> 0:19:54.480 came at the end of the day and he said, 0:19:54.520 --> 0:19:57.679 this company is worth between twenty and a hundred and 0:19:57.680 --> 0:20:01.440 twenty dollars a share, and it's quite a range. All 0:20:01.480 --> 0:20:04.320 the all the students like, oh my god, that's worthless 0:20:04.680 --> 0:20:07.080 that you know, that's useless. He said, no, no, no, no, 0:20:07.320 --> 0:20:10.480 it's very, very, very valuable if the stocks below twenty 0:20:10.600 --> 0:20:14.560 or above. That sort of is our mindset. We recognize 0:20:14.600 --> 0:20:16.639 we look for a range of fair value for the 0:20:16.680 --> 0:20:21.119 businesses that we study. All of our portfolio activity happens 0:20:21.320 --> 0:20:24.639 when companies are below that range or above that range. 0:20:24.960 --> 0:20:27.520 Within that range, we try not to do so much 0:20:27.600 --> 0:20:30.919 because turnover has a certain cost and an uncertain benefit, 0:20:31.200 --> 0:20:33.960 so we don't do a lot of fine tuning. But 0:20:34.040 --> 0:20:36.160 as things pushed to the high end of that range, 0:20:36.160 --> 0:20:39.080 they become sources of cash, usually not all at once. 0:20:39.119 --> 0:20:43.280 Now all at once sale tends to happen because something 0:20:43.359 --> 0:20:47.160 significant changed. Now what could change is the stock price 0:20:47.200 --> 0:20:50.080 could go up an enormous amount very suddenly, and that 0:20:50.200 --> 0:20:53.359 happens once in a while. I remember you probably remember 0:20:53.400 --> 0:20:56.960 Agilant that was spun out Hewlett Packard. They announced some 0:20:57.040 --> 0:21:00.639 new product called the Lambda router back into thousand or 0:21:00.680 --> 0:21:03.600 something like that, and I think the stock went up 0:21:03.640 --> 0:21:06.639 like a hundred and fifty percent that day. You know, 0:21:06.680 --> 0:21:09.640 it was some ridiculous It went from thirty to seventy 0:21:09.720 --> 0:21:12.280 or something like that. That's a good decade in a day. Yeah, 0:21:12.400 --> 0:21:15.040 and it was. So there could be times when the 0:21:15.080 --> 0:21:17.000 stock price moves up a lot where it would become 0:21:17.000 --> 0:21:19.360 a cell very quickly, but that's going to be very rare. 0:21:19.840 --> 0:21:23.480 What often happens is you get new news that causes 0:21:23.520 --> 0:21:26.960 you to change your projections of future cash flow. You 0:21:27.040 --> 0:21:29.960 adjust them down. When you discount them to the present. 0:21:30.160 --> 0:21:31.960 Even though the stock is the same, or the stock 0:21:32.000 --> 0:21:34.880 could even have gone down, it may now be above 0:21:35.119 --> 0:21:37.679 your new range of fair value, so that becomes the sale. 0:21:37.880 --> 0:21:41.199 So opportunity cost is a key concept. But and so 0:21:41.280 --> 0:21:43.399 you always have to look at each name relative to 0:21:43.480 --> 0:21:46.040 the others. You just don't want to imagine that within 0:21:46.080 --> 0:21:48.840 a tenth of a percent or a Nicola share or 0:21:48.840 --> 0:21:51.359 even a dollar or share, that you really can have 0:21:51.440 --> 0:21:55.240 that much precision. Quite interesting. Let's talk a little bit 0:21:55.280 --> 0:21:59.560 about the changes that have been going on in the industry. 0:22:00.240 --> 0:22:03.400 What do you make of the shift from active to passive. 0:22:03.440 --> 0:22:07.000 How has this changed the landscape? Well, I think it's 0:22:07.000 --> 0:22:11.520 sort of a long term secular shift. Now, of course, 0:22:11.760 --> 0:22:15.640 passive cannot have a so the debate will really be 0:22:15.840 --> 0:22:20.200 at what point is passive sort of at the period 0:22:20.240 --> 0:22:24.120 where there's enough excess return for active management to continue 0:22:24.160 --> 0:22:27.160 price discovery and so on. Well, that's the theoretical point. 0:22:27.400 --> 0:22:31.000 I think the practical point is this, people were charging 0:22:31.119 --> 0:22:33.879 fees for managing a fund that looked a lot like 0:22:33.920 --> 0:22:38.440 the index, had higher fees, had high turnover, was run 0:22:38.440 --> 0:22:42.160 by a portfolio manager with no alignment of interest, none 0:22:42.200 --> 0:22:44.840 of their own skin on the line. You know, high 0:22:44.920 --> 0:22:49.560 cost look like the index, high turnover, inexperienced no alignment. 0:22:49.960 --> 0:22:54.080 So part of this is a very healthy evolutionary process, right, 0:22:54.080 --> 0:22:56.159 there was a lot of mediocrity that needed to be 0:22:56.240 --> 0:23:01.399 pulled out. Frankly, it's amazing how long so much fat 0:23:01.640 --> 0:23:04.600 was able to stay in the system. Markets are efficient, 0:23:04.840 --> 0:23:08.240 just slowly and eventually efficient. Well, you know, a lot 0:23:08.280 --> 0:23:11.879 of it depends on what the return environment is. You know, 0:23:11.960 --> 0:23:16.280 when if stocks are compounding at ten twelve percent, nobody 0:23:16.359 --> 0:23:19.600 much notices a hundred or two hundred basis point fee. 0:23:19.840 --> 0:23:23.080 If stocks are compounding at six seven, then it becomes 0:23:23.160 --> 0:23:25.919 much much more material. And so I think part of 0:23:25.920 --> 0:23:28.080 it is about the normal evolution. You know, if you 0:23:28.119 --> 0:23:31.920 look in markets like China, uh financial services and markets 0:23:31.920 --> 0:23:34.159 like that, the fees are still very high. You know, 0:23:34.440 --> 0:23:36.560 over time they'll come down. If you even look at 0:23:36.600 --> 0:23:40.360 the traditional mutual fund business back in the fifties, sixties, seventies, 0:23:40.359 --> 0:23:41.879 you know, it is common to have a six or 0:23:41.920 --> 0:23:45.760 seven percent load or commission, you know, and it was 0:23:45.840 --> 0:23:48.600 just part of the backdrop. So the good thing about 0:23:48.680 --> 0:23:51.920 capitalism is over time things tend to become more efficient, 0:23:52.400 --> 0:23:55.159 more transparency, and so I think part of what's happening 0:23:55.240 --> 0:23:56.800 is very healthy. You're getting rid of a lot of 0:23:56.840 --> 0:24:01.520 overpriced mediocrity. I think part of it is also healthy 0:24:01.560 --> 0:24:05.480 because one of the biggest determinants of investor return over 0:24:05.560 --> 0:24:09.520 time is investor behavior. And one of the things that 0:24:09.640 --> 0:24:13.280 people know is that people's brains go to mush when 0:24:13.280 --> 0:24:16.080 it comes to managing money. When prices go up, they 0:24:16.080 --> 0:24:19.000 get more excited and want more. When prices go down, 0:24:19.000 --> 0:24:21.720 they get depressed and want to sell. And so there's 0:24:21.760 --> 0:24:26.280 always been a behavior penalty for investing. But with active management, 0:24:26.359 --> 0:24:29.600 if you are going to be with a successful active manager, 0:24:29.880 --> 0:24:32.160 they are going to look different from the index. By 0:24:32.200 --> 0:24:35.399 and large, they'll have pretty low costs, they will have 0:24:35.480 --> 0:24:38.080 an alignment of interest. Those sorts of things tend to 0:24:38.119 --> 0:24:41.800 really correlate with successful active management. But one of the 0:24:41.800 --> 0:24:45.200 important points to know is over a period of outperformance, 0:24:45.240 --> 0:24:48.080 even if it's a decade, ten twenty years, they will 0:24:48.119 --> 0:24:51.200 go through real periods of underperformance in there. And for 0:24:51.280 --> 0:24:55.119 some investors that's just too much. They can't handle it. 0:24:55.320 --> 0:24:58.840 So for them, for those sorts of investors, passive is 0:24:59.040 --> 0:25:01.640 maybe the right answer because the're gonna underperform a percent 0:25:01.680 --> 0:25:03.600 of the time, but just by a tiny little bit, 0:25:04.119 --> 0:25:08.320 And so it may now there are other investors. At 0:25:08.400 --> 0:25:12.359 lunch with an old friend yesterday, older older lady just 0:25:12.400 --> 0:25:15.639 sort of a wonderful, gracious and we were talking about 0:25:15.680 --> 0:25:18.040 how her adviser had recommended for her to be in 0:25:18.080 --> 0:25:21.560 passive index view. She said, I don't like that because 0:25:21.560 --> 0:25:24.400 I want somebody to be in charge. And for her, 0:25:24.600 --> 0:25:28.080 her behavior was greatly improved by knowing there was a 0:25:28.119 --> 0:25:31.400 portfolio manager, even if the performance was up or down 0:25:31.400 --> 0:25:33.919 in any given period, for her, it was important to 0:25:33.920 --> 0:25:36.800 have that alignment. And so I don't think there's a 0:25:36.840 --> 0:25:40.000 magic answer. It really means looking through at the end client, 0:25:40.119 --> 0:25:42.720 looking at their own behavior. But what I would say 0:25:42.760 --> 0:25:45.280 is the more and more goes passive, the better and 0:25:45.320 --> 0:25:48.159 better it is for those active managers. Like us that 0:25:48.240 --> 0:25:50.399 are going to be in the game not just a 0:25:50.480 --> 0:25:52.640 year from now, but ten years from now, twenty years 0:25:52.640 --> 0:25:54.439 from now. I mean, we run our place like a 0:25:54.480 --> 0:25:57.240 family office because we're the largest investor in the funds 0:25:57.240 --> 0:25:59.480 that we manage. We make a lot more money from 0:25:59.480 --> 0:26:03.080 ten percent better performance than ten percent more assets to manage. 0:26:03.080 --> 0:26:07.160 And the danger of this active passive thing is one 0:26:07.600 --> 0:26:11.120 people are confusing price and value. Right, prices, what you pay, 0:26:11.200 --> 0:26:14.600 values what you get. You know, if you're a fiduciary, 0:26:15.280 --> 0:26:20.399 managing for low costs is definitely part of your duty, 0:26:20.440 --> 0:26:23.080 but it's not your only duty. Right. You could really 0:26:23.119 --> 0:26:26.040 imagine a world where a client could say, wait a minute, 0:26:26.080 --> 0:26:28.800 you just automatically bought the most of whatever had gone 0:26:28.880 --> 0:26:31.439 up the most and whatever was the biggest company that 0:26:31.520 --> 0:26:34.600 was your strategy, and people feeling like, well, that doesn't 0:26:34.640 --> 0:26:37.440 feel like I'm necessarily a fiduciary. So costs are part 0:26:37.480 --> 0:26:40.960 of it, but like risk and volatility, because you can 0:26:41.000 --> 0:26:44.439 measure costs, you can't measure fiduciary duty. They equate the 0:26:44.440 --> 0:26:47.879 two Oh, cost equals fiduciary duty in the same way 0:26:48.119 --> 0:26:51.080 you can't measure risk, which is the possibility of something 0:26:51.119 --> 0:26:55.960 going terribly wrong. But you can measure volatility, so people 0:26:56.040 --> 0:26:58.640 equate the two and they aren't the same. Volatility has 0:26:58.640 --> 0:27:00.400 something to do with risk, but it's not the same 0:27:00.440 --> 0:27:03.680 as risk. How do you guys benchmark yourself if you're 0:27:03.760 --> 0:27:09.960 running such focused portfolios that aren't remotely You mentioned, um, 0:27:10.040 --> 0:27:13.560 the closet indexers, the funds that pretend to be active, 0:27:13.560 --> 0:27:16.400 but I've low active share and really look like the index. 0:27:16.760 --> 0:27:19.640 Your funds don't look at anything like the indexes. Well, 0:27:19.720 --> 0:27:22.440 we we start with a deep truth, which is that 0:27:23.000 --> 0:27:26.440 if you were to ask the average portfolio manager, would 0:27:26.480 --> 0:27:29.919 you rather compound at fourteen percent a year and have 0:27:30.000 --> 0:27:33.359 the market compound at fifteen or would you rather compound 0:27:33.480 --> 0:27:36.840 at four and have the market compound at three? The 0:27:36.920 --> 0:27:41.680 vast majority might take the latter choice because they would say, well, 0:27:41.760 --> 0:27:46.280 my firm will be enormous. We're the opposite. We we 0:27:46.320 --> 0:27:49.960 would choose a all day Job one is to build 0:27:49.960 --> 0:27:52.720 wealth where the largest investor in the funds we manage, 0:27:52.840 --> 0:27:56.239 we would weigh rather compound at fourteen than four, and 0:27:56.320 --> 0:27:59.120 we think every client we have would agree. So that's 0:27:59.200 --> 0:28:03.200 job one. But job too is that we have over 0:28:03.280 --> 0:28:06.600 time in all of our strategies since we started them 0:28:06.640 --> 0:28:09.920 beating the benchmarks. Now we haven't beaten them in all 0:28:10.080 --> 0:28:13.199 periods and so on, but since we started them to today, 0:28:13.600 --> 0:28:17.800 we've outperformed, and we think that over time that's our responsibility. 0:28:18.080 --> 0:28:20.639 We don't know what that pattern will look like. We 0:28:20.720 --> 0:28:23.719 don't know how long periods of underperformance will be or not. 0:28:24.320 --> 0:28:28.680 We would optimize for building wealth first, out performing second, 0:28:28.760 --> 0:28:32.000 but over time those are joint goals for us. And 0:28:32.000 --> 0:28:34.800 what we would say is we in a world where 0:28:34.840 --> 0:28:40.760 indexing continues to gain share. The momentum effects will be large, right, 0:28:40.800 --> 0:28:43.000 so it can go on a long time. But bury 0:28:43.040 --> 0:28:47.080 it's as simple as this. If I tell you that 0:28:47.360 --> 0:28:50.480 there is an investment where paying a higher price would 0:28:50.560 --> 0:28:54.040 increase your future return, you'd say, that doesn't make any sense. 0:28:54.640 --> 0:28:57.800 The price I pay is a determinant of my return, right, 0:28:57.920 --> 0:29:00.440 whatever the return will be. The lower the price I pay, 0:29:00.480 --> 0:29:04.959 the higher my return. Right, it makes sense. Yet momentum 0:29:05.160 --> 0:29:08.520 ignores that. Momentum says the opposite. The more it's gone up, 0:29:08.520 --> 0:29:11.280 the more attractive it is. Our view is we're going 0:29:11.360 --> 0:29:14.920 to choose common sense over whatever effects are fashionable and 0:29:15.000 --> 0:29:18.400 working today, because if the wheels come off that effect. 0:29:18.400 --> 0:29:20.600 It's going to feel pretty silly to say that, well, 0:29:20.640 --> 0:29:22.920 I bought it because it broke the fifty day moving 0:29:22.960 --> 0:29:25.400 average and had gone up a lot, so it became 0:29:25.440 --> 0:29:28.760 more attractive to me. So you know, our view is, look, 0:29:28.920 --> 0:29:32.480 the fundamentals over time will out. We have a strategy 0:29:32.520 --> 0:29:35.440 that we think has added value over the index over time, 0:29:35.480 --> 0:29:38.640 and really all of our strategies, and and that's sort 0:29:38.640 --> 0:29:41.200 of what we come to work to do. But that 0:29:41.360 --> 0:29:44.360 is a byproduct of the primary job, which is we 0:29:44.400 --> 0:29:47.280 want to buy businesses that are compounding machines. We want 0:29:47.280 --> 0:29:51.000 to build wealth for a generation, and and that relative 0:29:51.000 --> 0:29:54.280 performance will essentially wash out from that focus on the 0:29:54.320 --> 0:29:59.120 primary goal. Let's talk about the state of the markets today. 0:29:59.720 --> 0:30:03.600 You're a value investor. This has been a pretty rough 0:30:03.720 --> 0:30:08.440 decade for value. It's been all growth almost straight through 0:30:08.600 --> 0:30:12.880 maybe the fourth quarter of so value reassert itself. Why 0:30:13.480 --> 0:30:18.160 is value such a laggard this go round? Well, of course, 0:30:18.200 --> 0:30:22.680 I'm gonna take umbrage with the classifications. It is a 0:30:22.760 --> 0:30:26.640 really broad classification. What we describe as value, or what 0:30:26.800 --> 0:30:30.080 some people describe as value is using quite a broad 0:30:30.240 --> 0:30:33.240 brush debate with well, and of course, what counts is value, 0:30:33.280 --> 0:30:35.920 and what counts is growth keeps shifting. Growth is a 0:30:36.000 --> 0:30:40.680 component of value, right, Companies that grow profitably are more valuable. 0:30:40.680 --> 0:30:44.160 So when we model the future cash flows of a business, 0:30:44.520 --> 0:30:46.640 if we have a business that we can buy for 0:30:46.920 --> 0:30:49.280 you know, like that apartment building for ten million dollars, 0:30:49.280 --> 0:30:52.880 it's going to produce a million dollar coupon in perpetuity. Well, 0:30:52.880 --> 0:30:56.480 there's no mystery what our return is. It's ten but 0:30:57.200 --> 0:31:00.560 there's no growth. That's okay, returns ten per cent. Now 0:31:00.600 --> 0:31:02.720 we buy another business for ten million, but it only 0:31:02.720 --> 0:31:06.280 earns five hundred thousand. But that five hundred thousand is 0:31:06.360 --> 0:31:10.560 able to be reinvested at incremental return on equity. Well, 0:31:10.600 --> 0:31:12.960 the next year it's six hundred thousand, then it's seven 0:31:13.160 --> 0:31:16.440 twenty thousand, then it's eight fifty. That business will end 0:31:16.520 --> 0:31:20.240 up being a lot more valuable, even though you started 0:31:20.240 --> 0:31:22.360 with a lower earnings yielder. To put it in terms 0:31:22.400 --> 0:31:25.640 of stocks, a high PE stock could be a much 0:31:25.640 --> 0:31:28.880 better value than a low PE stock depending on what 0:31:28.920 --> 0:31:31.400 the earnings will do over time. So I think where 0:31:31.480 --> 0:31:35.880 value investors that category has been a misnomer. Is some 0:31:35.960 --> 0:31:39.120 of the greatest value stocks of the last twenty years 0:31:39.280 --> 0:31:43.200 have been companies like Google. Google came public at I 0:31:43.240 --> 0:31:46.400 think it was eight or nine times what it earned 0:31:46.480 --> 0:31:49.400 three years out. So if Google was trading at eight 0:31:49.400 --> 0:31:54.320 times earnings, you would say it's a great value stock. Right, Well, 0:31:54.360 --> 0:31:56.640 it was trading at eight times earnings three years out, 0:31:56.880 --> 0:31:58.880 so it grew into that and then blew by it. 0:31:59.160 --> 0:32:02.320 So I think one of the problems that value investors 0:32:02.440 --> 0:32:05.480 have had historically and need to get over. And by 0:32:05.520 --> 0:32:08.160 the way, to get over it, they should just follow 0:32:08.440 --> 0:32:11.120 the greatest of all, right, they should follow Warren Buffett, 0:32:11.280 --> 0:32:15.479 the value investors who say I determined value based on 0:32:15.520 --> 0:32:20.640 a predetermined set of business characteristics or industries, and I 0:32:20.680 --> 0:32:24.120 won't look at technology. So you mentioned Google, which is 0:32:24.200 --> 0:32:28.960 just a money machine. The advertising business just throws off 0:32:29.000 --> 0:32:32.440 a ridiculous amount of cash. One buffets investment in Apple. 0:32:32.840 --> 0:32:37.280 Just Apple continues to not only dominate phones, every time 0:32:37.320 --> 0:32:40.440 they introduce a new product. I don't love the air buds, 0:32:40.480 --> 0:32:42.840 but if it was a standalone company, it'd be like 0:32:42.880 --> 0:32:45.640 a six or an eight billion dollar revenue company. Their 0:32:45.680 --> 0:32:48.080 services are blowing up. I could see how you can 0:32:48.120 --> 0:32:51.280 make the argument Google is a value play. Apple's value 0:32:51.280 --> 0:32:56.400 play in your top holdings. Is also Amazon fast growing, 0:32:56.720 --> 0:32:59.560 not a lot of profits. How do you make Amazon 0:33:00.120 --> 0:33:02.480 value plan? Well, of course this is you know my 0:33:02.480 --> 0:33:05.240 my background. As I said, I started as an accountant 0:33:05.760 --> 0:33:07.360 and I was not a c p A. But I 0:33:07.440 --> 0:33:09.880 was a fund accountant. But you know, accounting is the 0:33:09.960 --> 0:33:14.160 language of business, and gap accounting in particular can have 0:33:14.280 --> 0:33:18.080 all sorts of distortions. And we always say what we're 0:33:18.120 --> 0:33:21.280 looking for is not reported earnings. We're not looking at 0:33:21.320 --> 0:33:24.800 statutory earnings. We're looking at owner earnings. In other words, 0:33:24.840 --> 0:33:27.680 if you owned a business, how much would you say 0:33:27.720 --> 0:33:29.720 that business was earnings? And what I mean by that 0:33:30.240 --> 0:33:33.240 is that when a company reports its earnings to the 0:33:33.280 --> 0:33:37.840 tax authorities, it chooses accounting policies that minimize current reportable income, 0:33:37.880 --> 0:33:42.520 accelerate appreciation, expense, things you could capitalize, you know, defer revenue, 0:33:42.560 --> 0:33:44.840 whatever it is. And often when they report their earnings 0:33:44.840 --> 0:33:48.000 to investors, they do the opposite. They choose accounting policies 0:33:48.000 --> 0:33:51.520 that maximize current reportable income. Well, we're trying to get 0:33:51.520 --> 0:33:53.800 it owner earnings, which is often between those two. So 0:33:53.880 --> 0:33:57.600 Amazon maybe the best example, because if you were to 0:33:57.680 --> 0:34:00.560 imagine a company that said, well, we have a very 0:34:00.640 --> 0:34:04.760 very profitable business. In fact, I'll use a familiar name, Geico. Now, 0:34:04.920 --> 0:34:08.319 if Geico says, well, insurance policies that have been on 0:34:08.320 --> 0:34:10.640 our books more than a year or two are very 0:34:10.760 --> 0:34:13.080 very profitable, and they stay with us for a long time. 0:34:13.440 --> 0:34:15.840 So we're willing to spend a lot of money to 0:34:15.920 --> 0:34:20.080 get new policies. Now, if they could grow their policies 0:34:20.360 --> 0:34:23.759 twenty percent a year but earned zero in the first year, 0:34:24.040 --> 0:34:25.520 they would do it. And if they could do it 0:34:25.600 --> 0:34:27.600 a second year, they'd earned zero in the second year, 0:34:27.680 --> 0:34:29.799 and a third year, they'd earned zero in the third year. 0:34:30.120 --> 0:34:32.960 In other words, if they're investing for growth but the 0:34:33.040 --> 0:34:36.479 core business is very profitable, then the accounting can be 0:34:36.600 --> 0:34:39.360 in a sense distorted. Now, I'll give you real numbers 0:34:39.400 --> 0:34:42.240 on Amazon. So when we bought Amazon, we were comparing 0:34:42.280 --> 0:34:46.719 it to Walmart. Now, Walmart grew sales. This is sort 0:34:46.719 --> 0:34:49.760 of an amazing thing to think about. Over a seventeen 0:34:49.840 --> 0:34:53.440 year period, they grew sales from about a billion dollars 0:34:54.120 --> 0:34:58.120 to about seventy billion dollars. This is wal Walmart over seven. 0:34:59.440 --> 0:35:02.799 This would have been nine eighty to like seven or 0:35:02.840 --> 0:35:07.560 somewhere in their right around there. Now, over a seventeen 0:35:07.640 --> 0:35:11.279 year period in its history, Amazon grew sales from a 0:35:11.320 --> 0:35:14.839 billion to about a hundred billion, so roughly the same 0:35:14.960 --> 0:35:17.200 rate of growth, right, those would be roughly the same 0:35:17.239 --> 0:35:21.920 over seventeen years. Now, during the seventeen years that Walmart 0:35:21.960 --> 0:35:26.680 grew from a billion in sales to seventy billion in sales, 0:35:27.200 --> 0:35:29.880 how much free cash flow do you think they generated. 0:35:29.880 --> 0:35:32.520 They reported a lot of earnings, so there's lots of 0:35:32.520 --> 0:35:36.640 net income. But if you owned the business, right at 0:35:36.680 --> 0:35:38.839 the end of the day, how much cash did you have? 0:35:39.000 --> 0:35:42.200 I gotta think a few billion dollars? Right? It was negative, 0:35:42.680 --> 0:35:46.920 really negative free cash flow for seventeen years cumulatively. Well, 0:35:46.920 --> 0:35:49.160 those stores are expensive. You gotta buy the land, you 0:35:49.239 --> 0:35:52.960 gotta buy the facilities, so it's not a zero cost 0:35:53.200 --> 0:35:55.799 of construction, all right, But why do they do that? 0:35:55.840 --> 0:35:57.920 Because they're going to get a good return on the 0:35:57.960 --> 0:36:00.759 money that they spent. Now, the account and treatment for 0:36:00.800 --> 0:36:04.560 that is that you capitalize it, you call it capital spending, 0:36:04.719 --> 0:36:07.279 and you depreciate it over time. So there's lots of 0:36:07.320 --> 0:36:09.960 net income, but if you go to the cash flow statement, 0:36:10.120 --> 0:36:12.200 there's no cash. In fact, there was negative. They had 0:36:12.200 --> 0:36:14.799 to borrow some money during that period of time to 0:36:15.000 --> 0:36:18.000 finance that growth. Now, during the same period of time, 0:36:18.040 --> 0:36:21.799 when Amazon grew sales from a billion to just about 0:36:21.840 --> 0:36:25.000 a hundred billion gross merchandise value, what was their cumulative 0:36:25.000 --> 0:36:27.879 free cash flow? They reported no earnings, no profits at all. 0:36:28.040 --> 0:36:30.200 It's got to be tens of billions of dollars. The 0:36:30.400 --> 0:36:33.560 cash it was about seven billion dollars. I think of cumulators. 0:36:33.560 --> 0:36:35.719 So if you own the business, you had seven billion 0:36:35.760 --> 0:36:37.800 dollars in the bank at the end of seventeen years. 0:36:38.080 --> 0:36:40.160 You grew sales from a billion to a hundred billion, 0:36:40.280 --> 0:36:42.960 but you reported no earnings, which is better. I'll take 0:36:43.040 --> 0:36:48.120 the ladder. Take the ladder. So our view was that's 0:36:48.160 --> 0:36:51.799 but but what was interesting is then you get to valuation, 0:36:52.200 --> 0:36:55.240 and when we bought Amazon, it was trading at about 0:36:55.280 --> 0:36:59.600 one time sales. Walmart in that period of that seventeen 0:36:59.680 --> 0:37:02.440 years growth was trading between one and two time sales 0:37:02.600 --> 0:37:05.720 that whole period. They both have the same gross margin. 0:37:05.920 --> 0:37:08.879 They're both making money selling stuff. It's just the net 0:37:08.880 --> 0:37:12.120 margin wasn't there. So what it required as a value 0:37:12.120 --> 0:37:17.560 investor to buy Amazon was one adjusting the core business 0:37:17.560 --> 0:37:21.200 and saying if they chose not to grow, just like Walmart. 0:37:21.239 --> 0:37:26.040 When Walmart's growth slowed, by the way, it just gushed cash. Oh, 0:37:26.120 --> 0:37:30.319 I mean the cash places to physically store and the 0:37:30.440 --> 0:37:34.040 way the tsunami behind them, of all of this cash, 0:37:34.080 --> 0:37:36.839 of all of those maturing stores just poured in. So 0:37:37.040 --> 0:37:40.160 cash flow at Walmart went through the roof in the 0:37:40.200 --> 0:37:42.840 next fifteen years. So the first thing you have to 0:37:42.880 --> 0:37:44.759 do is you had to look at that second, you 0:37:44.760 --> 0:37:47.960 had to say, okay, for every dollar. Now, we assumed 0:37:48.000 --> 0:37:50.520 that Amazon could have a five percent margin on sales 0:37:50.600 --> 0:37:53.360 about Walmart, and we looked at bundles of goods, and 0:37:53.920 --> 0:37:56.280 but what you would say is, well, for every dollar 0:37:56.480 --> 0:37:59.960 that Amazon is choosing not to report as net income 0:38:00.160 --> 0:38:02.640 that they are reinvesting on our behalf, do we have 0:38:02.840 --> 0:38:06.160 confidence like Walmart that they're earning a decent return. I 0:38:06.160 --> 0:38:09.120 think Walmart got about fifteen percent or fourteen percent or 0:38:09.480 --> 0:38:11.680 maybe as high as seventeen at one point of every 0:38:11.680 --> 0:38:14.600 dollar they retained and reinvested, that was their return on 0:38:14.600 --> 0:38:17.840 that increment. So are we confident that Jeff Bezos and 0:38:17.880 --> 0:38:20.440 Amazon is getting a good return on the money that 0:38:20.520 --> 0:38:23.000 they are not? And you know, the answers look at 0:38:23.040 --> 0:38:25.239 the data and this is when we bought it, you know, 0:38:25.440 --> 0:38:28.560 whether it was pushing into prime, whether it was pushing 0:38:28.560 --> 0:38:33.319 into video, whether it was wonderful creating a WS. They 0:38:33.320 --> 0:38:37.040 have gotten huge returns, huge returns on the dollar. You 0:38:37.080 --> 0:38:40.120 have one of the great capital allocators reinvesting. So split 0:38:40.160 --> 0:38:42.839 the business into those now with a WS, we say, 0:38:42.840 --> 0:38:45.799 really they're three components. You value AWS as if it 0:38:45.880 --> 0:38:49.640 was a standalone business, value the retail business, and then 0:38:50.040 --> 0:38:52.680 estimate what you think would be the return on the 0:38:52.719 --> 0:38:56.759 incremental capital they're spending. And ends up Amazon was a 0:38:56.920 --> 0:39:00.319 terrific value stock. And so we don't use new math, 0:39:00.400 --> 0:39:04.120 we don't use pops, we don't use eyeballs or clicks. 0:39:04.480 --> 0:39:06.840 We really just look at the cash that that business 0:39:06.880 --> 0:39:09.520 will produce. And it's funny because one of the great 0:39:09.560 --> 0:39:12.799 things about looking across industries is the more time you 0:39:12.840 --> 0:39:15.720 spend with Jamie Diamond, the more you see that somebody 0:39:15.760 --> 0:39:18.759 like Jeff Bezos, they speak the same language. You know, 0:39:18.880 --> 0:39:21.480 it doesn't matter that one's in banking and ones in finance. 0:39:21.560 --> 0:39:23.719 It's interesting they almost work together. I think it's been 0:39:23.760 --> 0:39:27.320 reported that Jeff tried to hire Jamie, but when Jamie 0:39:27.320 --> 0:39:30.000 went to Bank one to be his number two at Amazon, 0:39:30.640 --> 0:39:33.120 isn't that amazing, That's quite fascinating. And they did that 0:39:33.239 --> 0:39:38.239 joint project on healthcare with its Amazon, JP Morgan and 0:39:38.360 --> 0:39:42.319 uh Berkshire Hathaway that we still haven't heard anything about that. 0:39:42.800 --> 0:39:45.440 And when you look at Amazon, you have to wonder 0:39:45.920 --> 0:39:50.080 they keep finding these new industries to invest in. What 0:39:50.200 --> 0:39:52.879 would happen if they push into finance, What would happen 0:39:52.920 --> 0:39:55.279 if they push into healthcare? Those are two of the 0:39:55.280 --> 0:39:58.880 biggest industries in the country. I know, I don't want 0:39:58.880 --> 0:40:00.879 to bet against Jeff b so Us if he rolls 0:40:00.880 --> 0:40:03.680 something out like that. Well there, it's a hyper rational 0:40:03.800 --> 0:40:07.040 company that makes decisions for the long term. You know, 0:40:07.160 --> 0:40:09.759 one thing I would recommend every listener does, if they 0:40:09.800 --> 0:40:13.040 haven't done it, they should read Jamie Diamonds and your 0:40:13.080 --> 0:40:15.840 reports every year, and they should read Jeff bezos is 0:40:15.880 --> 0:40:17.960 in your reports every year. Both men write their own 0:40:17.960 --> 0:40:21.000 annual reports, which alone tells you something about the culture 0:40:21.040 --> 0:40:24.840 of the place. For sure, they're both hyperrational, they're modest, 0:40:25.000 --> 0:40:29.120 they're driven, they have smart people around them. And you know, 0:40:29.239 --> 0:40:32.680 in the case of Amazon, you know, Amazon is still 0:40:32.719 --> 0:40:36.560 smaller in retailer than Walmart. Retail is a ten trillion 0:40:36.560 --> 0:40:40.640 dollar business. So there's enormous, enormous room to go in 0:40:40.719 --> 0:40:43.600 terms of what they can do, and AWS is probably 0:40:43.600 --> 0:40:45.840 a bigger business than retail when you look sort of 0:40:45.840 --> 0:40:49.239 globally how that will unfold. So I just would say 0:40:49.280 --> 0:40:51.440 that it is at the higher end of our estimate 0:40:51.440 --> 0:40:55.759 of fair value. But the determination is for how long 0:40:55.800 --> 0:40:57.839 they will be able to invest at these high rates 0:40:57.840 --> 0:41:00.799 of return and and so we have sold some over 0:41:00.840 --> 0:41:03.240 the years, and of course that's been a terrible mistake, 0:41:03.320 --> 0:41:06.000 but we do have a value discipline. So there's a 0:41:06.000 --> 0:41:09.560 price where our math doesn't work with Amazon. It's pushed 0:41:09.640 --> 0:41:12.440 up towards that end, and we've trimmed some. But honest 0:41:12.480 --> 0:41:14.560 to God, if I said to my mother my mother 0:41:14.600 --> 0:41:17.760 owned Amazon, uh, she bought a little because she liked 0:41:18.000 --> 0:41:19.960 this story in the very beginning, and I've told her 0:41:19.960 --> 0:41:22.200 it's a big percentage of your portfolio, I wouldn't lose 0:41:22.239 --> 0:41:24.000 a lot of sleep over it. There you go, Can 0:41:24.000 --> 0:41:25.239 you stick around a little bit? I have a ton 0:41:25.360 --> 0:41:28.480 more questions. Absolutely. We have been speaking with Chris Davis. 0:41:28.520 --> 0:41:32.880 He is the chairman and chief investment officer at Davis Advisors. 0:41:33.120 --> 0:41:35.879 If you enjoy this conversation, be sure and check out 0:41:35.920 --> 0:41:38.759 the podcast extras, where we keep the tape rolling and 0:41:38.800 --> 0:41:42.759 continue discussing all things value investing. You can find that 0:41:42.880 --> 0:41:48.160 at iTunes, Spotify, Google Podcast, wherever your finder podcasts are sold. 0:41:48.360 --> 0:41:51.600 We love your comments, feedback and suggestions right to us 0:41:51.680 --> 0:41:54.839 at m IB podcast at Bloomberg dot net. Give us 0:41:54.840 --> 0:41:57.840 a review on Apple iTunes. You can check out my 0:41:57.960 --> 0:42:01.960 weekly column on Bloomberg dot um slash Opinion. Follow me 0:42:02.200 --> 0:42:05.719 on Twitter at ridlts. I'm Barry Hults. You're listening to 0:42:05.840 --> 0:42:11.959 Masters in Business on Bloomberg Radio. Welcome to the podcast, Chris. 0:42:12.000 --> 0:42:14.120 Thank you so much for doing this. I have been 0:42:14.200 --> 0:42:18.280 chasing you down for a while. We have a uh 0:42:18.680 --> 0:42:23.799 mutual colleague, Tucker Us, who first brought your name up 0:42:23.840 --> 0:42:25.920 to me, I don't know a year ago, and I 0:42:25.920 --> 0:42:29.640 started doing some research and said, hey, these guys really interesting. 0:42:29.719 --> 0:42:32.839 Let's let's get them into the studio and have a conversation. 0:42:32.920 --> 0:42:36.399 So I'm I'm glad we finally hunted you down. You're 0:42:36.520 --> 0:42:40.440 your New York based right, New York born, bread and based, 0:42:40.600 --> 0:42:42.839 so so you're here, so we're not taking you too far, 0:42:43.640 --> 0:42:46.000 um out of your way. There were a couple of 0:42:46.280 --> 0:42:50.560 um things I mentioned in your intro that we skipped 0:42:50.600 --> 0:42:52.719 by on the regular questions. I have to ask you, 0:42:53.239 --> 0:42:56.000 how did you end up on the board of directors 0:42:56.000 --> 0:42:59.400 of Coca Cola. Well, that's a very good question. I 0:43:00.160 --> 0:43:01.959 remember I was once has to be on the board 0:43:02.000 --> 0:43:04.680 of a wonderful think tank in Santa Fe called the 0:43:04.719 --> 0:43:08.279 Santa Fe Institute, And uh, you know is founded by 0:43:08.320 --> 0:43:12.600 Murray Galman, who is a Nobel Prize physicist and wonderful 0:43:12.680 --> 0:43:16.440 scientists and incredible innovative work they do there, and and 0:43:16.600 --> 0:43:19.759 Murray asked me to be on the board and I said, well, 0:43:19.800 --> 0:43:21.359 you know, I'm not going to give you any more 0:43:21.400 --> 0:43:23.799 money than I give you already, and and I love 0:43:23.880 --> 0:43:26.160 the place, but I don't really think I would contribute much. 0:43:26.160 --> 0:43:29.320 He said, no, We've we've studied decision making in complex 0:43:29.360 --> 0:43:33.439 situations and it ends up it's really important to have diversity. 0:43:33.760 --> 0:43:36.799 And I said, well, you know, I'm a white male 0:43:36.880 --> 0:43:39.440 from New York City. I don't know what you mean, like, 0:43:39.480 --> 0:43:42.719 what sort of he said, Oh, I Q diversity. He said, 0:43:42.880 --> 0:43:46.319 we're all geniuses, we need somebody like you to sort 0:43:46.320 --> 0:43:48.960 of round it out. So I don't know if that 0:43:49.080 --> 0:43:54.000 he's serious. He was actually quite serious. We need some dummies, 0:43:54.360 --> 0:43:58.680 we need somebody listen. Six that we looked down on 0:43:58.760 --> 0:44:01.200 that group, you know, in that group, it was it 0:44:01.280 --> 0:44:04.799 was probably not an insult, but but he you know, 0:44:04.960 --> 0:44:07.320 he also of course meant, you know, somebody that wasn't 0:44:07.320 --> 0:44:10.040 of a science background and so on. But but no, 0:44:10.400 --> 0:44:13.480 you know, I think that uh, you know, I would 0:44:13.520 --> 0:44:17.680 say that Coca Cola is maybe the pre eminent international 0:44:17.719 --> 0:44:20.799 global company. And so from my point of view, the 0:44:20.800 --> 0:44:25.879 opportunity uh, to serve sort of that icon, to learn, uh, 0:44:25.920 --> 0:44:29.120 to work with, you know, some of the terrific directors 0:44:29.120 --> 0:44:31.239 that are there, and and at a time that the 0:44:31.280 --> 0:44:34.359 company may face challenges in terms of you know, uh 0:44:34.520 --> 0:44:39.520 perceptions and and reinventing the model and beverages for life, 0:44:39.640 --> 0:44:42.399 it's an exciting time to be in. They clearly have. 0:44:43.440 --> 0:44:47.360 At one point in time, sugar beverages was their whole business. 0:44:47.840 --> 0:44:50.480 It's a really much smaller part of what they do. 0:44:51.040 --> 0:44:53.560 Water and fruit juice and and all sorts of other 0:44:53.600 --> 0:44:57.600 stuff has has really taken over. Yeah, they really are, 0:44:57.840 --> 0:45:01.040 you know, in their heart there beverages company, and sugar 0:45:01.200 --> 0:45:03.759 was part of that. Historically, it doesn't need to be 0:45:03.880 --> 0:45:05.520 and it has not been the same part of it. 0:45:05.719 --> 0:45:08.279 Although although I will tell you, whenever I travel to 0:45:08.480 --> 0:45:12.319 the Caribbean and there's a local bottle of coca cola 0:45:12.360 --> 0:45:16.759 bottling plant, that cane sugar coca cola is not like 0:45:16.800 --> 0:45:18.560 anything you get well, and of course they sell it 0:45:18.600 --> 0:45:21.960 in New York, Mexican coke they call it, and it 0:45:22.040 --> 0:45:24.960 really it reminds you of the romance of the brand 0:45:24.960 --> 0:45:27.680 and boy on your kid. Anyway, a hot day sitting 0:45:27.680 --> 0:45:30.600 on a Caribbean island and somebody brings out that that 0:45:30.800 --> 0:45:35.000 ice cold glass bottle of coke, You're you're absolutely right, 0:45:35.040 --> 0:45:37.759 and now it takes you back. I wouldn't promise that 0:45:37.800 --> 0:45:41.239 I could identify them in a blind taste test, but 0:45:41.400 --> 0:45:45.439 everything around that is just so so unique and special. Um. 0:45:45.520 --> 0:45:48.279 The other thing you're a board member of is the 0:45:48.760 --> 0:45:51.640 Museum of Natural History, one of my favorite places in 0:45:51.719 --> 0:45:54.400 the city. How did how did that come about? Well, 0:45:54.680 --> 0:45:57.560 you know, I think I've always felt a passion about 0:45:57.719 --> 0:46:00.160 understanding more about science. I mentioned the same of a 0:46:00.280 --> 0:46:03.359 institute with that same sort of mindset. You know, it 0:46:03.440 --> 0:46:07.200 is partly because it's my my grandmother, who was sort 0:46:07.200 --> 0:46:09.480 of an icon to me, an amazing woman, and she 0:46:09.640 --> 0:46:11.839 died at a hundred and six. She was kayaking at 0:46:11.840 --> 0:46:14.759 a hundred and five. So she really lived a full life, 0:46:14.840 --> 0:46:17.719 and she had a PhD in international relations. She was 0:46:17.840 --> 0:46:21.319 enormously well read, but she felt very insecure because she 0:46:21.400 --> 0:46:25.200 never studied science. And we talked a lot about it 0:46:25.360 --> 0:46:28.200 late in her life, and she said, you know, I 0:46:28.239 --> 0:46:31.560 realized now that the reason was the name science scared me. 0:46:31.600 --> 0:46:34.840 It took me back to high school biology and feeling 0:46:34.920 --> 0:46:37.799 overwhelmed and not knowing what was going on. She said, 0:46:37.840 --> 0:46:41.560 I wish they would simply call science how things work 0:46:41.719 --> 0:46:46.239 and why things happen, because then everybody's interested in it. 0:46:46.320 --> 0:46:48.960 And I would say the Museum of Natural History is 0:46:49.160 --> 0:46:54.000 maybe the pre eminent institution for delighting people with the 0:46:54.040 --> 0:46:57.239 ideas of science. In other words, it makes them accessible, 0:46:57.280 --> 0:47:01.719 it makes people curious, It estou you. And so I 0:47:01.840 --> 0:47:04.920 felt like, in that sense, thinking of my grandmother, who 0:47:05.040 --> 0:47:07.399 became a supporter of the museum late in her life, 0:47:07.600 --> 0:47:12.360 that idea of sort of recognizing that scientific literacy it 0:47:12.680 --> 0:47:16.480 should be a lifelong pursuit because it's just so fascinating. 0:47:16.560 --> 0:47:18.920 Let alone that it's good for policy, it's good for 0:47:18.960 --> 0:47:22.240 the electorate, it's good for people to understand the basic 0:47:22.480 --> 0:47:26.040 fundamentals of the scientific method and why things happen and 0:47:26.120 --> 0:47:30.239 how things work, And what New York area school kid 0:47:30.480 --> 0:47:35.000 does not have a vivid recollection of the first time 0:47:35.560 --> 0:47:40.120 you see the Torhinosaurus rex or the blue whale hanging 0:47:40.160 --> 0:47:42.600 from the ceiling, or if you get to go to 0:47:42.640 --> 0:47:47.439 the planetarium, and every one of those experiences five six, 0:47:47.440 --> 0:47:49.439 seven years old, that stays with you for the rest 0:47:49.440 --> 0:47:52.320 of your know. Even that Hall of North American Mammals, 0:47:52.360 --> 0:47:54.879 you know, the giant bears standing there, and you can 0:47:54.960 --> 0:47:57.960 almost those dioramas, you almost feel them twitching. You know, 0:47:58.440 --> 0:48:02.080 it is I absolutely agree, and I think for like 0:48:02.160 --> 0:48:04.480 most New York City parents, you know, there are a 0:48:04.600 --> 0:48:08.040 lot of weekends that you spend just wandering down those halls. 0:48:08.040 --> 0:48:10.239 And the best thing about the museum is to go 0:48:10.320 --> 0:48:12.799 with no agenda, to just wander. And you know, they're 0:48:12.840 --> 0:48:16.000 doing this spectacular new edition the Guilder Center, which is 0:48:16.120 --> 0:48:18.160 one of the big changes will be how it will 0:48:18.160 --> 0:48:21.239 affect circulation, and that I you know right now, when 0:48:21.239 --> 0:48:22.840 you wander the museum, you get to a lot of 0:48:22.880 --> 0:48:26.799 dead ends. One of the exciting things about the new 0:48:26.840 --> 0:48:29.160 plan is you really will be able to wander sort 0:48:29.160 --> 0:48:32.080 of almost endlessly. It it'll be delightful and it is 0:48:32.440 --> 0:48:35.040 you know, it is a place that people should just 0:48:35.360 --> 0:48:39.759 go and revisit and revisit because on every topic they 0:48:39.800 --> 0:48:45.680 have a thoughtful, knowledgeable, uh and accessible approach to learning 0:48:45.719 --> 0:48:48.200 about the world that we live in. When does that reopen? 0:48:48.200 --> 0:48:50.600 When does the new edition go live? I think it 0:48:50.600 --> 0:48:53.839 will be twenty one, so coming up quite soon. It's 0:48:54.000 --> 0:48:58.120 uh Gene Gang from Studio Gang is the architects. She's 0:48:58.160 --> 0:49:03.600 a spectacular architect. The that entrance will be on Columbus Avenue, 0:49:03.840 --> 0:49:06.759 so you'll enter from the other side. It's just it'll 0:49:06.800 --> 0:49:09.400 be fantastic. People forget I think the museum has something 0:49:09.440 --> 0:49:13.040 like twenty six buildings. Uh, you don't think of it 0:49:13.160 --> 0:49:16.239 is a giant and it's just I mean it's a 0:49:16.280 --> 0:49:19.120 wonderful place. So you know, I I like going to 0:49:19.200 --> 0:49:21.920 an art museum or the operas, but just the next guy, 0:49:21.960 --> 0:49:26.279 which probably isn't all that much, but but going there 0:49:26.440 --> 0:49:29.560 it's always energizing and you know, it's run. One of 0:49:29.600 --> 0:49:31.399 the amazing things I'll just say as an a side 0:49:31.400 --> 0:49:33.360 about the museum is it's had the same you know, 0:49:33.360 --> 0:49:36.680 when we invest in companies Berry. We love when you 0:49:36.719 --> 0:49:39.360 can have a run with an executive like Jeff Bezos 0:49:39.520 --> 0:49:43.640 or or Larry Page or Jamie Diamond. You know, where 0:49:43.719 --> 0:49:46.840 you can have twenty thirty years of you know, you 0:49:46.920 --> 0:49:50.239 gained conviction early, and then you have the conviction to 0:49:50.360 --> 0:49:53.759 ride through the downturns by more. And in a way, 0:49:53.840 --> 0:49:56.879 the Museum of Natural History embodies that because it's had 0:49:56.920 --> 0:50:00.000 the same executive director. I don't want to make up 0:50:00.000 --> 0:50:03.920 the number, but it's it's a decade, maybe thirty thirty 0:50:04.040 --> 0:50:06.880 or by the end of her career maybe forty years almost, 0:50:07.400 --> 0:50:10.920 and she is just a force of nature, Ellen futter 0:50:11.040 --> 0:50:13.719 And and so it's also excited to be part of 0:50:13.719 --> 0:50:16.760 an institution that has been so shaped by the long 0:50:16.880 --> 0:50:19.480 term vision of a leader, and to be in a 0:50:19.520 --> 0:50:22.400 sense get to spend time with the team that she's built. 0:50:22.480 --> 0:50:25.359 It's one of the best managed institutions. I know. It's 0:50:25.400 --> 0:50:28.200 funny you mentioned the the ability to wander and not 0:50:28.360 --> 0:50:32.319 hit dead ends. My wife is now retired, but she 0:50:32.440 --> 0:50:35.400 taught fashion, illustration and design, and so I've been dragged 0:50:35.440 --> 0:50:38.239 to every museum in the world. We just went to 0:50:38.360 --> 0:50:42.680 the reopened MoMA here in New York and they did 0:50:42.680 --> 0:50:46.120 exactly what you describe there. Really everything is a loop. 0:50:46.480 --> 0:50:49.840 There are no more dead ends. You walk into uhum 0:50:51.160 --> 0:50:54.400 a gallery and there's an exit that takes you to 0:50:54.480 --> 0:50:57.080 the next gallery. It's not like the old days where 0:50:57.120 --> 0:51:00.920 it was a perplexing series of dead end. I do 0:51:01.080 --> 0:51:04.120 wonder if it's almost hardwired in us to be wanderers. 0:51:04.480 --> 0:51:07.200 It is amazing, and it's it's something that I think. 0:51:07.760 --> 0:51:09.920 You know, New York has lots of problems, and I 0:51:09.960 --> 0:51:12.120 travel all over the country and all over the world, 0:51:12.200 --> 0:51:14.680 and I can see the pluses and minuses. But one 0:51:14.719 --> 0:51:16.799 of the wonderful things about New York is that it 0:51:16.880 --> 0:51:19.759 is a walking city. And you really don't have that 0:51:19.800 --> 0:51:22.799 when I visit Los Angeles, and you know, and and 0:51:22.920 --> 0:51:28.120 other cities, small cities Midwestern Akron, Toledo, uh Cleveland. You 0:51:28.280 --> 0:51:30.720 just that that sense of being able to walk to work, 0:51:30.840 --> 0:51:33.600 walk through the park, walk around. But I do think 0:51:33.680 --> 0:51:36.279 there is something in us that that enjoys wandering, and 0:51:36.520 --> 0:51:39.520 it is wonderful when these institutions reconfigure to allow that. 0:51:39.600 --> 0:51:43.120 And and of course, intellectually, like investing, one of the 0:51:43.160 --> 0:51:45.919 great things about investing is it's wonderful to be able 0:51:45.920 --> 0:51:48.759 to intellectually wander. You know, one of the things my 0:51:48.840 --> 0:51:51.719 grandfather was a passionate investor. He called it the best 0:51:51.760 --> 0:51:54.720 game in town. And he said, because everything is relevant 0:51:54.719 --> 0:51:57.000 in the moment you get to an end on a thread, 0:51:57.239 --> 0:51:59.719 you can just move in a different direction. But you 0:51:59.760 --> 0:52:02.360 in a sense, it's not like if you were making 0:52:02.440 --> 0:52:04.600 chairs for a living. You know, you sort of make 0:52:04.640 --> 0:52:06.719 the chair out, it goes, you make another chair out, 0:52:06.719 --> 0:52:11.080 it goes. There's something about this constant learning, constant improvement, 0:52:11.160 --> 0:52:15.400 constant wandering process that's really delightful about it. I totally agree. 0:52:15.680 --> 0:52:18.400 I want to get to some questions that we skipped 0:52:18.480 --> 0:52:24.120 over um during the broadcast portion, and really the first 0:52:24.160 --> 0:52:28.239 thing we have to talk about is Davis Advisors is 0:52:28.360 --> 0:52:31.920 relatively new to the worlds of ETFs. Uh. This is 0:52:33.719 --> 0:52:36.640 something like that, you guys added a couple of ETFs 0:52:37.040 --> 0:52:41.560 which have all accumulated a decent amount of assets under management. 0:52:42.719 --> 0:52:45.359 Given your fifty year history and mutual funds, what made 0:52:45.400 --> 0:52:48.320 you say, hey, let's try these new fangal dtfs on. 0:52:48.480 --> 0:52:50.400 For some it's such a great question, Barre, and you're 0:52:50.400 --> 0:52:52.760 gonna love the answer because it's such an interesting story. 0:52:53.120 --> 0:52:55.280 You know, we didn't start as a mutual fund company. 0:52:55.320 --> 0:52:59.759 We started as an institutional advisor, that pension advisor. You know, 0:52:59.800 --> 0:53:04.240 this was the sort of uh in the early nineteen sixties. 0:53:04.280 --> 0:53:07.280 My father started that business. You know, he managed money 0:53:07.360 --> 0:53:09.880 for people like you know, Allied Signal or you know, 0:53:09.960 --> 0:53:15.440 foundations and so on, and uh, very reputable and uh. 0:53:15.480 --> 0:53:18.319 One of the consultants that had worked with his firm 0:53:18.400 --> 0:53:20.400 came to him and said, you know, would you be 0:53:20.440 --> 0:53:24.680 interested in starting a mutual fund And my father said, well, well, 0:53:24.719 --> 0:53:26.800 don't you need to go to a mutual fund shop 0:53:27.120 --> 0:53:31.600 where an institutional advisor Mutual funds is something else. And 0:53:31.680 --> 0:53:34.840 happily this advisor said, well, I don't think so, because 0:53:34.960 --> 0:53:37.640 I want you for your money management approach, your money 0:53:37.640 --> 0:53:41.200 management philosophy, and I have clients for whom a large, 0:53:41.200 --> 0:53:44.160 separate institutional account is not suitable but a mutual fund 0:53:44.160 --> 0:53:47.520 would be. Well, happily my father saw that fifty years 0:53:47.520 --> 0:53:50.680 ago and started the mutual funds. We started the managing 0:53:50.680 --> 0:53:53.640 the mutual funds. Then, well, the same thing happened Barry 0:53:53.719 --> 0:53:56.040 with et s. So what happened was we had a 0:53:56.080 --> 0:53:58.840 long most of our clients come to us through financial 0:53:58.840 --> 0:54:02.040 advisor sort of trust advisers. They've had a long relationship 0:54:02.120 --> 0:54:04.840 with an advisor that we had done business with for 0:54:04.880 --> 0:54:07.239 twenty or thirty years came and said, you know, I'm 0:54:07.239 --> 0:54:10.120 curious if you could start an E T F and I, 0:54:10.160 --> 0:54:12.000 like my father, said, well, E T S. Don't you 0:54:12.040 --> 0:54:13.560 need to go to an E T F shop? Aren't 0:54:13.600 --> 0:54:17.200 they passive? Aren't they index based? He said, well, lots 0:54:17.239 --> 0:54:21.000 of indexes have higher turnover than you have. UM, so 0:54:21.200 --> 0:54:24.319 you know, there's great tax efficiency, there's ease of transactions. 0:54:24.360 --> 0:54:27.080 They really are suitable for some clients. So we looked 0:54:27.120 --> 0:54:30.880 at it and we launched UH four actively managed ETFs 0:54:30.920 --> 0:54:33.440 based on the four strategies that we thought had the 0:54:33.520 --> 0:54:35.880 most promise in today's market where we see the biggest 0:54:36.880 --> 0:54:39.600 So it's a concentrated U S strategy called d U 0:54:39.800 --> 0:54:43.080 S A Davis Select US. So that is a really 0:54:43.560 --> 0:54:47.560 UH sort of focused U S strategy UH Davis International 0:54:47.680 --> 0:54:52.280 d I N T and that's non US international again 0:54:52.560 --> 0:54:56.000 very focused. So it's not you know, the international indexes 0:54:56.040 --> 0:54:58.640 are just a mess. You know, I think we've outperformed 0:54:58.680 --> 0:55:01.520 the international indexes and sort of all periods. It's and 0:55:01.600 --> 0:55:03.799 a lot of active managers have So if you want 0:55:03.840 --> 0:55:06.480 to invest internationally, being active is usually the way to go, 0:55:06.840 --> 0:55:09.880 but there weren't some great active ets. So d A 0:55:09.960 --> 0:55:12.759 global that combines both. I always say, if somebody's coming 0:55:12.800 --> 0:55:15.279 does with just wants one fund Global is probably the 0:55:15.320 --> 0:55:17.759 best because it's the least constraint. D w L D 0:55:18.000 --> 0:55:21.840 Davis Worldwide and then financial where I started my We 0:55:21.960 --> 0:55:24.719 started d F n L because the financial e t 0:55:24.920 --> 0:55:26.600 F s. Do you know the financial e t F 0:55:26.719 --> 0:55:32.800 the largest financial ETF has almost in five stocks. I 0:55:32.840 --> 0:55:37.040 mean that's a little scary, you know, aping the s. Yeah, 0:55:37.200 --> 0:55:40.440 and so they have huge concentration risk in a single subsector. 0:55:40.760 --> 0:55:44.680 So we we launched those. They're actively managed, We run 0:55:44.719 --> 0:55:47.600 them with the same discipline, the same philosophy, the same team. 0:55:48.040 --> 0:55:50.000 And I thought, well, this will be the beginning of 0:55:50.080 --> 0:55:52.160 the wave, like everybody will do it now. But it 0:55:52.280 --> 0:55:55.120 hasn't happened. And I think the reason is is that 0:55:55.280 --> 0:55:59.480 are we're large enough to have credibility to be able 0:55:59.520 --> 0:56:02.280 to offer it, to make the investments and operational excellence 0:56:02.320 --> 0:56:04.480 to do it, but we're small enough that we don't 0:56:04.520 --> 0:56:07.279 have to worry about liquidity and front running. And you know, 0:56:07.320 --> 0:56:09.280 if we're buying Google, I don't have to worry about, 0:56:09.440 --> 0:56:11.319 you know, somebody trying to jump in front of us 0:56:11.480 --> 0:56:15.120 or that. Uh. We have a culture of transparency. We're 0:56:15.200 --> 0:56:17.960 already low cost. You know, all of our actively managed 0:56:18.000 --> 0:56:20.480 funds have below average fees, and so we didn't have 0:56:20.560 --> 0:56:24.400 to worry about some fee arbitrage and uh. And so 0:56:24.640 --> 0:56:27.360 we we sort of set out with fully transparent, you know, 0:56:27.600 --> 0:56:29.960 true ETFs. We put a lot of our own money 0:56:30.000 --> 0:56:31.960 in them because there is a lot of tax efficiency 0:56:32.400 --> 0:56:35.120 uh in them in this environment and and uh and 0:56:35.360 --> 0:56:38.239 what we found surprisingly very is there a few traditional 0:56:38.360 --> 0:56:40.839 et F advisors that have come to us and said, hey, 0:56:40.880 --> 0:56:43.640 I'm mostly passive, but I've looked at the data and 0:56:43.719 --> 0:56:46.080 there are periods of time where even the average active 0:56:46.120 --> 0:56:49.680 manager outperforms for five years. Maybe I should reserve a 0:56:49.719 --> 0:56:52.520 place in my portfolio for real active management. And so 0:56:52.640 --> 0:56:55.279 we saw at first globally international, but we're even seeing 0:56:55.280 --> 0:56:58.680 in the US. Now you mentioned the tax efficiency. I 0:56:58.800 --> 0:57:02.160 know this has been said jokingly, maybe it's only half jokingly, 0:57:02.600 --> 0:57:05.239 but it's true. If they were introduced as a new 0:57:05.320 --> 0:57:10.080 product today, mutual funds might have a harder time finding 0:57:10.160 --> 0:57:13.000 an audience, whereas the e t F s because of 0:57:13.120 --> 0:57:17.560 the way they're structured. What happens internally doesn't generate a 0:57:17.640 --> 0:57:21.320 tax bill until you send sell them. Are we seeing 0:57:21.400 --> 0:57:24.240 that transition from mutual funds to e T F or 0:57:24.400 --> 0:57:27.000 is it still too much of a niche product and 0:57:27.120 --> 0:57:30.080 mutual funds are gonna be around for another century of 0:57:30.200 --> 0:57:32.480 so well, I mean, we started the e T s 0:57:32.600 --> 0:57:35.080 because we saw the advantages. They are not advantaged in 0:57:35.280 --> 0:57:39.320 every environment. Right, A traditional mutual fund with steady inflows 0:57:39.600 --> 0:57:43.920 has enormous advantages because it can in a sense reposition 0:57:44.000 --> 0:57:46.760 the portfolio without generating any gains and so on. An 0:57:46.800 --> 0:57:50.520 ETF does not have that advantage. And et F is 0:57:50.640 --> 0:57:52.640 very much like an s M A right, it's a 0:57:52.720 --> 0:57:57.040 separately managed to count in essence um. So there are advantages. 0:57:57.440 --> 0:58:00.560 There are environments where you could imagine the mean, but 0:58:00.720 --> 0:58:03.360 by and large, I would say, if I had to predict, 0:58:03.440 --> 0:58:05.960 I could definitely see the It would be hard for 0:58:06.000 --> 0:58:09.000 me to understand why et F wouldn't continue to gain 0:58:09.480 --> 0:58:13.480 traction because of the relative ease of transactions and so on, 0:58:13.640 --> 0:58:16.640 and so I you know, I think in a sense, 0:58:16.840 --> 0:58:19.600 you know, they have the the some of the advantages 0:58:19.640 --> 0:58:22.760 of mutual funds in terms of governance and co mingled accounts, 0:58:22.960 --> 0:58:25.919 but the ease of transaction of individual stocks. You could 0:58:25.920 --> 0:58:27.600 sort of see how that could have a long way 0:58:27.640 --> 0:58:29.200 to go, And we certainly wanted to put a marker 0:58:29.240 --> 0:58:32.240 in the sand and be really the leader in true 0:58:32.320 --> 0:58:37.960 active management with any everybody focuses on low cost and passive, 0:58:38.520 --> 0:58:42.800 but the tax benefits are just so spectacular. I'm surprised 0:58:42.880 --> 0:58:46.360 we haven't seen more mutual funds roll out some for 0:58:46.520 --> 0:58:51.080 the form of an ETF based version of their active funds. Well, 0:58:51.200 --> 0:58:53.560 I think that they have a number of barriers that 0:58:53.680 --> 0:58:57.200 we were comfortable, uh stepping over that stand in their way. 0:58:57.320 --> 0:58:59.880 Some are too large and they worry about the liquidity 0:58:59.880 --> 0:59:03.280 of effects. Some have fees that are too high. So 0:59:03.400 --> 0:59:07.160 if you're charging one percent on a mutual fund, it's 0:59:07.200 --> 0:59:10.800 hard to offer a low cost e t f uh 0:59:11.520 --> 0:59:14.640 and without creating the opportunity for fee arbitrage and so on. 0:59:14.920 --> 0:59:18.520 You mentioned that, meaning I recall when PIMCO first rolled 0:59:18.520 --> 0:59:21.880 out their ETFs, they had them at a higher price 0:59:22.000 --> 0:59:26.760 point than their mutual funds. Was that the concern the arbitrage? Well, yes, 0:59:26.960 --> 0:59:29.160 I think so. I mean I think that you you 0:59:29.320 --> 0:59:33.480 don't want to create a situation where somebody could buy 0:59:33.560 --> 0:59:37.840 the underlying stocks, uh and in a sense short the 0:59:37.960 --> 0:59:42.080 E t F and make a guaranteed return that would 0:59:42.120 --> 0:59:46.320 be reasonable. Uh So, if that guaranteed return is you know, 0:59:46.920 --> 0:59:50.280 thirty basis points or sixty basis points, that's gonna be 0:59:50.400 --> 0:59:52.040 tough to make a lot of money on because you're 0:59:52.080 --> 0:59:55.479 taking single event risk and things like that, so you'd 0:59:55.480 --> 0:59:57.800 have deliver it so high. But you know, if you're 0:59:57.880 --> 1:00:00.320 charging one or one and a half percent, then you 1:00:00.560 --> 1:00:02.880 somebody could say, well, I'll just buy those stocks short 1:00:02.920 --> 1:00:04.440 the t F. I make an extra one and a 1:00:04.480 --> 1:00:08.440 half percent doing that. Um So, you know, it's a 1:00:08.520 --> 1:00:11.320 little bit like iTunes. I mean, one of the things 1:00:11.400 --> 1:00:14.439 that I would say is that, you know, music was free, 1:00:14.520 --> 1:00:17.200 you could rip it off on the internet. And I 1:00:17.320 --> 1:00:20.040 think Apple's philosophy was if you make it easy for 1:00:20.160 --> 1:00:22.520 people to do the right thing, they'll do the right thing. 1:00:23.280 --> 1:00:25.960 And and that's what and I feel that way about 1:00:26.360 --> 1:00:27.920 the E t f s. You know, if you make 1:00:27.960 --> 1:00:31.160 it easy for somebody to do the right thing to 1:00:31.280 --> 1:00:34.000 invest with you at a reasonable fee, uh, then I 1:00:34.080 --> 1:00:36.360 think they'll do it. You know, could can somebody open 1:00:36.400 --> 1:00:39.080 a separate account and mimic what you're doing, you know, 1:00:39.520 --> 1:00:42.520 you know, of course they can. People see the confirms, 1:00:42.600 --> 1:00:44.920 they can see the trades that you're doing for an account, 1:00:44.960 --> 1:00:47.720 and they can mimic those for other accounts on which 1:00:47.720 --> 1:00:50.200 they're not paying you a fee. But I think that 1:00:50.360 --> 1:00:51.920 if you make it easy for people to do the 1:00:52.040 --> 1:00:54.240 right thing, they do the right thing. You know, I've 1:00:54.360 --> 1:00:57.680 I've heard people talk about that. But let's say someone 1:00:57.720 --> 1:00:59.600 were to open an s m A and then they 1:00:59.640 --> 1:01:03.160 would shane a different account to that s m A. 1:01:03.640 --> 1:01:07.000 That that seems like it's far too much work to 1:01:07.160 --> 1:01:10.840 actually do to save fifty or seventy five basis points, 1:01:11.280 --> 1:01:14.280 unless it was hundreds of millions of dollars, in which 1:01:14.320 --> 1:01:18.480 case it would be really easy to identify, um, who 1:01:18.720 --> 1:01:21.720 is piggybacking on all your trades. There was a wonderful 1:01:22.120 --> 1:01:25.120 story but real mentor of mine early was a man 1:01:25.200 --> 1:01:28.480 named Bob Kirby, and he worked at Capital Group, and 1:01:28.560 --> 1:01:31.280 he was just a legend wonderful, wonderful investor in a 1:01:31.320 --> 1:01:34.960 wonderful human being. And uh he tells the story about 1:01:35.040 --> 1:01:38.880 how he was managing an account for an older lady 1:01:39.760 --> 1:01:42.439 and uh, she came in one day and she said, 1:01:42.480 --> 1:01:44.520 you know, my husband has died, and would you take 1:01:44.600 --> 1:01:47.480 on managing his account. He always wanted to do it himself, 1:01:47.960 --> 1:01:50.200 but now that he's dead, I'd like you to take 1:01:50.280 --> 1:01:53.200 it on. And Kirby looked at the account and realized 1:01:53.280 --> 1:01:57.800 that this, uh, this husband had been free riding on 1:01:57.880 --> 1:02:00.920 all his trades, and every time Bob bought a stock 1:02:01.040 --> 1:02:03.760 for the wife, the confirm would be sent home. The 1:02:03.880 --> 1:02:06.120 husband would take a portion of his paycheck at the 1:02:06.200 --> 1:02:08.560 end of the month and buy the same stock. But 1:02:08.920 --> 1:02:12.520 here's the punchline. What was amazing is that the husband's 1:02:12.520 --> 1:02:17.680 account had meaningfully outperformed. Why well, because the husband never 1:02:17.760 --> 1:02:20.960 sold anything, and because he was buying it out of 1:02:21.040 --> 1:02:24.960 income every month, whereas Bob, managing this closed account, was 1:02:25.080 --> 1:02:28.480 constantly selling things and and so what he was doing 1:02:28.560 --> 1:02:31.400 what we call cutting the flowers and watering the weeds. Right, 1:02:31.480 --> 1:02:34.240 what I've done with Amazon for a decade, Right, I'm 1:02:34.360 --> 1:02:37.560 constantly trimming it, uh, you know, to add to something 1:02:37.640 --> 1:02:41.560 that hasn't gone up. And and over time, any honest investor, 1:02:41.680 --> 1:02:44.800 and especially any honest value investor, will tell you that 1:02:44.880 --> 1:02:47.760 their biggest mistakes were what they sold what they bought. 1:02:48.120 --> 1:02:50.840 Quite quite interesting, I know I only have you here 1:02:50.880 --> 1:02:53.320 for a finite amount of time. So let me get 1:02:53.440 --> 1:02:58.240 to my favorite questions that I asked all my guests. 1:02:59.040 --> 1:03:01.520 Lets These are usually pretty revealing about who you are 1:03:01.560 --> 1:03:05.280 and what you're about. Let's start with, UM, you mentioned 1:03:05.360 --> 1:03:08.480 Amazon Prime. What are you streaming these days? Give us 1:03:08.520 --> 1:03:15.040 your favorite Netflix Amazon Prime podcasts? Uh programs. Well, this 1:03:15.240 --> 1:03:18.800 is a very disappointing question because I am I. I 1:03:19.280 --> 1:03:22.959 find that I watched things so infrequently. I I feel 1:03:23.000 --> 1:03:25.440 there were two decisions I made when I was in 1:03:25.600 --> 1:03:28.360 my early twenties. As I said, I'm not going to 1:03:28.480 --> 1:03:32.400 become a sports fan because it's three to five hours 1:03:32.480 --> 1:03:35.800 a week at least least at least and uh, I 1:03:35.920 --> 1:03:39.640 don't understand who is home every Sunday watching football for 1:03:39.840 --> 1:03:42.360 twenty weeks a year. I don't care. And you know, 1:03:42.520 --> 1:03:45.480 and golf is the same way. It's an enormous commitment 1:03:45.520 --> 1:03:48.200 of time. And what I felt when Netflix came out 1:03:48.280 --> 1:03:50.720 and people could binge watch a series, what I said, 1:03:50.760 --> 1:03:53.000 as well, you know, like May West, I I can 1:03:53.080 --> 1:03:57.000 resist anything but temptation, So why get on that trolley? 1:03:57.480 --> 1:04:00.240 So I simply said, I'm not going to subscribe because 1:04:00.240 --> 1:04:01.800 I don't want to see these. I don't want to 1:04:01.840 --> 1:04:05.240 get addicted to some series. So I would say, you know, 1:04:05.600 --> 1:04:08.680 I watched films, I read a lot, uh, but I 1:04:08.800 --> 1:04:10.720 don't watch a lot of you know, I've I've seen 1:04:10.840 --> 1:04:12.840 some of the big ones, the Breaking Bad and so on. 1:04:13.000 --> 1:04:15.040 But but I also find if you don't watch for 1:04:15.080 --> 1:04:16.800 a long time and then you put it on, you're 1:04:16.880 --> 1:04:20.040 so shocked by violence and things like that, You're like, 1:04:20.680 --> 1:04:23.120 this may not be for me. So I'm hopelessly out 1:04:23.160 --> 1:04:25.720 of sync with pop. We'll get two books in a minute. 1:04:25.760 --> 1:04:28.720 But that's fascinating. So I was gonna the next question 1:04:28.880 --> 1:04:31.840 is tell us the most important thing people don't know 1:04:31.960 --> 1:04:34.880 about you? But but that might be it is there 1:04:35.000 --> 1:04:37.080 is there something else that I think. I think people 1:04:37.120 --> 1:04:39.360 that know me assume I'm pretty square, so I think 1:04:39.400 --> 1:04:42.240 that they wouldn't be surprised by that. I I don't 1:04:42.480 --> 1:04:45.000 you know. I would say that it in in many 1:04:45.080 --> 1:04:49.040 ways that I find very reassuring. I'm very very conventional. Um. 1:04:49.720 --> 1:04:53.400 People may not know. I was in seminary, uh when 1:04:53.480 --> 1:04:56.280 I did a master's degree in theology, and I went 1:04:56.360 --> 1:04:59.000 to work for the Episcopal Church, which is really a 1:04:59.080 --> 1:05:07.080 repository of decency. Within Christianity. It's sort of enormously modest, thoughtful, restrained, uh, 1:05:07.480 --> 1:05:12.120 sect of the faith. And I'm fairly agnostic, uh, but 1:05:12.320 --> 1:05:15.440 I my my view was I thought that it did 1:05:15.480 --> 1:05:18.320 a lot of good in the world. But anyway, going 1:05:18.400 --> 1:05:20.080 to work for the church for a year convinced me 1:05:20.160 --> 1:05:21.880 that that wasn't for me. And and so that might 1:05:21.920 --> 1:05:24.000 be signing people don't know. I have a buddy who's 1:05:24.040 --> 1:05:29.520 a deacon in the Episcopal Church, and when we've discussed 1:05:30.440 --> 1:05:33.800 not just faith but religion, and he laid out what 1:05:34.160 --> 1:05:38.680 the precepts of that faith is. It was really quite 1:05:38.720 --> 1:05:43.000 fascinating because it's such a different premise in terms of 1:05:43.840 --> 1:05:48.280 perceiving knowledge and responsibility, and it's very different than what 1:05:48.440 --> 1:05:53.600 you think of as versus a traditional religious belief. Well, 1:05:53.640 --> 1:05:56.160 of course, yeah, religion has got a bad rap as 1:05:56.200 --> 1:05:58.080 a result. But but I will give you something that 1:05:58.160 --> 1:06:01.040 ties to investing, which is one of my favorite teachers 1:06:01.080 --> 1:06:03.640 at that time. It was a bishop of Newark, and 1:06:03.920 --> 1:06:06.840 he episcopal Bishop of Newark. And he once asked me 1:06:06.920 --> 1:06:11.840 what's the opposite of faith? And I said doubt And 1:06:11.920 --> 1:06:16.720 he said no certainty. He said, if you doubt and 1:06:16.880 --> 1:06:19.360 faith are required of you. You need doubt to have 1:06:19.440 --> 1:06:22.880 faith in the same way you need fear to have courage. Right. 1:06:23.080 --> 1:06:25.680 If you don't have any fear, you don't have any courage, 1:06:26.080 --> 1:06:28.480 right You. You may be you may do things that 1:06:28.600 --> 1:06:31.280 appear to be courageous, but you don't have any courage. 1:06:31.520 --> 1:06:33.480 You need fear in order to be courageous. You need 1:06:33.520 --> 1:06:35.800 doubt in order to that faith. Certainty is the opposite 1:06:35.840 --> 1:06:37.880 of faith. That's so interesting you said that because I 1:06:37.920 --> 1:06:41.040 have a friend who always asks what's the opposite of love? 1:06:41.520 --> 1:06:44.400 And the answer is, it's not hate, it's different, and 1:06:44.520 --> 1:06:48.280 it's the same philosophical Well, in this political time, it's 1:06:48.320 --> 1:06:51.160 a good phrase to bear in mind because, as I said, 1:06:51.200 --> 1:06:53.720 I I have time for people whose politics are on 1:06:53.880 --> 1:06:57.080 either side of this divide, provided they think it's a 1:06:57.120 --> 1:07:01.080 difficult choice. Well, when somebody thinks that obvious and easy, 1:07:01.200 --> 1:07:03.480 that's when I get a little nervous for sure, and 1:07:03.720 --> 1:07:06.280 and it never is. Um. So let's talk about mentors. 1:07:06.320 --> 1:07:09.480 Who were some of the mentors that guided your career 1:07:09.600 --> 1:07:13.600 and helped influence the way you think about uh investing. Well, 1:07:13.920 --> 1:07:16.480 I mean I I grew up with two at at 1:07:16.520 --> 1:07:18.880 the dining room table, so you know, I had, you 1:07:18.960 --> 1:07:22.480 know father, that is, my father is a spectacular teacher 1:07:22.520 --> 1:07:26.840 about investing. It's just he very early. It was about 1:07:26.880 --> 1:07:30.160 the businesses, not the pieces of paper. It was visiting 1:07:30.240 --> 1:07:32.800 companies with him, seeing the people, as he would always say, 1:07:32.840 --> 1:07:37.200 people and ideas. Uh. He would uh we could buy stocks. 1:07:37.240 --> 1:07:40.320 He would finance them if we wrote a report and 1:07:40.520 --> 1:07:44.200 called the company. Uh and uh. It was just he 1:07:44.320 --> 1:07:45.720 made it. So, you know, I used to say, when 1:07:45.720 --> 1:07:48.400 the train pulled in at night, uh in uh. He 1:07:48.480 --> 1:07:51.640 lived out in Tuxedo. Uh. And the commuters get off 1:07:51.680 --> 1:07:53.400 the train and they all looked gray and sort of 1:07:53.520 --> 1:07:56.960 ashen with their briefcase and you know, their sack suits, 1:07:57.040 --> 1:07:59.040 and and my dad would get off and he was 1:07:59.200 --> 1:08:01.880 just exuber you know. He just loved the ideas. And 1:08:02.000 --> 1:08:04.360 of course he learned from his father, who was the 1:08:04.440 --> 1:08:06.840 same way. The best game in town. And he only 1:08:06.920 --> 1:08:09.880 invested in financials. That was his specialty. But he just 1:08:10.120 --> 1:08:13.080 loved them. So those two. But but outside of them, 1:08:13.800 --> 1:08:15.880 it would have to be Charlie Munger. I mean, he is, 1:08:16.320 --> 1:08:19.400 he came into my life at a wonderful stage. I 1:08:19.520 --> 1:08:23.799 admire him more than almost anybody. I know, his intellect, 1:08:24.000 --> 1:08:28.360 his character, his wisdom, his thoughtfulness, his decency, and he's 1:08:28.400 --> 1:08:30.479 just one of the great human beings I've ever know. 1:08:30.600 --> 1:08:33.679 How did Charlie Munger come into your life? Well, that's 1:08:33.720 --> 1:08:37.240 a good question. Uh. You know, my grandfather had a 1:08:37.280 --> 1:08:40.040 long history and my father investing in Berkshire, So we 1:08:40.120 --> 1:08:42.559 had gone to annual meetings. And you know, for many 1:08:42.680 --> 1:08:45.320 years my board was actually my father was actually on 1:08:45.360 --> 1:08:48.760 the board of Geico. Uh, I mean my grandfather was 1:08:48.800 --> 1:08:50.760 on the board of Geico. So there had been overlaps 1:08:50.880 --> 1:08:54.960 that way. But I met Charlie through a mutual friend, uh, 1:08:55.200 --> 1:08:58.160 when I was interested in trying to sell a business 1:08:58.280 --> 1:09:01.160 that my grandfather had, which was a curities lending business. 1:09:01.200 --> 1:09:03.320 And I won't bore you with all of the details 1:09:03.360 --> 1:09:07.440 of that business, but uh it basically as my grandfather. 1:09:07.680 --> 1:09:09.880 When my grandfather died, he gave a hundred percent of 1:09:10.000 --> 1:09:14.200 his estate to charity and uh, and so he had 1:09:14.240 --> 1:09:16.479 asked me to try to wrap up his business while 1:09:16.520 --> 1:09:18.800 he was still alive, so that when he died, people 1:09:18.800 --> 1:09:20.400 wouldn't be out on the streets. And so I was 1:09:20.439 --> 1:09:23.519 looking for a home for this securities lending operation, and 1:09:23.880 --> 1:09:26.040 and I thought Berkshire could be They had obviously a 1:09:26.080 --> 1:09:28.560 great balance sheet, they had a big equity portfolio and 1:09:28.880 --> 1:09:31.559 and maybe they would take this operation. And I arranged 1:09:31.640 --> 1:09:34.559 this breakfast with Charlie Munger. I pitched it to him 1:09:34.640 --> 1:09:37.640 between eight and eight oh seven in the morning. At 1:09:37.680 --> 1:09:39.640 eight oh seven, he said, I have no interest in 1:09:39.680 --> 1:09:43.120 the business that's you know, uh, you know ten guys 1:09:43.200 --> 1:09:46.400 named Tony and you know, back office business where we 1:09:46.439 --> 1:09:48.720 don't understand, you know. But he said, I'm interested in 1:09:48.800 --> 1:09:51.400 why you picked Berkshire. And so I talked to him 1:09:51.400 --> 1:09:53.120 about the balance sheet and the security and he said, 1:09:53.160 --> 1:09:55.200 well that's it. And then we got and we didn't 1:09:55.280 --> 1:09:59.160 leave the table until lunchtime, and it was you know, 1:09:59.240 --> 1:10:02.200 I would define it as, you know, the big most 1:10:02.240 --> 1:10:06.400 significant change, uh in not just my professional but really 1:10:06.720 --> 1:10:09.639 my professional and personal life in terms of the direction 1:10:09.720 --> 1:10:12.200 of my life. That breakfast was an enormous change. And 1:10:12.280 --> 1:10:14.280 I've always been grateful to him, and I try to 1:10:14.320 --> 1:10:18.080 see him whenever I can and and uh uh he 1:10:18.160 --> 1:10:20.000 probably wouldn't mind, I say. I. I asked about his 1:10:20.880 --> 1:10:23.960 birthday what he wanted for his birthday, and he said, 1:10:24.000 --> 1:10:28.920 a paternity suit. Yeah, that sounds like him. That's hilarious. Um, 1:10:29.080 --> 1:10:33.120 let's talk about books you mentioned um, uh, you enjoy reading. 1:10:33.200 --> 1:10:36.559 I know Monger and Buffett do spend half their day reading. 1:10:37.000 --> 1:10:38.800 What are some of your favorite books? What are you 1:10:38.880 --> 1:10:42.720 reading these days? Fiction, nonfiction, whatever? Well, you know, it's 1:10:42.760 --> 1:10:44.800 funny the waves that you go through. I find I 1:10:44.920 --> 1:10:47.080 find myself in periods of time where I'm reading too 1:10:47.160 --> 1:10:50.120 much fiction and I need to force back in nonfiction, 1:10:50.439 --> 1:10:52.880 and then the opposite. I've been in the opposite phase. 1:10:53.320 --> 1:10:56.280 More recently, it's much more nonfiction. I think it's part 1:10:56.320 --> 1:10:59.560 of getting older is that you just become more You 1:10:59.760 --> 1:11:03.080 just you see more wonder in the reality, and you've 1:11:03.120 --> 1:11:05.000 lived enough that a lot of the stories in fiction 1:11:05.080 --> 1:11:07.439 begin to feel you know, you know, well we've we've 1:11:07.479 --> 1:11:10.839 seen that story before. The old joke about um fiction 1:11:11.000 --> 1:11:14.960 versus nonfiction fiction has to make sense, Yes, exact nonfiction 1:11:15.080 --> 1:11:18.360 could be completely and perfectly said. So well, I mean, 1:11:18.640 --> 1:11:21.200 of course, everybody should read the what I call the 1:11:21.280 --> 1:11:24.360 three scandal books, uh, you know of last year. You know, 1:11:24.520 --> 1:11:31.120 the Paronos book, uh Blood, Bad Blood, the unbelievable book 1:11:31.200 --> 1:11:35.000 on one MDB on the Malaysian Front. It's called the 1:11:35.040 --> 1:11:37.840 Billion Dollar Wail. It's a terrible title, but just a 1:11:37.920 --> 1:11:41.720 spectacular story. And uh, and then everybody should read Bill 1:11:41.760 --> 1:11:44.880 Browner read capital you know that is, you know, just 1:11:45.040 --> 1:11:47.639 the the corruption that went on under Putin in Russia. 1:11:48.040 --> 1:11:51.200 So that was and is ongoing and is ongoing. Um. 1:11:51.320 --> 1:11:53.320 But I would say the best book that I read 1:11:53.439 --> 1:11:56.680 last year, uh was I'm going to mispronounce his name. 1:11:56.720 --> 1:12:00.600 I'm sad to say it's Boo Trevanissan. I think B 1:12:00.840 --> 1:12:03.720 h U and then S R and V and a 1:12:03.800 --> 1:12:06.880 bunch of consonants. Uh. But it was a book called Americana. 1:12:07.400 --> 1:12:09.240 And you have to be careful because when it was 1:12:09.280 --> 1:12:11.719 first recommended to me, I went and bought a book 1:12:11.720 --> 1:12:15.720 called Americana, which was about a Nigerian refugee and hair 1:12:15.840 --> 1:12:18.640 dressing and a few other things. And I thought, I 1:12:18.760 --> 1:12:21.160 was very surprised that my friend recommended this. But it 1:12:21.280 --> 1:12:24.559 was a good novel, but clearly it was the wrong one. 1:12:24.720 --> 1:12:29.639 Americana is a history of American capitalism, but it's divided 1:12:29.680 --> 1:12:32.960 into chapters where each chapter stands on its own as 1:12:33.040 --> 1:12:36.519 the history of a specific industry in this country and 1:12:36.680 --> 1:12:39.960 not just the people that started it, the ideas how 1:12:40.080 --> 1:12:44.479 it caught traction, but importantly how it was financed. You know, 1:12:44.560 --> 1:12:49.320 who financed the Mayflower, Who financed you know, the cotton 1:12:49.400 --> 1:12:53.080 gin who financed Ford versus General motors, who financed the 1:12:53.160 --> 1:13:00.080 telegraph or the canals, the microprocessor and resist transistor. You know. 1:13:00.400 --> 1:13:03.560 So you really have this sweeping account, beginning with the 1:13:03.600 --> 1:13:08.160 Mayflower and ending with the Internet, of how these industries 1:13:08.240 --> 1:13:11.200 developed with a real focus on specific companies and people, 1:13:11.520 --> 1:13:14.439 but also how did the capital flow in? Who owned them, 1:13:14.479 --> 1:13:17.840 how did they raise the money? Wonderful, wonderful book that 1:13:17.920 --> 1:13:21.080 sounds fascinating. I'm gonna make a book recommendation to you 1:13:21.520 --> 1:13:27.000 only because you describe that trilogy of um fraud books. 1:13:27.479 --> 1:13:30.240 If you haven't read The Spider Network, I think it 1:13:30.320 --> 1:13:35.360 was by David Enrich. It's about the library manipulation. If 1:13:35.400 --> 1:13:38.880 you liked the Bad Blood book, this is the same thing. 1:13:38.960 --> 1:13:41.960 It reads like a thriller straight through. Really quite fascinating. 1:13:42.000 --> 1:13:44.280 I love. I have to say, I think financial journalists 1:13:44.280 --> 1:13:47.040 don't get enough credit when they do expose these things. 1:13:47.120 --> 1:13:49.240 And it's funny, you know, we all know Sarah Nos 1:13:49.640 --> 1:13:52.600 but tharahs was tiny compared to one m dB, I 1:13:52.640 --> 1:13:56.920 mean one MDB. Somehow a young man stole nine billion 1:13:57.000 --> 1:14:01.519 dollars and is still at large and it's almost you know, 1:14:01.720 --> 1:14:05.840 whatever you say about Elizabeth and Paraos, you know, Uh, 1:14:06.520 --> 1:14:08.280 she was a believer and went down with the ship. 1:14:08.880 --> 1:14:12.240 I mean it is so money went in, but billions 1:14:12.360 --> 1:14:16.720 wasn't lost. You know. Here nine billion dollars just poof. Uh. 1:14:16.920 --> 1:14:21.519 It's a spectacular story. So I if you're interested in 1:14:21.560 --> 1:14:24.400 financial it's it's it's a good one. I'm definitely gonna 1:14:24.479 --> 1:14:26.920 check that out. Um, tell us about a time you 1:14:27.080 --> 1:14:31.400 failed and what you learned from the experience. Well, you know, 1:14:32.040 --> 1:14:35.519 I said earlier success as a lousy teacher. Uh. You know, 1:14:36.360 --> 1:14:40.519 the culture of our firm is so based on trust 1:14:40.800 --> 1:14:44.160 between the team of us that worked together. And the 1:14:44.280 --> 1:14:47.240 reason that we feel trust is so important is because 1:14:47.560 --> 1:14:50.559 admitting and learning from your mistakes is such a critical 1:14:50.640 --> 1:14:53.639 part of getting better. And so we actually in our 1:14:54.160 --> 1:14:56.360 the center of our research department, we have a wall 1:14:56.960 --> 1:15:00.280 with the frame stock certificates of our biggest mistakes and 1:15:00.760 --> 1:15:03.920 uh that goes back twenty or twenty five years and 1:15:04.720 --> 1:15:08.040 it keeps growing, unfortunately, my son said, starting to look 1:15:08.080 --> 1:15:11.800 like a mural and uh. And each certificate has a 1:15:11.840 --> 1:15:15.320 plaque on the bottom with the transferable lesson learned and 1:15:15.479 --> 1:15:20.960 some are mistakes like quantification. Some are mistakes of qualification judgment. Uh. 1:15:21.560 --> 1:15:24.840 Some are mistakes of omission, things that we failed to 1:15:24.880 --> 1:15:26.519 do that we ought to have done. Some our mistakes 1:15:26.560 --> 1:15:30.760 of comission. Some companies are on there twice. Uh. And 1:15:30.960 --> 1:15:32.920 they can be on there twice because you bought them 1:15:32.960 --> 1:15:37.479 wrong and you sold them wrong. Uh so uh, you 1:15:37.560 --> 1:15:41.960 know there were Uh. The mistakes of quantification are the 1:15:42.040 --> 1:15:45.840 easiest to fix because like that manufacturing process earlier when 1:15:45.840 --> 1:15:49.040 we talked about Danny Kahneman, you know, you constantly feed 1:15:49.080 --> 1:15:51.080 those back into the process. All Right, we have to 1:15:51.640 --> 1:15:54.599 reconcile the cash flow from operating section with the cash 1:15:54.640 --> 1:15:56.800 flow from investing section and make sure those tied to 1:15:56.840 --> 1:16:00.200 the income statement. Because that's how Enron or Loo sent 1:16:00.320 --> 1:16:04.880 most dramatically, was manipulating their their cash flow statement, their 1:16:04.880 --> 1:16:09.919 income statement through their cash flow statements. On mistakes of quantification. Uh, maintenance, 1:16:10.000 --> 1:16:13.599 capital versus appreciation, those are valuable lessons because you put 1:16:13.640 --> 1:16:15.280 them back in the system, you don't make them again. 1:16:15.320 --> 1:16:18.040 The firm gets better judgments a little tougher because each 1:16:18.080 --> 1:16:21.439 one looks a little different, like Tolstoy's unhappy families. Um. 1:16:21.840 --> 1:16:23.719 And you don't want to learn so broad a lesson 1:16:24.240 --> 1:16:27.280 that you miss a real uh, you miss an opportunity. 1:16:27.360 --> 1:16:31.799 The other way, the mistakes of omission, those are enormously valuable. 1:16:31.840 --> 1:16:34.600 I mentioned Google earlier Google's on our wall because I 1:16:34.680 --> 1:16:37.400 did all the work. I met Google five or six 1:16:37.520 --> 1:16:40.280 times before they came public. You know, we are large 1:16:40.280 --> 1:16:45.000 shareholders in three newspaper companies. We understood the advertising business, 1:16:45.520 --> 1:16:48.880 and yet we didn't understand how effective Google ads were. 1:16:48.960 --> 1:16:52.960 For one simple reason, we never called an advertiser. If 1:16:53.000 --> 1:16:55.080 we had called Geico or Progressive, who were two of 1:16:55.160 --> 1:16:58.840 the largest advertisers on Google before they came public, we 1:16:58.920 --> 1:17:02.240 would have learned that to get a lead through Google 1:17:02.400 --> 1:17:06.240 was costing them something like two dollars. Their next nearest 1:17:06.360 --> 1:17:10.200 customer acquisition vehicle, which I think was late night cable television, 1:17:10.360 --> 1:17:14.920 was thirty dollars. It was so valuable. So anyway, those 1:17:14.960 --> 1:17:17.559 are mistakes. So I would say, you know, we've been 1:17:17.600 --> 1:17:21.479 guided by failure, uh and UM. We really try to 1:17:21.560 --> 1:17:24.040 have a culture of embracing it and learning from it 1:17:24.280 --> 1:17:28.080 and and earning a subsequent return on the past mistakes 1:17:28.120 --> 1:17:30.719 we've made. It's interesting you guys do that via wall 1:17:31.080 --> 1:17:34.240 all of the I shouldn't say all. Many of the 1:17:35.200 --> 1:17:39.840 prominent venture capitalists hold out there. Some people call it 1:17:39.920 --> 1:17:44.320 their anti portfolio, either the things they said no to, 1:17:45.040 --> 1:17:48.920 like Apple or Amazon, or some of the more spectacular 1:17:49.000 --> 1:17:52.240 failures they've said yes to. And I don't want to 1:17:52.280 --> 1:17:55.559 call it a badge of honor, but it does reflect 1:17:55.600 --> 1:17:59.240 a certain degree of humility and willingness to learn from mistakes. 1:17:59.800 --> 1:18:02.760 You don't see it in many of the companies that 1:18:02.920 --> 1:18:06.080 manage public funds. So it's interesting to hear that you 1:18:06.200 --> 1:18:09.280 guys do something similar to what the vcs do. Well, 1:18:09.400 --> 1:18:12.200 it's my my grandfather's You don't learn from mistakes if 1:18:12.240 --> 1:18:14.920 you don't admit you make them. And and you know, 1:18:15.040 --> 1:18:18.160 we're in a dynamic business. What what what helped us 1:18:18.160 --> 1:18:21.280 succeed in the nineteen seventies was different than the eighties 1:18:21.600 --> 1:18:23.479 or in the eighties didn't work in the nineties. So 1:18:23.600 --> 1:18:25.880 this process of evolution. That's why, going back to your 1:18:25.960 --> 1:18:28.240 very early question about value and growth, that's why I 1:18:28.320 --> 1:18:30.880 get so mad when people say I won't look at something, 1:18:31.560 --> 1:18:34.400 because if you won't look at biotech because you're a 1:18:34.520 --> 1:18:40.280 value investor, you're gonna miss an enormous change in society. 1:18:40.400 --> 1:18:43.479 In the economy that may or may not unfold, but 1:18:43.560 --> 1:18:46.479 when it does, it will have real economic consequences. And 1:18:46.560 --> 1:18:48.760 you might not look at it in order to buy 1:18:48.800 --> 1:18:50.960 a biotech company, but you might look at it in 1:18:51.080 --> 1:18:53.400 terms of what it will mean for healthcare costs, or 1:18:53.560 --> 1:18:56.920 what it which is your in your insurance portfolio, or 1:18:57.280 --> 1:18:59.840 what it might mean for you know, life expectancy. And 1:18:59.880 --> 1:19:02.960 so we just we have a curious mindset, but we 1:19:03.040 --> 1:19:05.920 also think that the idea of not looking at things 1:19:06.120 --> 1:19:08.439 is very, very dangerous. Why why didn't you invest in 1:19:08.520 --> 1:19:10.960 the company that cured cancer? Well, they didn't have any 1:19:11.000 --> 1:19:13.920 earnings the first two quartersactly, just a crazy You know, 1:19:14.040 --> 1:19:16.439 we made a lot of money investing in Cable, and 1:19:16.800 --> 1:19:19.639 you know Cable had no earnings for twenty five years. 1:19:20.439 --> 1:19:23.599 Isn't that really? I think? So, you know, it's all 1:19:23.680 --> 1:19:25.840 cash flow. I don't think they went to earnings until 1:19:25.880 --> 1:19:29.000 about fifteen ten or fifteen years ago, and Cable started 1:19:29.040 --> 1:19:31.559 in the seventies, so I would yeah, I would say 1:19:31.640 --> 1:19:33.880 it would have been twenty five years with no no 1:19:34.080 --> 1:19:37.720 reported earnings. But again going back to accounting, lots of 1:19:37.760 --> 1:19:40.280 cash flow. So what do you do for fun? What 1:19:40.360 --> 1:19:42.479 do you do when you're not in the office or 1:19:42.600 --> 1:19:47.080 when you're not reading. Well, Uh, that's a good question. 1:19:47.200 --> 1:19:49.840 I mean, I you know, we we always say, you know, 1:19:50.000 --> 1:19:54.800 it's hard to find investors that successful investors that had 1:19:54.840 --> 1:19:58.840 a history playing team sports. I always say it's sort 1:19:58.880 --> 1:20:02.400 of the mindset you te to end up with runners, swimmers, 1:20:03.040 --> 1:20:05.800 case link offers, but you don't get a lot of 1:20:06.160 --> 1:20:09.000 uh in the type of long term sort of value investing. 1:20:09.080 --> 1:20:14.280 I think partly it's because I think investing successful investing. 1:20:14.320 --> 1:20:17.759 Value investing requires you to think differently than the the others, 1:20:18.120 --> 1:20:21.880 to set yourself apart, and that mindset tends to lend 1:20:21.920 --> 1:20:25.960 itself more to quiet pursuits, you know, individual things rather 1:20:26.080 --> 1:20:27.960 than being part of the team. You have to have 1:20:28.080 --> 1:20:31.519 lower emotional intelligence things like that. Um so I do 1:20:31.880 --> 1:20:34.320 you know, I enjoy things like running and swimming. Uh. 1:20:34.560 --> 1:20:35.920 But but I would say the one thing I do 1:20:36.000 --> 1:20:38.800 that's a little bit unusual is I have I have 1:20:38.920 --> 1:20:41.679 had for twenty years or so a very very old 1:20:42.080 --> 1:20:48.200 wooden sail boat feeling and I h it was built 1:20:48.320 --> 1:20:51.400 fifty two years ago, fifty three years ago, went down 1:20:51.439 --> 1:20:54.599 the ramp the same month I did. And uh, it's 1:20:54.640 --> 1:20:56.960 not a fancy boat. And it's uh, but it's a 1:20:57.080 --> 1:20:59.800 very well built, sort of hearty boat. And and I 1:21:00.080 --> 1:21:02.640 love sailing that wherever I can. And so we've been 1:21:02.760 --> 1:21:06.320 up to Scandinavia, or up to Nova Scotia, or down 1:21:06.400 --> 1:21:09.559 to the Caribbean. And what I love about the metaphor 1:21:09.680 --> 1:21:12.600 of sailing is that, you know, people say golf is 1:21:12.720 --> 1:21:14.680 like life. I don't think golfs like life. I mean, 1:21:14.720 --> 1:21:16.439 people say you play against yourself and so on. But 1:21:16.760 --> 1:21:18.760 but in golf, the small stuff counts the same as 1:21:18.800 --> 1:21:20.920 the big stuff, and I don't think that's like life. 1:21:21.200 --> 1:21:23.479 I don't think the six inch pot counts the same 1:21:23.520 --> 1:21:26.160 as the hundred yard drive in life, or I guess 1:21:26.200 --> 1:21:28.000 two hundred yards. I don't know how far people drive 1:21:28.000 --> 1:21:31.760 a golf ball. But but sailing, I think is very 1:21:31.840 --> 1:21:36.479 metaphorically powerful, especially for investing, because you can't change the 1:21:36.520 --> 1:21:39.800 direction of the wind. You have to adapt. But if 1:21:39.840 --> 1:21:43.040 you want to make progress, you can continue to make progress, 1:21:43.080 --> 1:21:45.720 but in an indirect way against the way. Yeah. And 1:21:45.760 --> 1:21:48.200 when we come back to investing, you know what we 1:21:48.240 --> 1:21:49.920 say is we know we're going to go through periods 1:21:49.960 --> 1:21:52.479 of bad weather and storms. We want to run our 1:21:52.520 --> 1:21:55.280 portfolio like a ship to survive all different kinds of 1:21:55.320 --> 1:21:58.320 weather to continue to make progress. But we don't want to, 1:21:58.520 --> 1:22:00.760 in a sense expose ourselves to the risk that when 1:22:00.800 --> 1:22:03.600 the storm comes, will founder. But we also want to 1:22:03.640 --> 1:22:06.360 make sure that we're making progress, so we have to 1:22:06.439 --> 1:22:11.480 move forward. So that sort of balance of adaptation, response, thoughtfulness, 1:22:11.840 --> 1:22:14.200 you know, the inability to predict the short term, you 1:22:14.240 --> 1:22:17.479 know that those things all matter. So two things. First, 1:22:17.520 --> 1:22:19.479 I'm gonna have to send you something. I'm gonna make 1:22:19.479 --> 1:22:22.719 a note to email you something about that exact topic 1:22:22.720 --> 1:22:26.040 because it's so fascinating. But second, so I have a small, 1:22:26.120 --> 1:22:29.879 little runabout little power boat, but I got into boating 1:22:30.479 --> 1:22:34.559 through a friends sailboat, and to me, there is nothing 1:22:35.040 --> 1:22:38.560 more relaxing than just being out on the water with 1:22:38.800 --> 1:22:42.519 no engine noise, just the wind and the sails. There's 1:22:42.600 --> 1:22:46.640 something about it that is unique in the world of 1:22:47.120 --> 1:22:51.200 um leisure activities. Well, we talked about being wandering and 1:22:51.320 --> 1:22:55.560 that maybe a genetic predisposition to be wanderers, to be explorers, 1:22:55.640 --> 1:22:58.240 as having served our species over time, and and I 1:22:58.360 --> 1:23:02.080 agree that there's something about sailing and the silence, the harmony, 1:23:02.160 --> 1:23:06.040 the balance. UM. I also particularly love navigating, and so 1:23:06.360 --> 1:23:09.320 you know, I do a little celestial navigation. I have 1:23:09.439 --> 1:23:13.880 a GPS as everyone's got to go there. But you know, 1:23:14.000 --> 1:23:17.320 there's something about being in that moment that I find. 1:23:17.840 --> 1:23:19.400 And of course it's my favorite way to be with 1:23:19.479 --> 1:23:24.280 my family because it's there's no TV, there's no cable 1:23:24.400 --> 1:23:27.120 and and uh, you know, a friend of mine once 1:23:27.200 --> 1:23:30.960 referred to it as a wasp Winnebago. I didn't love, 1:23:31.040 --> 1:23:33.479 but but boy it is. It is a beautiful way 1:23:33.520 --> 1:23:38.080 to to see the world. So, speaking about, um, how 1:23:38.200 --> 1:23:41.120 we see the world, what are you most optimistic about 1:23:41.840 --> 1:23:43.840 in the world of investing and what are you most 1:23:43.920 --> 1:23:49.920 pessimistic about these days? Well, I'm most optimistic about ingenuity. 1:23:50.240 --> 1:23:54.479 You know, it just uh the you know, we're we're 1:23:54.600 --> 1:23:56.960 not uh you know, we we aren't sort of a 1:23:57.600 --> 1:24:00.479 mindless optimists, you know, we don't. But you know the 1:24:00.560 --> 1:24:03.519 fact that that on average, the world gets better, the 1:24:03.600 --> 1:24:07.000 world gets safer, the world gets cleaner. Uh. We address 1:24:07.080 --> 1:24:10.800 problems in part because we worry about them so much. Um, 1:24:11.120 --> 1:24:15.240 when I look at what's happening in AI, in biotech, uh, 1:24:15.600 --> 1:24:18.240 you know, the innovation, what's happened in China was just 1:24:18.360 --> 1:24:20.880 back from China. I mean, you know, look at those people, 1:24:20.960 --> 1:24:23.680 you know, a billion people who when we were kids, uh, 1:24:24.040 --> 1:24:28.160 they were starving and uh, you know, it's just the 1:24:28.360 --> 1:24:31.000 progress of the civilization in the last thirty years is 1:24:31.120 --> 1:24:34.600 just breath taking. So I would say I am excited 1:24:34.640 --> 1:24:37.680 and optimistic because when we talk about black swans, we 1:24:37.840 --> 1:24:41.759 forget we assume that black swans are negative. Right, A large, 1:24:41.920 --> 1:24:47.920 unexpected event, unpredictable with huge economic consequences. We assume that's negative. No, 1:24:48.479 --> 1:24:50.280 I mean you end up with a you know, a 1:24:50.320 --> 1:24:55.720 pharmaceutical or you know, biotech cure for diabetes, Alzheimer's and 1:24:56.040 --> 1:24:59.000 uh a l S and you know, maybe a couple 1:24:59.040 --> 1:25:02.800 of others, and you have medical deflation for the next 1:25:02.880 --> 1:25:05.280 fifty years. Just just look at the recent data on 1:25:05.479 --> 1:25:09.639 cancer death and it's amazing. So so I love the innovation. 1:25:09.680 --> 1:25:11.160 It's one of the things I love about my job 1:25:11.240 --> 1:25:12.960 is meeting in vendors. I meet with a lot of 1:25:13.240 --> 1:25:16.759 firms that are still private, that are have great ideas, 1:25:16.800 --> 1:25:19.240 simply because it's energizing. We don't invest in a lot 1:25:19.320 --> 1:25:22.240 because of the risk reward tradeoff is too great. But 1:25:22.400 --> 1:25:24.560 we love living in the future. That part of it 1:25:24.680 --> 1:25:27.200 is great. My grandmother was once asked what's her favorite day? 1:25:27.360 --> 1:25:29.080 You know, she was five when they were She was 1:25:29.120 --> 1:25:32.920 asked that, she said tomorrow, And so I love that. Uh, 1:25:33.439 --> 1:25:35.960 you know, I think the pessimism is the things that 1:25:36.080 --> 1:25:40.120 can disrupt that. I mean, obviously it's amazing to look 1:25:40.240 --> 1:25:45.120 at what capitalism has done to build uh wealth in 1:25:45.360 --> 1:25:49.320 in China and India, how well it works. Um. I 1:25:49.479 --> 1:25:52.639 lived in in Europe for five years. I went across 1:25:52.720 --> 1:25:56.960 the Berlin Wall and into Czechoslovakia and the eighties. I mean, 1:25:57.520 --> 1:25:59.240 you do not want to go back there. So I 1:25:59.360 --> 1:26:03.120 get a little bit worried about. You know, I would 1:26:03.160 --> 1:26:07.800 say the promises that people politicians can make that can't 1:26:07.880 --> 1:26:10.960 be kept without bankrupting the civilization. It's true of our 1:26:11.000 --> 1:26:14.200 social security, our healthcare promises. So you know, the fact 1:26:14.280 --> 1:26:17.200 that the policy cycle is longer than the political cycle 1:26:17.920 --> 1:26:21.519 is a deep systemic problem. Um. I think we'll muddle through. 1:26:21.840 --> 1:26:25.200 But that that's the one that gives me pause, quite 1:26:25.280 --> 1:26:28.280 quite intriguing. Um. What sort of advice would you give 1:26:28.360 --> 1:26:31.120 to a recent college graduate who was thinking about a 1:26:31.200 --> 1:26:35.680 career in finance. Well, I'd start with the idea that, 1:26:36.280 --> 1:26:38.920 you know, I think you better do it because there's 1:26:38.960 --> 1:26:41.880 something about it that you find meaningful rather than because 1:26:41.960 --> 1:26:43.439 you think you're gonna make a lot of money. I mean, 1:26:43.520 --> 1:26:45.800 one of the great things about what's happening in the 1:26:45.840 --> 1:26:49.880 financial services sector generally is that a lot of uh, 1:26:50.760 --> 1:26:54.800 you know, a lot of excess pay is being squeezed 1:26:54.840 --> 1:26:59.799 out uh and that's probably a healthy development that count reduction. 1:27:00.080 --> 1:27:03.519 So yeah, exactly if people are interested in it because 1:27:03.520 --> 1:27:07.160 of stewardship, if they're interested in it because they're excited 1:27:07.160 --> 1:27:10.040 about the puzzles. You know, one thing I would say 1:27:10.080 --> 1:27:12.519 to all this is millennials I have I have. I 1:27:12.640 --> 1:27:15.680 have four children, and all of who I'm very, very 1:27:15.720 --> 1:27:18.120 proud of right now what they're doing. But is that 1:27:18.840 --> 1:27:22.880 don't imagine that just because something doesn't sound interesting that 1:27:23.000 --> 1:27:26.360 it's not interesting. I think that there's an enormous amount 1:27:26.400 --> 1:27:28.120 of pressure on kids when they come out of college 1:27:28.160 --> 1:27:30.920 to do something that sounds cool, that sounds woke, that 1:27:31.040 --> 1:27:34.760 sounds connected, that sounds and they cheat themselves out of 1:27:34.880 --> 1:27:39.000 learning about things that might not sound that interesting that 1:27:39.080 --> 1:27:42.280 are actually fascinating. So choose your boss. You know, It's 1:27:42.320 --> 1:27:45.680 like in college, don't don't study courses that have cool descriptions. 1:27:46.080 --> 1:27:48.280 Ask your friends what the best teacher they had was 1:27:48.600 --> 1:27:50.920 and that it doesn't matter if they're teaching chemistry or 1:27:50.960 --> 1:27:54.160 they're teaching politics, it'll be a great course. And too 1:27:54.240 --> 1:27:56.800 many people uh study, you know, are drawn to the 1:27:56.880 --> 1:27:59.799 description instead of the teacher. It sounds like good advice. 1:28:00.320 --> 1:28:02.720 And our final question, what do you know about the 1:28:02.800 --> 1:28:06.280 world of investing today that you wish you knew thirty 1:28:06.400 --> 1:28:11.200 years ago when you were first getting started. Well, that's 1:28:11.240 --> 1:28:16.160 a good question, I would say. Um, I am struck 1:28:16.280 --> 1:28:20.759 by resilience. I'm struck by how my time horizon continues 1:28:20.800 --> 1:28:24.360 to Lengthen, you know, my my grandfather, uh, you know, 1:28:24.600 --> 1:28:28.000 there's an apoc a story that was true when I 1:28:28.160 --> 1:28:30.000 was a kid of trying to borrow a dollar from 1:28:30.080 --> 1:28:32.080 him to buy a hot dog, and he said that 1:28:32.160 --> 1:28:34.760 if I invested the dollar and earned his returns and 1:28:34.840 --> 1:28:36.240 lived as long as he would, it would be worth 1:28:36.280 --> 1:28:38.519 a thousand dollars by the time I was his age. 1:28:38.520 --> 1:28:40.639 And he said, it's a hot dog worth a thousand dollars. 1:28:41.360 --> 1:28:45.920 And you know the power of compounding, the resiliency of 1:28:46.080 --> 1:28:49.160 the economy and of businesses. You know, if I told 1:28:49.200 --> 1:28:51.479 you what was going to happen in Italy between nineteen 1:28:51.600 --> 1:28:54.920 fifty and two thousand and seventeen, you'd have, I don't 1:28:54.960 --> 1:28:58.120 know what fifty three governments, you'd have the Lira ago 1:28:58.320 --> 1:29:02.240 from you know, tend to three thousand, you'd have, you know, 1:29:02.439 --> 1:29:06.479 the euro crisis, you'd have corruption all. You know, you 1:29:06.520 --> 1:29:08.639 would have been terrified to have a business in Italy, 1:29:08.720 --> 1:29:10.479 and yet if you own Ferrari, you did pretty well, 1:29:10.680 --> 1:29:14.479 did pretty well. And so the ability for businesses to adapt, 1:29:14.640 --> 1:29:18.280 to respond, uh, to change. I wish I had really 1:29:18.400 --> 1:29:20.640 deeply understood that. And God, I wish there were a 1:29:20.680 --> 1:29:22.479 lot of businesses I owned along the way that I 1:29:22.520 --> 1:29:26.439 had just held on too, uh, not been not been 1:29:26.479 --> 1:29:29.600 so worried about next year's results, but really focused on 1:29:29.680 --> 1:29:33.200 the next decade. Quite fascinating. Chris Davis, thank you so 1:29:33.320 --> 1:29:35.880 much for being so generous with your time. We have 1:29:36.080 --> 1:29:39.960 been speaking with Chris Davis, Chairman, chief investment officer at 1:29:40.200 --> 1:29:44.360 Davis Advisors. If you enjoy this conversation, well be sure 1:29:44.360 --> 1:29:46.200 and look up and intro down an inch on Apple 1:29:46.280 --> 1:29:49.160 iTunes and you could see any of the previous three 1:29:49.240 --> 1:29:52.479 hundred such conversations we've had over the past five and 1:29:52.479 --> 1:29:56.040 a half years. Uh. We love your comments, feedback and 1:29:56.280 --> 1:30:00.639 suggestions right to us at m IB podcast that Bloomberg 1:30:00.680 --> 1:30:04.759 dot net. Give us a review on Apple iTunes podcast section. 1:30:05.560 --> 1:30:08.639 You can check out my daily read column on ritalts 1:30:08.680 --> 1:30:12.400 dot com, follow me on Twitter at Ritalts. See my 1:30:12.560 --> 1:30:15.960 weekly column on Bloomberg dot com. I would be remiss 1:30:16.000 --> 1:30:18.280 if I did not thank the crack staff that helps 1:30:18.320 --> 1:30:23.040 put these conversations together each week. Mark sin Ascuce is 1:30:23.160 --> 1:30:28.400 my audio engineer. Tracy Walsh is my producer. Michael Batnick 1:30:28.560 --> 1:30:31.559 is my head of research. I'm Barry Ritolts. You've been 1:30:31.600 --> 1:30:34.559 listening to Masters in Business on Bloomberg Radio.