We are pleased to revisit our timeless conversation on investing with Christopher Davis and Danton Goei of Davis Advisors in 2014. Davis Advisors is a leading independent, employee-owned investment manager, founded in 1969. The firm embraces a value-oriented, long-term investment philosophy.
Christopher C. Davis joined Davis Advisors in 1989. He has more than 25 years experience in investment management and securities research. He is a portfolio manager for the Davis Large Cap Value Portfolios and a member of the research team for other portfolios. Mr. Davis received his M.A. from the University of St. Andrews in Scotland.
Danton G. Goei joined Davis Advisors in 1998. He is a portfolio manager for the Davis Large Cap Value Portfolios and a member of the research team for other portfolios. Mr. Goei received his B.A. from Georgetown University and his M.B.A. from The Wharton School. He was previously employed at Bain & Company, Morgan Stanley Asia Ltd. and Citicorp. Mr. Goei speaks multiple languages and has lived in Europe, Asia and currently resides in New York City.
MOI Global: We are keen to learn about your philosophy and approach to value investing. Before we get to that, perhaps we could touch on some of the history. How has your view of investing evolved?
Chris Davis: I probably trace my roots as an investor to my grandfather. Of all things, he was an insurance commissioner. He was Deputy Superintendent of Insurance in New York. That sounds very uninteresting, but it was an interesting time. It was in the late 1940s, so the baby boom was underway, the soldiers were coming back, the suburbs were being built. What he realized was that as household formations grew and wealth was being created, people’s primary vehicle for security was life insurance. Life insurance was this huge growth industry, but the accounting for life insurance and the cash flows for life insurance are very complicated, so companies that were reporting big losses were actually the companies growing the fastest and creating the most value.
“Life insurance was this huge growth industry, but the accounting for life insurance and the cash flows for life insurance are very complicated, so companies that were reporting big losses were actually the companies growing the fastest and creating the most value.”
—CHRIS DAVIS
As he came to understand this, he saw an investment opportunity. He started the investment firm, which was then called Shelby Cullom Davis & Company, specializing in fundamental research, where he tried to look at reality versus optics. He’d sort of worked on this idea of, if you owned the business, how would you look at the economic value creation of the business as opposed to what you’re reporting on financial statements, which are driven by accounting conventions that are required but may or may not accurately reflect value creation. He started focusing on life insurance and — just like Geico and Berkshire Hathaway — when an insurance company grows quickly, they are often paying a lot of expenses to put that new business on the books, but the business has a very positive expected long-term value. He recognized that, and the life insurers became like biotech.
That experience — his portfolio was probably up six or sevenfold in a decade — shaped a culture that carries through the fundamental lessons that shape us today: doing the legwork, doing the research, trying to identify inefficiencies where common perception is not what you see with economic reality, getting out and visiting the companies. Very early he became focused on culture and on the idea of trying to stand for something, on stewardship; he really shaped that underlying tenet. My father really opened up to the idea of accepting clients. He recognized that mutual funds were a great vehicle because they were relatively low-cost, they allowed a money manager to stay focused on managing one pool of money and yet it opened up that pool to people that normally wouldn’t have had access to a star money manager. In those days, only the institutional investors did. There was a democratization, and he really shaped that. That same ethos and culture my grandfather had of trying to stand for something in terms of research evolved into a culture of stewardship in terms of overseeing the life savings of clients.
Their influence is sort of the bedrock. Then you look at all of the people that came in. As you’ve written, value investors are a generous community in terms of sharing wisdom and insights. Even the walls of our research room are covered with people that have shaped our thinking from, of course, Warren and Charlie, but also people like Howard Marks and Ben Graham, Ben Franklin, people all through history that have shaped the culture of the firm.
MOI: With the democratization and flow of information a lot of people have this notion that it’s not possible to find inefficiencies in today’s markets. You’ve written about uncertainty and the assertion that if you don’t accept uncertainty, it can lead to all sorts of dangers…
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