|A topic on everybody's mind right now is, are we going to have a recession? Are we going to have inflation? And a lot of time is spent thinking about, oh, well, how do I invest in a recession? How do I invest in inflation? And it's a crazy mindset, because the answer is you're going to invest in a recession. We're going to have recessions with some regularity over time. We're going to have periods of rising rates and falling rates. We're going to have periods of disruption, and will be a constant force. And so, it's amazing to me that as people invest, they try to think about it, they begin to imagine that successful investment requires changing your style and changing how you invest when you're in a recessionary environment versus a booming environment. And you're going to try to optimize your portfolio to whatever part of this cycle that you're in, and there's these asset rotation strategies.
|And I think it's a fool's game. And I look at it in terms of the individual businesses that we study, because the characteristic that we think about the most is resilience. Is this business going to be able to withstand? And so, as we talk about the current environment, we say, well, one, we are going to go through a bear market. We don't know when, in one now, we'll see. So, what is the impact of a bear market on businesses? Well, for businesses that don't need access to capital markets, they can be indifferent. Now, if a business needs access to capital markets, it's fragile as relates to a bear market, because they might not have access to capital. And then there are a few handful of businesses that are anti-fragile, where a bear market may actually help their businesses.
|You think of companies like Markel or Berkshire, where there's an investment component and the person making those decisions tends to lean into lower prices rather than away from them. So, that's how you invest through a bear market. Well, you're prepared with a portfolio that has that resilience. With a recession, it's similar. You have businesses that are incredibly vulnerable to a recession, because they have huge fixed costs and so a small decline in revenue can have a leveraged impact on their bottom line, which could then lead to hemorrhaging cash. So, you would think knowing that there's going to be a recession, instead of trying to rotate out of cyclical businesses into non-cyclical businesses, which seems to be what's happening right now in the markets, that people would think, well, I just want to own businesses that can go through a recession and have the resilience and adaptability.
|And of course, with inflation, the same thing. If you know that there will likely be periods of inflation, then you don't want to own businesses where somehow their costs can go up faster than their revenue can. They don't have pricing power because you could see how they become fragile. So, all of these ideas of resilience, of durability, of fragility, I think play a part in how we invest, but they also play a part in how people make their own financial decisions, where they make themselves more vulnerable. So, I'm curious how you would take the framework of how we look at businesses and then apply it to how people make decisions as investors.
|Well, I think there's a big difference between getting rich and staying rich. They're very different skills and getting those skills to coexist with each other is really important. And they're conflicting skills, so you need to have this mindset of like, what you need to get rich is to be an optimist, to take a risk, to swing for the fences, to be optimistic about humanity, that's what you need to get rich. To stay rich, you need almost the exact opposite. It requires a degree of pessimism and paranoia and conservatism, and this idea that all of history has been and will be a never ending chain of setback and surprise and disappointment. You need both of those at the same time. There's this great interview with Mike Moritz of Sequoia. Sequoia is the greatest venture capital firm that's ever existed, not just in recent times, but they've been crushing it for 40, 50 years.
|And Mike Moritz did an interview with Charlie Rose, and Charlie Rose just said, "What's the key to your success in this high tech booming industry with so much change and you've been so successful at it, you're so good at it. What's the key?" And Mike Moritz said, "We've always been scared of going out of business." And this is a gentleman for whom, if there's one person in the industry who can boast about how smart they are and how successful they are, it's him. And it's not the key to their success is paranoia. It's the classic only the paranoid to survive. And I think it gets back to what you and I have talked about a lot today, which is what compounding is, what really matters is time and endurance and sticking around, it's just can you stick around for a long period of time. The person who can endure all of the surprises and just stay in the game for the longest period of time is who wins and then sticks around.
|So, a lot of why Sequoia has been so good is because they've survived the busts. It's not that they have done so well during the booms, although that's part of it. The biggest reason that they have survived the busts and therefore for them as a firm that it increases their reputation for companies that want to work with them because they are Sequoia. So, because they survived, they are now the leaders of the next boom. And I think at the personal finance level, there's a lot of that as well, that to do well financially, to have the optimism work, you need for the pessimism to play a part as well and getting those two things at the same time, the getting rich and staying rich are really important.
|Now, there are a lot of people in the world who are pretty good at getting rich and have no skill whatsoever at staying rich, and there are also vice versa. There are people who only have the pessimistic side to them that will never get rich. They're always going to be the super conservatism. It's getting those two things at the same time that makes you look publicly like you're contradicting yourself. And internally just for yourself, personally, the cognitive dissonance of like, well, sometimes I can talk to you and I'm a crazy optimist, and sometimes I can tell you about how pessimistic I am right now. And having being okay with that is I think really the key to a lot of success over time at the personal financial level.
|When Charlie Munger says, "We never want to go back to go," it captures that idea. My grandfather once said, "Getting the first million dollars was the hardest," because he had to be up 20 fold from where he started. The second million, he needed to double. And the third, he only needed 50%. And then the fourth, only 33%. And so, there was this sense of how his expectations evolved as he created that first, his tolerance for risk. And you're absolutely right. And it's sobering, because I would say the same is true in politics. We often say, the skills that could get somebody elected are not necessarily the skills you want in the sitting president. To get elected, you need to be promotional and visionary, and you certainly need to be partisan, you need to talk about how the other guys stink and how great you are.
|And of course, when somebody is in a position of leadership, they have to be able to compromise. They have to be able to work with the other side. They have to be able to admit their own shortcomings and failures and adapt, and it's true with CEOs. It's one of the characteristics that we worry about in companies is the characteristics that can get somebody into a CEO's office. Well, if it's a bureaucratic political type of corporation, then those are not the skills you want in the leader of that company. You want somebody that makes decisions, that's accountable, that's not a political animal and so on. And I think that you're absolutely right, the skills that it takes to get rich, the optimism, the drive, the risk taking, is very different than staying rich. I think that's a powerful analogy.
|A famous investor who I've always been interested in, everyone knows him, Jesse Livermore, the famous trader of the early 20th century, he was probably better at anyone before or since getting rich, and he had absolutely no ability whatsoever to stay rich. So, after the crash of 1929, which he was short, the market, he became the richest man in the world after the crash of 1929. Within the course of a couple days, he made the equivalent adjusted for inflation of about $3 billion over the course of a couple days. And within a decade or so, he died at the hand of a gun, broke. And over the course of his life, there were, I think, three separate occasions when he became the equivalent of a billionaire and then went bankrupt, three separate times in his life. And I think it's fascinating to watch, but I don't necessarily admire that. Even as well as he understood markets, as prescient as he was at various times in his career, I don't really admire someone whose only skill is getting rich, but no ability whatsoever to keep it.
Chris & Morgan Bios
Chris is Chairman of Davis Advisors, an independent investment management firm founded in 1969 with approximately $20 billion in AUM. He’s co-portfolio manager of the Davis NY Venture Fund as well as other portfolios focused on Large Cap and Financial companies across mutual funds, SMAs and ETFs. Chris has over three decades of experience in investment management and securities research, was recognized as a Morningstar Manager of the Year and was recently named to the Board of Directors for Berkshire Hathaway.
Morgan is a partner at The Collaborative Fund and serves on the board of directors at Markel Corp. His book The Psychology of Money has sold over two million copies and has been translated into 49 languages. He’s won multiple awards and accolades for his writing and insights from the Society of American Business Editors and Writers, the New York Times, and other industry organizations. Morgan has presented at more than 100 conferences in a dozen countries.