PM Chris Davis with David Rubenstein of Carlyle Group

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Chris Davis: I think all investing is value investing and if it isn't, it's either gambling or speculating. Investors should recognize that the biggest threat to their generating or return over time is their own behavior.  I have the patience to be out of favor for a decade but I love the idea that my thoughts and ideas are right and I have the patience to let them unfold.

David Rubenstein: In a classic American story, Chris Davis followed his father and grandfather before him into the family business.  It just so happens that family business is a $20 billion investment firm, Davis Advisors. 

Chris Davis: Both my grandfather and father loved what they did, so that has a huge influence on a kid.

David Rubenstein: Chris's grandfather Shelby Davis began investing in insurance stocks in the 1940s. He turned an initial investment of $100,000 into more than $800 million by the time he left the business in the 1990s.

Chris Davis: He talked to people about this concept of owner earnings. That, you know, don't just look at the reported earnings, look through it, what the business if you own the whole business, the value creation.

David Rubenstein: As the third generation Davis to run the firm, Chris still uses his grandfather's value investment approach. 

Chris Davis: That's sort of the core of what we do, making an assessment about what the value of the business is, generated by the earnings of the business rather than by a prediction about changing psychology or being lucky. 

David Rubenstein: Chris is militant about his discipline of investing in which a company's fundamentals are paramount. 

Chris Davis: In a sense, we always say we're value investors because the valuation discipline is so central to us.  But we want to own businesses that we can own for a decade or longer.

David Rubenstein: In addition to his father and grandfather, Chris had another value investor as a mentor, the late Charlie Munger. 

Chris Davis: Outside of my family, Charlie mattered more to me than any mentor that I could think of. He had made a huge difference at both this. Somebody that taught me a lot about investing in business but also taught me a lot about life and wisdom.

David Rubenstein: Even has a bust of Munger in his office. 

Chris Davis: Charlie Munger once said deferring gratification gives him so much gratification that he's not sure he's actually deferring it.

David Rubenstein: And that patience is still a hallmark of Chris's investing style.

Chris Davis:  I don't mind that patience to let the value of the business appear over time.  I don't need it all at once. I don't need the big payoff.

David Rubenstein: Tell me what a value investor really is.

Chris Davis:  Well, I think value investing is a redundancy. I think all investing is value investing. And if it isn't, it's either gambling or speculating. And if it's gambling, that means you're putting up money for something that has a negative return expectation. But you feel lucky.

All the rest does is about investing. You're putting up money with the expectation of getting more in the future. And that expectation is based on an assessment of the cash flows and the probability of that assessment being validated.

So that's sort of the core of what we do is, you know, making an assessment about what the value of the business is generated by the earnings of the business rather than by a prediction about changing psychology or being lucky.

David Rubenstein: But most investors would not describe themselves probably as value investors, so you're saying most investors are really buying some future-anticipated earnings that they hope will be there, but may not be there today.

Chris Davis: Yeah, or often people make a distinction between growth investors and value investors, and I would say that to us is a strange distinction because a company that grows profitably is more valuable than one that doesn't grow, so growth is a component of value.

What I would distinguish from is momentum investing, and maybe that's been a big characteristic of the market in the last 10 years.  The idea that because something is going up, it's likely to continue going up, so I'm buying it without regard to the underlying value of the business, but with an idea that somehow this pattern will continue.

David Rubenstein:  So today we have the “Magnificent 7”, so-called.  Do you regard stock purchases of those stocks as value investing or momentum investing. 

Chris Davis: Well, a little bit like when “FANG” was popular or “BRICS” and, you know, people come up with an acronym, they think the Magnificent Seven.  But each one of those business has totally different business models, different prospects. They just happen to all be in favor at the moment.

And I think the way to think about it is that when you get the valuations, getting higher and higher and higher, you think about what would have to happen for you to earn a 10% return if you bought the whole business. And when you start breaking each one of those businesses down, what you find is there's some of them where they would have to grow, you know, 20% a year for a decade.

They'd have to maintain margins above 50%. And when you look at how many companies have done that in history, I think it's a tenth of a percent of companies in the S&P 500 have kept margins above 50% for more than a decade.

David Rubenstein:  But if what you say is true, most people who are buying stocks are not really value investors, right? 

Chris Davis: Well, I think that there's a whole category of people that get excited because stocks have already gone up and then they want to jump in.

So in a sense, they're what I would call momentum investors, but they aren't really value investors. There's stocks have this peculiarity that they're the only asset where somehow the more the price goes up, the more people want to buy them.

David Rubenstein:  So if a stock is, let's say, like Nvidia, very highly values that company or even Apple, which used to be very highly valuable, but not quite at the same multiple at once was, you would say those are not value investments. Though Warren Buffet did buy Apple.

Chris Davis: Yeah, yeah, it's, well, what I would say is that in order for Nvidia to be worth what it is, you have to extrapolate the durability of their competitive advantage way into the future.

And if you think about the early days of the internet, we all knew who the winners were, right? It was, oh, it was Cisco, it was AOL, it was Yahoo.  Those were the three titans of the internet. And in the early days of a transformative technology, people are very anxious to identify the winners.

But remember, Google wasn't public yet. Amazon had, you know, gone up to 80 and collapsed down to about six. Meta, then Facebook, I don't think had come public yet.

So you were, there was a huge amount of speculation about who the winners of the internet were going to be before it was ready.

Now, there's speculation today that Invidia has won the AI game, that the future of AI will be driven by Invidia in the same way the PC was driven by Intel, let's say.

 It's possible that that could happen, but it needs to happen to justify the current valuation. You need growth for a decade to come. You need to sustain high margins in a company like Nvidia where we admire them very much. And obviously I have some sour grapes because I missed it.

But I think that I think you have a lot of their customers who are going into their business trying to design their own chips, you have a fabricator, TSMC, Taiwan-Semi, that in this sense the only company on Earth that can make their chips.

So, Porter's forces would say that there's a lot of pressure on that going forward. 

David Rubenstein:  Your view on the economy now with tariffs as something that the president wants to impose, as inflation is still not completely under control, are you worried about a recession in the near term?

Chris Davis: Well, I'm certain we're going to have a recession. I'm just not sure when, and that's a big part of our mindset is if we're buying a business that we're going to own for a decade, we know we're going to own it through some sort of shock in the system.

What we sort of say is we can't predict, we can prepare. We have to be prepared, both for the sunny days where we'll make a lot of progress, but also to withstand the storms and trying to predict the timing of those and reposition your portfolio. We think is a dangerous game. 

David Rubenstein: So you're on the board of Berkshire Hathaway. Do you give any tips to Warren Buffett about value investing or you mostly learn from him?

Chris Davis:  What's so amazing about Warren and really Warren and Charlie is in addition to being, you know, maybe the greatest practitioners of all time of this art of value investing, they also both were dedicated teachers and talented teachers.

David Rubenstein: Now in your office, you have a bust of Charlie Munger. So you must obviously admire him. Did you have a special relationship with him?

Chris Davis: Yeah, I mean, you know, outside of my family, Charlie mattered more to me than any mentor that I could think of.  I met him when I was young enough. He had made a huge difference, both as somebody that taught me a lot about investing and business, but also taught me a lot about life and wisdom.

David Rubenstein: Warren Buffett used to say, I'd like to buy something for 50 cents that is really worth a dollar. And Charlie Munger said, well, if you buy something for 50 cents, you want to make sure that it's going to be a company that could be worth many, many dollars in the future.  So you should buy, at a discount, things that are really going to improve and get much more valuable, as opposed to just buying something cheap.  It might stay cheap. Is that an essence of what they talk about? 

Chris Davis:  Well, it's something that really connects to sort of the way we invest here, which is this idea that, you know, So you want to buy something that is an attractive value.

But if that underlying business has durability, high quality, resilient growth, it's so much more valuable because of just the nature of compounding over time.  So if you think of buying that dollar for 50 cents, well imagine if that dollar is growing 15% a year, then it may be worth paying 75 cents for that dollar because it has the ability to grow.
So, in a sense, we all say, we're value investors because the valuation discipline is so central to us, but we want to own businesses that we can own for a decade or longer, in which case you want them to have this qualities of durable, resilient growth.

David Rubenstein:   Take us inside and tell us what you can without violating confidences, what it's like to be in a board meeting of Berkshire Hathaway.  You've got, for a long time, you had Charlie Munger. You have Warren Buffett still there as the Chair. and you've got other people now on the board.  Do people ever say, Warren, you're wrong on this or Charlie, you don't really know what you're talking about? Is that ever happened?

Chris Davis:  Well, what I'd say is I probably attended Berkshire Hathaway annual meeting since 1989, let's say. And I read every annual report in 10K.

And the difference on the inside versus the outside is really very limited. In other words, this is a company that's valued transparency, candor, I mentioned, Warren and Charlie, their ability to teach.  And so I would say it's there were no surprises being on the inside versus the outside because of that culture.  I would say the one difference of nuance is it's just amazing how much Warren and before Warren and Charlie together, think about the durability of the business, how much they think about risk, how much they are determined that they are trying to build something to last, and the sense of responsibility they feel to their shareholders, the people that have their life savings in, and that was one of the big lessons from Charlie in terms of our business was to really reinforce this culture of stewardship.  

Both my grandfather and father loved what they did. So that has a huge influence on a kid. 

David Rubenstein:   So let's talk about how you became a value investor. Your grandfather was a very famous investor. His name was, 

Chris Davis:  Shelby Davis. 

David Rubenstein:   Shelby Davis. And he started with nothing and worked his way up.  How did that happen? 

Chris Davis:  Well, he originally wanted to be in public policy to be a diplomat, and he had a PhD in international relations that he earned in 1929, and he worked for Hoover and worked for Governor Dewey when he was running against Truman.

Well, when Dewey lost, he made my grandfather the Deputy Superintendent of Insurance for the State of New York. So you can imagine what had come down that, what must have been.  But, you know, when he went up to Albany what he realized was, of course, the soldiers were coming home. The Baby Boom was underway. The suburbs were being built.  And life insurance was the first thing you bought when you got married and you created a family.

So life insurance was like biotech. I mean, it was this hot growth sector. And my grandfather as a regulator looked at it and said, oh no, these are gold mines.

So he resigned at the end of his term, and he borrowed $100,000 from his wife's family. And he started investing exclusively in financial stocks, in general, insurance in particular.

David Rubenstein:   Was he investing his own money? Took that $100,000 and invested himself, made 800 million for himself and his family. But did he take outside investors at some point?

Chris Davis: No, and that was really where my father came into it. So my father got into the business in 1958. And he decided that he should build an investment counseling operation in a sense using my grandfather's discipline and approach but to take in outside money.

And that was when we started the client business in really 1966. 

David Rubenstein:  1966 called Davis Advisors. Yeah. And now you manage $20 some billion dollars?

Chris Davis: Twenty-some billion and we started the mutual funds in ‘68 and we separate accounts and so on. And my father, while my grandfather stayed exclusively focused on financial stocks, my father took that same mindset and then applied it more broadly.

David Rubenstein: Did you grow up in a family where your father and your grandfather said you have to be a professional investor, you couldn't do anything else?

Chris Davis: No. Sort of the opposite I think.  Both my grandfather and father loved what they did. So that has a huge influence on a kid.

 If your dad is happy getting off the train at night, I would go meet the train out at Tuxedo and all the commuters are getting off.  They're looking gray and worn with their briefcases and my dad would sort of spring off the train. And he loved what he did. So we grew up, but when I'd go away to school, my dad drove me. We would often visit companies on the way.

So we grew up knowing one that they loved what they did. Two, that it was interesting because stocks weren't pieces of paper wiggling around, you know, in the news charts and so on.  They were ownership interests in businesses. So we would visit businesses and there are people and it was just always sort of an interesting world.

David Rubenstein: After you got your Masters, did you come and join the family business time? 

Chris Davis: Definitely not. There was always a risk that a family business this becomes employer of last resort for people with the same last name.

And so there was sort of a strong understanding that there was no seat waiting in a family business. You had to go out and find your own way.

Now interestingly, when I first got out of a university, I went to seminary and I had thoughts of becoming an Episcopal priest.  So I actually moved to Paris and worked for the American Cathedral. 

David Rubenstein: So when did you full time come to work in this firm?

Chris Davis:  Well, around 1990 or so, 80, 90. 

David Rubenstein:  And you became the chairman when? 

Chris Davis:  And I became the chairman in 1998. 

David Rubenstein:   Okay, so now are you spending time running the firm, investing, looking for clients?  What are your responsibilities? 

Chris Davis:  Well, if I had a business card, it would say “Analyst” on it. That's still my full time job.  It's a part of the job I love. I love visiting companies. I love this idea of Business / People / Price. You know, it's a constant puzzle. Every day, it's interesting. So I still spend a lot of time visiting companies. I love that part of the job.  I like going out and traveling. So I'd say that's the lion’s share. 

David Rubenstein:  So your grandfather was an investor. Your father was an investor. You're an investor. Do you have a child who ultimately will succeed you? 

Chris Davis:   I don't. I love my kids there. They're the thing I'm most proud of in life and but each one of them has chosen a different path. One in real estate, one is a litigating, working for the attorney general.  And one has started her own business and is an entrepreneur and is moving in that direction. 

Chris Davis: I don't mind that patience to let the value of the business appear over time.  I don't need it all at once. I don't need the big pay off. 

David Rubenstein:  Let me ask you, what do you do outside the office, you know, are you a big art collector, are you a big philanthropist, what do you do with your outside activities, and generally if you're a value investor, you wouldn't probably be a big spender, that would be my impression because value investors don't spend a lot of money on their personal habits, Warren Buffett doesn't seem to spend a lot of money on his personal habits, living in the same house, he's lived in for 50 years or so.  So, are you a big spender on the outside of the money you make here, or do you basically live a very simple life?

Chris Davis: Well, compared to my grandfather, my grandfather would say I'm a big spender because he wants to ask me to paint his oven rather than replace it.   And my father's very frugal, I would say that, but none of us have ever felt deprived. Charlie Munger once said, deferring gratification gives him so much gratification that he's not sure he's actually deferring it.

So, but both my father and grandfather were, at the end of the day, philanthropist. They, you know, they, my father would talk about learn, earn, return.

You know, you spend a third of your life learning, a third earning, and then you move into this return phase, and both of them essentially gave away their entire fortune.
They did not believe hers in inheritance. 

David Rubenstein:   You ever raise your hand and say, don't give it all away? 

Chris Davis: Yeah, my grandfather said, I don't, I don't want to deprive you of the dignity of earning a living.  I was like, you just deprive me a little bit. But I will say, you know, I have sort of the same mindset, and each one has my grandfather's passion was public policy, my father's was education, and for me, I'm creating parks is something I love.

I think about that as, you know, a very sort of democratic with a small D sort of mindset that, you know, you create a park, unlike like building a building, the operating costs are very low, it becomes more valuable and it's self-programming. 

People go there and I think that connection... 

David Rubenstein:  Where do you do that? 

Chris Davis:  So my biggest project is in the Hudson Valley Park in the Hudson Highlands and I've worked with groups like Scenic Hudson.

David Rubenstein:  So if somebody's watching this and says I'm watching a famous value investor and I want to get some tips about what I should do, should you go try to look for stocks yourself, should you give to a money to a money manager, should you give it to a long-only money manager, a hedge fund money manager.  And what kind of rate of return should the average person watching a show like this try to get for his or her money?

Is it 6% a year to be happy with, 7%, 5%, 8%, what do you think a value investing person should feel they should get as a rate of return on a consistent basis so they can go away, take a trip around the world and not have to worry about their money?

David Rubenstein:  Is it 6% a year to be happy with, 7%, 5%, 8%, what do you think a value investing person should feel they should get as a rate of return on a consistent basis so they can go away, take a trip around the world and not have to worry about their money?

Chris Davis:  An investor should recognize that the biggest threat to their generating a return over time is their own behavior. And so if somebody has the mindset of when stocks go up, I get excited and want to get in.  When they go down, I want to get out. That behavior penalty will swamp any other choices they make in terms of whether they picked great stocks, whether they hired a great manager, whether they invested in a great fund.

So, what I would say is, if you are prone to these very normal behavioral biases, having a great financial advisor who can provide that sort of courage, that fortitude, and that patience, like the two lines at the public library, Patience and Fortitude, an advisor who can modify your behavior is one  of the most important investments you make. Now, if you're wired where you don't have that investor behavior problem, then that simple systematic investing, you know, putting something away every month, every quarter, every year, those will matter so much more than whether you selected the hot manager or the right section. You can get in at the wrong time, but if you stay in, you can earn your way out of that.  What really matters is the behavior.

David Rubenstein:  Why should somebody a young professional want to get into the value investing business? Is there a big future in that business? Is it more exciting than the other ones I've just mentioned? and why should some young professional want to be a value investor?

Chris Davis:  Well, they might be a masochist, but in a way, I think there's something, I would say the temperament of the young person is what's gonna matter.  In other words, do they have that patience or they thoughtful this idea of being able to move in a very deliberate fashion?

For me, it is incredibly suited to a research mindset. that, the other areas you mentioned, you know, tech investing. It's exciting, it's dynamic, it's fast-changing, and that suits a very different temperament. You think about the idea that being right more than you're wrong, well, for a value investor, we think along those terms, but technically what really matters is not how often you're right and how often you're wrong, it's how much you make when you're right.   But so I don't mind that patience, that sort of traditional mindset that says I'm willing to let the value of the business appear over time. I don't need it all at once. I don't need the big payoff.

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