One of the peculiarities of investing is that the more risk people feel they're taking, the less risk they are taking. I think maybe the most important word in that investors should have on their mind now is durability or resilience. So you're right that that starts with a balance sheet, right? You don't want to be beholden to the capital markets. We're never happy when a valuation goes up a lot. We like it when the bis when we buy a business we want our return to come from the growth of the business not from a revaluation because when it gets revalued our margin of safety goes down. Any honest investor will tell you their biggest mistakes were what they sold. >> Chris welcome back to excess returns. It's great to have you here. >> Oh Justin Jack, I'm so glad to be here. Your firm, Davis Advisors, has been managing money and investing in companies since 1969. And you and the firm have a reputation of being long-term fundamentally driven investors and allocating capital to durable businesses. Um, you know, right now I think we're in an interesting time to have you on. The world is going through this change with AI as we were just talking about before we started here. And then you have, you know, all the other dynamics happening in the market that are on investors mind. And it's always good to have long-term oriented investors like yourself on to help our audience sort of try to put this stuff in some context, but also make sure that, you know, we're always trying to tie back and think about the long run when it comes to investing and trying to compound capital over time. So really appreciate your time. We know you're very busy. our audience can learn more about all the different things. You have investment strategies, SMAs, you have ETFs, you have mutual funds. Just go to davisadvisors.com and that's sort of the jumping off point for everything that um Chris you and your team do there. So to start I wanted to ask you about I know in doing some research for this discussion with you you know you've been talking a little bit about there's a lot of uncertainty in the market but also that investors you know might be and it's hard to judge this complacency like what that actually what you kind of just feel it it's like what how do you get that indicator I don't know but you kind of feel it maybe in the market and how you know for you at least in terms of building portfolio and thinking like a long-term investor, you know, does that at all does does the backdrop change anything for you in terms of how you're looking at the markets or is the answer now? Well, definitely in the sense, you know, I always say if if I was to pick a, you know, an an animal that sort of manifests uh how we manage, you know, I I say sometimes as value investors, we feel like dinosaurs, but but what we really are is like turtles where, you know, these qualities of of resilience and relentlessness and sort of uh uh surviving allows us to persist through changing epics. And so you know a lot of the dinosaurs weren't able to handle change in the external envir environment but of course you know turtles did. So there we are in this period of real transition and I think there's you know that is sort of a biological analogy right there is a big change in the external environment and there are three drivers of that change. One is certainly has to do with the nature. It sounds technical to say monetary policy and but what I really mean by that is we went through really you know since 1981 a period in which the cost of money continued to fall sort of relentlessly and it got to absurdity right it got to zero which has never happened in human history. uh it doesn't make any sense for money to be free, right? You're letting somebody use a productive asset that you own. They should pay you for that. Uh and so it was a really anomalous time and I think it allowed for an enormous amount of bad behavior to sort of take root and we're still in the early stages of that unwinding. I think we're starting to see it in things like private equity. We've seen some in commercial real estate. you know there's just a seed change at the same time when deficits and inflation are running. That's one. You know, the the second big transition is geopolitics, right? We've been for all of our lives, we've lived in a world of globalization, international cooperation, relative peace. Um, and that has very positive economic benefits in many aspects, but it had some negatives, too, in terms of employment and manufacturing. That is a 50-year trend that is now being unwound and that has huge transformational implications. And then we have technology, right? This massive change in AI and technology and what that means. So you have all this transition in the external environment. And you said it's hard to measure complacency, but if you just wanted one measure, the market's at 26 times earnings. the Russell 1000 value index is at like 21 times or 20 times. Uh our portfolio is at 14 times, right? But that external environment is expensive by all measures. And so that doesn't mean it's absurd, but it just means you have complacency measured in high valuations, high concentration, cheery growth expectations that go on into infinity. uh at the same time you have all of this transition and uncertainty and I think this is going to create a very a backdrop that is going to create a lot of shock and a lot of opportunity. >> So does that do those transitions how do they manifest themselves like in the investment process um for you and Davis? Do you guys kind of try to peel the onion back on each one of those and say where are the risks and where are the opportunities? Like how how does that work? >> It's such a good question. You know what I'd say is is you know I've always felt that the line between growth and value is a strange one because a business that grows profitably is more valuable than a business that doesn't grow. Right? So growth is a component of value. And what I would say is there are times that growth gets really underpriced because people are so pessimistic and they're so convinced the world is ending that you can buy, you know, growing companies at really cheap prices. So think about Amazon in 2002. Think about Meta three or four years ago. You know, you get times when there's a panic. It could be in the whole market or it could be financial stocks like Capital One during COVID. You know, you had stocks down 60 70%. Great growth companies. Boom. You can buy them at a huge value price because the growth expectations are very pessimistic and muted. Then you have the opposite. And this is the sort of period of time that we're in now where the growth expectations are so optimistic and so euphoric that the valuation discipline would make us say that wow there's a lot of optimism baked into that uh model. And it may happen but there's no margin of safety. And you can have an environment like this where the companies that are out of the spotlight, nobody's paying attention to, you know, they're not in the glamorous parts of the market that's very concentrated and you could find real opportunities to vi buy what I would call sort of classic value names uh at a time when there's enormous indifference and those companies don't have optimism built in and yet they have resilient proven business models. And so, you know, 1999 is not a terrible analogy for where we are now. If you saw that the market was going to be down for the next five years, you could say, "Oh, I better go to cash." But actually, we were up quite a bit in the next 5 years. The market was down uh I think in the year 2000, the market was down 9 or 10% and you know, investors like us that had maintained a value discipline and not been in the center of that spotlight of euphoria actually had a terrific year. I think we were up, you know, 9 or 10%. A lot of investors we admire were up 10, 12, 15, 18%. With the market down 10. So, you could get that sort of environment. It's just the key is you don't want to be in the heat of that spotlight when psychology changes. So, you have like the value, which is like the margin of safety. But how would you go about defining or what things are you looking at when you're talking about resilience or durability? um income statement, balance sheet, like how do you guys assess that? >> Well, I think maybe the most important word in that investors should have on their mind now is durability or resilience. So, you're right that that starts with a balance sheet, right? You don't want to be beholden to the capital markets. It's one of the things that's going to be very delicate about uh you know, a lot of these companies that need access to capital. they can they may get away with it but it it does increase fragility. So you know thinking about the amount of debt thinking about the term of debt thinking about liquidity. So the balance sheet liquidity the ability to change your mind that's a number one criteria of resilience. It's one of the reasons I think some of the people that have locked their money up in private equity and things like that have made a terrible mistake because being illquid at a time of transition where you can't adapt, you can't pivot to how the world is moving that that's a very expensive option to give up the option to change your mind or move in a different direction. So starts with the and then it you look at the business model, right? Is this a business model? And you have to run that business model through the lens of the three mega trends that are changing. Higher cost of money, uh a uh uh uh del globalizing a more unstable world politically uh in terms of supply chains and so on and through the world of AI. Is this a business that is going to be hurt? Uh is this a dead man walking? Right? Is this Kodak a 10-year-old razor? you know where you look in the mirror and this is one of the reasons I think a lot of the the quantitative models the momentum strategies the dividend models have become so mispriced. I think people are grossly overpaying looking backwards without recognizing the vulnerabilities that those underlying businesses could have. So I think when we think of durability and resilience those are the sorts of factors we're thinking and and I'd throw management in there on top of it all. But we want that durable balance sheet. We want that resilient business model, but we also want managements that are able to adapt that, you know, we we don't want the first rodeo cowboys uh as we go into uh some unexpected uh uh uh an unexpected fragile world. How do you think about durability in in a world of like crazy technological change like we are now? Like many people thought the software businesses were very very durable businesses but then like it feels like you know at the flip of a hat they're no longer durable businesses. So like how do you think about that balance between durability and something that's changing that might be like a life-changing technology? Well they may be durable but at a smaller level right see this is where the valuation comes in. uh you know I I think it's going to be very hard to dislocate and rip out a you know software from a company like SAP but the difference between paying 40 times earnings for that and 15 times earnings for that you have you don't you need uh you don't need the same wildly optimistic future. That's part of having resiliency is not overpaying because remember the more cash a company generates upfront the more they can adapt as well. So um I think you could have over euphoria in software which we certainly did a few years ago. Look at some of the private investments that were being done in software companies that were forecasting 50% margins for a decade and 20% growth rates for a decade and those are really hard to achieve. I think fewer than 2% of companies have grown uh uh their revenue at a 20% rate for more than a decade and I think fewer if I remember right fewer than 210 of 1% have maintained margins above 50% for more than a decade. So and you compound those on each other and you don't want to have that be your baseline assumption to justify the price you're paying. So I think in this world of change you have to you know it's an amazing thing. I I I'll digress just to say it's an area where you could really be hurt. I think as an index and passive investor because the indexes can be very slow to adapt. You sort of have to go down with the ship. And so an example that I've been thinking of a lot lately is Kodak. I was a avid photographer in in my youth. Had a dark room even into the 1990s. Um and uh in by 2001 or two, I think 10 million uh digital cameras had been sold. That was the year that digital camera sales crossed film camera sales. You only had to use it once to know that film was dead, right? It it's just you just think of how crazy that model, what a huge quantum improvement it was in your life not to drive to the store, buy the yellow canister, put it in your camera, take 36 pictures, drive back to the store, drop it off, drive home, drive back to the store 3 days later, pick it up, look at your pictures, and see your kid's eyes were closed, right? I mean, now you just take it like, "We got to do that one again." I mean, it was like 10 million people knew that. and Kodak was still in the top third of the S&P 500. And if you were a person who based who invested based on dividend resiliency, you know, history, you'd be like, "Oh my god, it's got a 3% dividend." You know, that's a dividend aristocrat. And it was dead. It was bankrupt 5 years later. Uh so I think the index and that was when the indexes might have only been 20 or 30% of shares. Now realistically the indexes in one form or another maybe 50 to 70%. And so I think that you could be in for some surprises as business models adapt or fail to adapt and you know they're going to be some dead men walking. Chris, real quick, what was your favorite favorite picture you ever took? Is there one that jumps out at you? >> Well, I I would say I I took a picture out in Monument Valley. I was crossing the country on a motorcycle and uh sort of I won't say illegally, but you know, I I was camped in a place where you probably shouldn't have camped. And it was a very mysterious night out in Monument Valley with those great bees. And I woke up in the morning and it was just this perfect moment of sunrise and I snapped a picture uh that ended up I think being my favorite picture I ever t took and I'm sad to say I've lost the negative. Uh so there there are five prints in existence. >> Uh but alas uh that might have been my favorite. >> I'm just curious going back to what Justin asked about at the beginning. Do you think we're like in an above average level of uncertainty? Like I find like myself saying that all the time on the podcast saying like we have so much uncertainty in the world and you've invested through many more markets than I have. Like do you think like this is a world where we have like a crazy high level of uncertainty or do you think this is just something that maybe we're reacting to too much because we're in the here and now? Well, you're you're very right that one of the most idiotic uh expressions is unprecedented uncertainty. Right. It is always uncertainty. I think that the underlying shifts though are are those three vectors are massive in that we can say in 50 years we hadn't seen anything to unwind globalization. We hadn't seen anything but a falling price of money and falling inflation. Uh, and we hadn't seen anything like well I was going to say the the a technology that has such a wide cone of uncertainty. You could argue that, you know, if you think about factory automation and globalization, you know, those were massive changes that require, you know, that just put whole factories and business models out of work. Um but but I would say that those three vectors are not unprecedented in history but but you certainly the idea that they're happening at the same time the confluence now the stage is set for something to shock the system and that is of course unpredictable. That's where the we are always uncertain. I I used to say, you know, it's like risk. What really changes is not the level of risk, it's our perception of the risk. So before 9/11, uh, you know, we all felt flying was safe. And after 9/11, we were all scared to death. And of course, the opposite was true. After 9/11, flying was far safer. Before 911, it was far riskier. We just didn't know the risks we were taking. And therefore, one of the peculiarities of investing is that the more risk people feel they're taking, the less risk they are taking. And I learned that in a really fascinating way, which is not going to sound fascinating when I tell you where I learned it. I learned it at the college of insurance where where I could have been the captain of the football team. I'll tell you that. like you know it was down in Tribeca. It's now been absorbed into St. John's but it was the the college of insurance and I uh uh took a lot of courses there over the years and underwriting science and actuarial science and so on and uh and I had a teacher down there and I don't know if you remember I think the Ford Explorer and the Mazda Miata were introduced around the same time. I I could be wrong, but that was the analogy that we were looking at together. And he said, "You know, Chris, there's something very unexpected." Uh because which car is more dangerous? And I said, "Well, of course, the Miata. You know, you're in this little tin can, you know, flying down the highway and the Explorer is of one of the first big SUVs and you have all this metal around you." And he said, 'Yeah, but the data says the opposite, that uh uh the Explorer was far more dangerous. And I said, 'Why? The Miata is unquestionably a less safe car. He said, "Yes, but when you drive the Miata, you feel that lack of safety and you adjust your driving." So uh and similarly when people began transitioning to SUVs, one of the most dangerous things is they felt safer and they were up high. They say, "I've got four-wheel drive." You know, four-wheel drive doesn't make you stop sooner, you know? And so, you know, and failing to stop is the number one cause of accidents, right? You know, and so people drove worse feeling safer. And so this wonderful teacher said to me in a very uh uh Malthusian way that if you really wanted to save lives on American highways, you would install a sharpened metal spike on the steering column pointed at the driver's heart. And you know, there would be a few unfortunate impalings and so on, but uh nobody was going to be doing their nails and nobody's going to be texting. I mean, people aren't going to be driving like, "Oh my god." Like, and uh and so again, the perception of risk alters the behavior and uh and and how could investing be different? So, we're at an all-time high in the market. People feel great. uh you know the MAG7 is the talk of the town in the way the nifty50 was or the three horsemen of the internet or fang or whatever other hot acronym generally points to a bubble in a sector and uh and people just you know no price is too high. You've just got to get on the train. And that's that's a pretty that that's a pretty risky setup. Uh simply because people feel like it there those are sure things. >> Do you think there's anything different now like structurally in terms of how the market deals with risk? Like one of the things when I talk to our clients like I hear all the time is like I don't understand why the market's not going down. Like all this craziness is happening around me and the market doesn't go down. I'm wondering like I don't know if it's passive investing. I don't know if it's like the retail trader buying the dip. I mean, do you think there's something different today like in terms of structure that that leads to the market absorbing risk in different ways? Well, you know, I certainly think that there has been an increasing view that speculators will be bailed out. And you know, I I went to I I recently visited there was a wonderful judge, Judge Patterson. He lived in the Hudson Valley. And I think I'm remembering this right. Uh that one of when he was a very old man, he uh was uh brought into uh review and uh uh he was the judge on some of the cases that were brought against the big wire wirehouse firms for uh by little old ladies that had invested in hot tech IPOs in 1999. Um and the view of the plaintiffs was these were very risky. you know, you I should never have been bought this and I and his opinion said it is not the job of the judiciary to indemnify speculation, right? Which was a wonderful nobody bought, you know, it's nobody bought a a tech IPO uh uh thinking that they were buying DuPont, right? They knew and they want the upside but they wanted you know the the wirehouse to take the downside and and by the way the wireous also behaved badly so let's let's not rewrite history too much but it wasn't like it wasn't driven by greed in terms of the buyers and similarly I think where we've lost the thread is that I think there's this view that whatever happens in the market or the economy you know the Fed will print money we'll throw money at it will bail us out. And you know, we got through the financial crisis which was really serious and then we had COVID and then we just sort of kept it going. And so I think that changes behavior. So I do think there's something different now in terms of the conviction that the market can't go down 50%, let alone 70 or 80%. uh that you know anything terrible that happens you know somehow the Fed Treasury will bail us out and that that may create a moral hazard that is going to be somewhat different in the future but is even different now because people when the stock market goes down it's ah buy the dip buy the dip we'll you know and that is uh uh you know that that's a risky change in investor sentiment I think when we were closer to the financial crisis, people sniffed a crisis around every corner. Uh when we were closer to 99 and 2000, people felt like they were very wary of growth assumptions. You look at the IPO price of Google, uh you know, or Facebook going down after the IPO, like people weren't ready to believe quite yet. Whereas, uh now I I I do think that's somewhat different. But I it reminds me a little of residential real estate, right? Residential real estate had never ever in the his recorded history had a nationwide downturned uh uh uh well a nationwide downturn. Uh there had been regional downturns, but nationwide it had never declined. And so, you know, people that were running quote conservative books might say, "Well, I model in a 10% nationwide decline in residential real estate prices." That sound extremely conservative. It's never gone down. And you're modeling in a 10. And of course, it went down 30, but you know, it took a long time for people to just believe they were safe and therefore there was no price that was too high. So, that may be a difference. >> Yeah. Yeah, it's it's funny like so many times in my career I've heard that phrase, this has never happened before and then it goes ahead and happens. So, so you said about unprecedented uncertainty, nothing has ever happened before that's happening right now. You know, it's like >> it's just that you you find the patterns. >> I want to shift to AI because you've invested through previous technological revolutions and I'm trying to wrap my arms around like what this is a tech as a technology. How should we think about this as investors? And I know you've laid out a five category framework around this. So could you just talk about like how you're thinking about AI as an investor in general? >> Yeah, you know, it's a funny thing. For many years, value investors used to say, "Oh, we don't invest in technology." You know, you'd even hear that, you know, at Berkshire and things like that. And then, you know, his biggest investment became Apple and and so you know, again, adaptation is the key. you have to be able to adapt and the economies change, business models change, modes and competitive advantages change. Um, but I think we've had an advantage in that we we started in the 60s. Um, we had one of the founders of Intel on our board. Uh and so we we've always had this sort of deep exposure and that's allowed us to really lean into technology uh at times when there's sort of panics and changes and also to develop a wonderful network of relationships. I was just down in Texas having dinner with the now just retired but magnificent former longtime CEO of Texas Instruments and you know our history with companies like Applied Materials and so on, you know. So we have a wonderful network of relationships uh in Seattle and in Silicon Valley. I go out probably every 12 weeks of my career. Um so but what we tend to feel is that you get in a lot of danger in technology when uh people project that somehow capitalism is dead and there'll be no competition. Uh they put in euphoric growth rate assumptions. um and uh uh and the modes have tended to be somewhat fragile from much of so I give that just as a background to say it's not new territory to us looking at technology and the second thing I'd say though is even though we generally have are more skeptical than the wild bulls we really think in the case of AI that Amara's law is the right way to think about it and as you know Amara's law says that a revolutionary technology is overestimated in the short term and underestimated in the long term and as investors that helps you build a rhythm to look at. We are definitely in the overestimating phase. Um but that does not mean that the technology isn't real or that it isn't really going to be underestimated in the long term. So again, I'll use the late 90s as the example. So much time and energy right now is focused on the first category of what I would call AI investing or investing through the lens of AI. And the first category is where all the excitement is and that is who are the emerging winners, right? We want to put our chips down and buy the the new winners of this new technology. And the amazing thing is how dangerous that is at a time when there's still this enormous uh uh unfolding. So when you think about fundamental questions to ask about AI, is it a network effect business, right? Is it a winner take all business? It does not seem to be yet. Now, social networks were the telephone was uh uh certainly search was the bigger you got, the better you got and the harder it was to compete, right? You know, there weren't going to be two phone networks. Um so that was a winner. Those are winner take all technologies. Other technologies, the real spoils go to the users of the technology. So if you think about electricity uh uh if you think about uh well railroads uh broadband you know the builders of the technology weren't the ones that made the money it was the users of the technology. So that's an important question for people to say this is a revolutionary technology. How will the value be created? Um and you know to imagine uh to have enormous conviction that Nvidia will have a monopoly. I love Nvidia. What a wonder. We don't own it. It's a wonderful company. But it's clear that their customers are all doing the best they can to compete with them. Uh Google had an announcement just today uh uh about uh the continue breakthroughs they have on their own chips at a tiny fraction of the cost. And so Nvidia may end up creating network effects because of the programming languages and so on. But we'll we're always say we want to be very thoughtful. Will one model will open AI have a permanent advantage over anthropic? Will Anthropic have one over uh uh Gemini and so on? Right now we have not seen it. Countries are competing. Countries are uh uh companies and countries are competing but you know anthropic is certainly gaining a lead in coding and so we'll watch that. But it's a dangerous time to put your bets down on the table because right now they're all valued as if they will be money machines and we think that that's risky. So if we want to spend time trying to identify the emerging winners at this stage of the cycle, we have to look back with caution at the internet and just remind ourselves who were the three horsemen of the internet. Then it was Cisco, Yahoo, and AOL. If you just wanted to own the obvious winners, they were the kings of the internet. And uh you know, and two of them just basically were vaporized. Uh the third is still quite a shadow of what it was. Um and Amazon was there. So you could have found Amazon in 99, but when you went from the period of overestimation to underestimation, you also could have bought it down 80% uh in 2002. And of course, Google and Facebook weren't public yet. So I think there's a lot of time and attention on the early winners. We do have a couple of markers on the table and our bias is towards the companies where they can fund the spending necessary out of their existing business and that every incremental improvement in AI increases their existing earnings from their existing businesses. So obviously Google and and Meta would be the standouts in that regard. And you could argue Amazon as well simply because they get a return on every dollar of capital they spend because the return is provided by contracts with customers that are using that capacity. So those are sort of what I'll call our three markers for uh uh managing both risk but also saying they have the raw materials of proprietary data but and they can make the investments but they can make them out of income. Um the second category are the enablers, right? If there's going to be, you know, a trillion dollars spent and the returns on that spending are uncertain like the railroads, who are the enablers, right? Who are providing steel to the railroads? uh who are uh uh the companies where that money will be spent and they will make a fortune on the spending whether or not a return is generated on the spending. So there you know to me the obvious examples are you know the semiconductor capital equipment companies applied materials has been was a long time holding of ours. I will say we did trim some uh uh uh very early this year on valuation but you know it is a company I would leave for my grandchildren. Uh it's very hard company to disrupt. Uh Samsung you know Samsung a year ago was trading at something like eight times earnings and yet it's one of only two or three foundaries in the world that can manufacture at the advanced most advanced levels. Well, it it went up 300% or something last year. So, that was a very sudden move uh unfortunately. Uh and uh because we get a little sad when companies move ahead of the value creation, but but so think of the the enablers, but also natural gas companies could be an enabler. Copper is an enabler. And so uh you know we do think that the surge in natural gas demand is going to be a long-term trend and having long well-located reserves domestically is going to be terrific. So those are enablers. Uh third category the users right who is going to use the technology in a way that makes their business much more valuable right AI may be the most valuable tool that humanity has created you know since steam or electricity or you know fire I mean it's a tool who are the companies whose businesses will allow them to use that tool to gain competitive advantage on their uh on in their industry And there I would say well what are the characteristics you'd look for? You'd look for companies that are very data sensitive have huge data um companies where a lot of the processing in their businesses could be automated compliance functions underwriting functions all the things that are systemsbased white collar work. Right? In other words AI will do to the white collar a little bit what what factory automation did to the blue collar. And what that means is in the same way if you were a manufacturer, your world became way better when you could automate your factories or global, you know, move globally to lower cost areas. Well, I think you'll see that. So there the the absolute top of the pack is Capital One. You know, people say it's a bank. It's not a bank. It's been a fintech data company since it was founded. It's still run by the founder. By some measures, they are in the top five of all companies on Earth as holders of AI and machine learning patents. I've seen them listed as number seven and seen them listed as number four, and I have not been able to fact check which it is, but that's Capital One Bank, right? Uh and so huge data uh uh e you know jobs that can be fabulously automated through AI where they can be more responsive faster and they have the right tech stack, they have the right culture and they have the right proprietary data. So they would be a great example uh of a user. Uh then you've got the the fourth category would be the Jeff Bezos category where he said people always ask me what what's what's ch going to change and sometimes they ought to ask me what's not going to change and so these are the companies that are protected or insulated uh where it's going to be really hard to change. Uh, so you think of a, you know, well, a company we own, Tyson Food. Uh, I think MGM is a wonderful bet for what's not going to change. And you could say, well, what about online gambling and all this stuff? Yeah, but if you own 50% of the Las Vegas strip and you own 30% of Macau, you're going to own a 100% of Osaka, which I think will be one of the most valuable gaming set uh the only one in Japan and you know closer to to Beijing than Macau and it is a fabulous property, but it won't be online till 2028 or 2029. It's nothing in the stock form, but I think I think those are assets you could leave your grandkids and in the world of AI, it'll still be a great thing to go to Las Vegas. Maybe we'll have more leisure time. Maybe, you know, but so what's not going to change that that that protected category? And then the last category is where we started earlier talking about things like Kodak. You know, what are the walking dead? Who are the classified ad salesmen? and uh you know you think local newspapers uh you know the who are going to be radically disintermediated by this new technology and and I think a lot of success in the next 5 years will be what you avoided and what you got out of when the writing was on the wall and if you don't think technology can change business models that look secure you know I would look at what uh you know internet advertising did to Annheiser Bush I uh you know Annheiser Bush had 50% market share. I mean forget the the issues around transgender. I mean even before that they were in big trouble and they were in big trouble because nobody sees the Clydesales anymore. Nobody sees the what's up you know uh these ads that were iconic because nobody watches 30 secondond spots except for football which ain't nothing but other than that there's pretty much no. So, we all go to the supermarket and we're like, "Oo, I'll try this IPA or I'll try this." Or my friends said a huge fragmentation of brands. That fragmentation of brands is because the internet changed commercial advertising in a way that a consumer product like Proctor and Gamble. I mean, imagine that there are not one but two huge retailers that don't even offer Crest toothpaste and they don't offer uh you know Budweiser. Like that would have been unimaginable. Pepsi, Coke, and what are they? Well, Trader Joe's and Whole Foods. That wouldn't have even been thinkable. Maybe one of the most valuable brands on Earth right now is Kirkland Signature, right? You wouldn't have thought that that was possible. Why would you buy Kirkland Signature if you could buy, you know, Pampers? Uh, and they it's just we don't see the ads anymore. So that's how technology can change a business model that was carved in stone. And I think we're going to see a lot of that. And that's where I say I think a lot of these dividend darlings and aristocrats are vulnerable. The index is vulnerable both because of the concentration, but also because it will be slow to get out of the walking dead. So those are my five categories. >> Well, I'm a big consumer of Kirkland Signature myself. I I even drink the wine, which actually is much better than people think it is. I thought it was Robert Parker like 92 or 94, >> right? >> Promise. You know, we were the largest shareholder of Costco for a decade. And one of the big most important mistakes of my career was selling Costco. Um, and you know, it was an example where I said we're never happy when a valuation goes up a lot. We like it when the bis when we buy a business we want our return to come from the growth of the business not from a revaluation because when it gets revalued our margin of safety goes down usually it's a bigger position in the portfolio because it's outperformed with that revaluation and then we have a hard decision to make and I hate that. I'd much rather yeah you know our clients like it because you know it usually means you did really well in something but I every business we buy we buy with the expectation that our return will be driven by the earnings yield on the business on that hard decision if you had to lean a little bit more towards holding more expensive companies over your career like that's probably the biggest thing I'd criticize myself for as a value investor is like a lot of these great companies the right thing to do was just to hold them um over to maybe not do you think I mean have you learned have you maybe expanded did your willingness to hold things that are a little more expensive over your career. >> Yeah. Although that is a bull market lesson, too. So, you have to be a little careful. Uh but yeah, I had a really painful existence proof. This is going to turn into a therapy session, so I'll lay it out here. Uh I had a wonderful stepfather who died in the uh around 2007 or so. And uh my mother was all invested because he was so conservative. He was only in municipal bonds, but he had bought 20-year municipal bonds back in the 80s, right? So, he had, you know, municipal bonds yielding 9 10%. And so, just to make the math easy, let's say she had a $3 million portfolio and she was living on $200,000 a year, but each time one of these bonds rolled over, it was going to be invested at 4%. Or three. And I was like, you know, mom, uh, this is not going to the math's not going to work here. So, I said, 'D don't worry, you know, I'm going to backs stop you. You don't have to, you know, you're never going to be homeless or anything. She's a very frugal Yankee. Uh, and um uh but I said, "Look, each time a bond matures, just put it into the funds and we will uh you know, and over time uh that's going to give you this inflation protection and this cushion and so on." And she said to me, "Well," cuz as I say, she's a frugal New England Yankee. She said, "Uh, well, I think that would upset your siblings." And I said, "What do you mean?" She said, "Well, you know, because then I'm paying you a fee." I'm like, "Oh my god, really? You know, you're asking for my advice." >> So, you know, she's my mother. What am I going to do? So, I said, "Look, whenever a bond matures, just call me and I'll tell you what our top holdings are." you know, they're on the internet, you can see them. Um, and uh, you know, I'll explain to you why we own each one, and then you can make your decision. And, well, her portfolio has probably outperformed our fund by 500 basis points a year for almost 20 years. And you say, how's that possible? She doesn't own a single company that we don't own. We own them all. She never put more into a company than we put in. And it's Jack, of course, it's exactly what you said. It's that she never sold a share. So, you know, Amazon might be 40% of her portfolio and Google might be 30. And, you know, and the remaining 30% might be in 10 stocks, but you know, with all of them, she started with a 3 or 4% position, and she just let them go. Whereas I started with a 3 or 4% position and when it went to six or seven I was like oh trim it back to six or five. And so any honest investor will tell you their biggest mistakes were what they sold. Um when you find a really wonderful company uh but you have to balance that with two things. One the investment act of 1940 which has rules about diversification. And then second, the idea that I'm willing to take that volatility, but that could be very hard on a teacher or a nurse who has their life savings in us and is unable to absorb a 20% idiosyncratic hit, right? I mean, you know, they will go through a bare market or so on, but you know, to have in one day one stock where everybody else is doing fine, but I got hit with this. And so there are issues that would make it hard in a fund, but I will tell you that my father ran the fund until 1994 five and he never let a position get over 5%. And that was sort of the general thinking. And uh when Danson and I became partners whatever it was 15 20 years ago, Danson said, "What's so special about five?" And we ran all the models on diversification and correlation and so on. And so we said, "Well, we're going to make that 10 instead of five." And that was the best decision we ever made, right? that it meant that we allowed companies to go farther and uh we maintain a lot of price discipline because as I say there is a bull market lesson you can get wrong uh you know we saw that in some funds that had an enormous concentration and you know a company or two uh that went sideways but I think that you're right I I I think that in general uh especially when you adjust for taxes you So allowing bigger positions. Now whether that position limit should be 10 or 15 or eight or 20 you know the math sort of indicates that that you get a lot of diversification with you know that sort of 8 10% limit at the top. But that's it's a great it's a rich topic and one we spend a lot of time on and we don't want to learn the wrong lesson at the wrong time. And so as much as I love Meta, as much as I love Applied Materials, you know, we've probably sold three quarters of the shares that we once owned. And uh and you know, our view is just we have to have that discipline. And if our IRRa used to be 14% and now it's 4%. We're just we can't have a huge position in a company where we're modeling a four or 5% irr. I want to ask you uh as we get towards the end here about Berkshire Hathaway, but the point you just made about concentration is interesting because sometimes you know from time to time I've gone back and looked at like letters from Buffett in the 80s and 90s and there was I mean because if you look at the holdings now he's still he's got these major positions these like core positions but there are a lot of stocks in the portfolio maybe 40 to 60 stocks at any given time roughly something like that but going back in the day you know it's like those annual the letters. There used to be like 12 names in there or something like that. You know, you had American Express, Coke. Um, so yeah, it's it's kind of interesting like when you kind of look at sort of somebody like Buffett or even like to your point like Chris, you're saying with the you know, the portfolio you gave um, you know, the recommendations to your mom. But I guess the question is um, with Bergkshire like what do you think do you have any sense of Greg's top priorities as he kind of takes over the company here? Well, and and and by the way, I say my mom had something that allowed her to take that risk, which was a backs stop. And so that's where I think you know we our our portfolios tend to be 25 to 35 stocks which seems extremely concentrated relative to the rest of the world but feels to us like that is and you know and by being rejecting in essence 95% of the index >> which we reject as either we don't like the quality of the business or we don't like the valuation. uh uh you know we're able to put together a portfolio at 14 times earnings that has grown I don't know four or 500 basis points a year faster than the Russell 1000 value and just about at the same rate as the S&P 500 which is at 26 times earnings. So select se selectivity I think really matters. Uh but I don't think the value of selectivity has been reflected in the last decade but I think it really could be. And so that's sort of what we're setting up for as we see this ship. But uh you know what I'd say is I you know I I'm not a spokesman for Bergkshire and I so whenever I am asked about Bergkshire I always say well look I was attended Bergkshire shareholder meetings for 30 years before I was on the board. And so I I can talk >> about the principles that I think are core to Bergkshire. And what I would say, if you were to ask me if I could write the headline for Bergkshire 5 years from now, >> it would say that Bergkshire was a great investment company that became a great operating company. And the analogy that I think of is I'll ask you guys like, can you name the the second or third CEO of uh of Standard Oil? >> No. >> Right. >> Yeah. >> And you know, we can all name John D. Rockefeller was the first and Standard Oil was the most valuable company on earth for 12 or 13 decades and is still in the top 10 or so. Uh so what how did that happen? And we can't name any CEOs since John D. Rockefeller until we get to modern day. Uh and the answer is because John D. Rockefeller was a unique builder and he built something incredible. But what were the characteristics of what he built? Well, there were two. He built long lived assets, right? Think about the idea that the comp plan at Exxon doesn't vest for the CEO until 10 years after retirement. Like, isn't that the best? >> That's today. >> Uh there's no company like it. Uh and uh so long lived assets, they make investments for the long term. They recognize gap earnings will be totally capricious, right? But that they create value over decades. And they used to say, you know, governments come and go, but we're Exonh. So really, and that ties to the second part. So they have long lived assets and then they had a very peculiar culture and it was a culture that disdained the short term. It disdained fads. It disdained Wall Street. and instead it focused on engineering and the long-term extreme rationality. So I I think that's not a bad mental model when you think about you know the the the the nature of Berkshire. You have extremely long lived assets. You've got a very peculiar culture that is very much rational, very long-term oriented, very skeptical of Wall Street fads and mania and run the way Exxon was with this idea that we're building something that is got to last through everything. As I said, Exxon said, "Governments come and go. We're Exon." You know, they they had a they have a culture of duration uh that is unbelievable. And I and I think that's very much part of of the Berkshire ethos. >> Yeah. Thank you. And I I sorry I forgot that you were on the board of Berkshire, so I didn't mean to put you in a weird spot. >> No, that's all right. Um, one of the other things I know about Davis Advisors is you have sort of this wall of mistakes where you like to kind of try to look back and think about what and you've shared some of those even I think with us today which I which is I think you know our audience appreciates and we appreciate but is there anything else like in the more recent times it kind of jumps out at you that you say you know that that kind of should go up there or is up there and what you've learned from it? Well, Justin, it's funny that that really our biggest topics have been about mistakes of omission or things we sold that we shouldn't have. So, we did a mistake review recently on Costco. Uh because, you know, we don't view it as a mistake because Costco went to 35 times earnings or something. That's not our mistake was that our estimates of how many stores could be in the US uh was wildly low. So that was a fundamental mistake. So we're wondering what can we learn about density, right? You could have made the same mistake with Starbucks back in the day and so on where you just couldn't believe that you could have so many and that they would remain so valuable and profitable. The second mistake we made is we didn't think it would translate internationally. Now I give us a bit of a buy on that because the record of successful retail American retailers globally is very like zero uh and but what they've done in Korea and in Asia and Australia it's just been phenomenal. So that one I give us more of a pass. >> The Kirkland signature we touched on. Um, you know, Jim Sagal, the CEO, said he thought it would be very dangerous for private label to be more than 10 or 15% of sales because he said, "Our customer can only determine that we're offering a great value if there's compare comparability." And so, and he would say, by the way, if if Jim was here, I think he would say, "All of these mistakes are things we've discussed with him." And he would say, "Well, I got that wrong, too." Which is part of why he was such a great CEO. he was never promoting uh you know the store density international private label uh uh those were were things that he just you know he just did and and I think the last thing is and this goes back to our touch what we touched on with MGM I think we thought that Amazon was a bigger threat uh to Costco because the customer profiles were so similar you know remember I'm talking about the early days before everybody was a customer of Amazon But, you know, you basically had fairly upper middle class people using them. And I just thought if you eliminate one trip a month, uh, Costco, you know, that is, you know, you could easily have comps be down five or 8%. And at 30 times earnings or 35 times earnings. So, but so we're really looking back and saying where can we give ourselves a pass that looking at what we knew then we couldn't have predicted and then what can we learn from things that we we should have modeled more aggressively. So, one of the things we're doing is if we're selling a company today that we love and we're getting out of it on price, one of the exercises we do is a premortem on the bull side. Right? We've always done premortems you what you call a bear case right but before we buy something you know you have the devil's advocate the bear case what is you know if we're wrong what will be the reasons were wrong so we do a very aggressive study of that in advance um but what we haven't done in the past is if we are wrong to sell this what would what would the company have to look like to be a good value at today's price and we've done that I mentioned Nvidia earlier I mean we've done that with Nvidia and it's crazy. The margins are so high is the problem. But uh but you know, we always say if we're selling this because it's optically expensive, what would it have to look like? What would the future have to look like for this to be an attractive price? And that's a useful exercise. And that's kept us in a number of companies that were optically expensive, but we thought actually reasonable 3 years, four years, 5 years out. You just have to have a lot of conviction in that moat. This has been a great conversation, Chris. Um, we want to ask you our one of our standard closing questions, which is what is one thing you believe about investing that the majority of your peers would disagree with you with? I think that people matter a lot more uh than is generally realized. I think we have a society that believes in equality and believes that, you know, it's very quick to figure that the people that did well got lucky or if I had had that idea, I could have done it. And they don't have the same feeling about basketball, right? Nobody looks at LeBron and thinks like, ah, you know, I could do that. You know, I wish I had that job, right? He'd be like, you know, the guy is just a different animal what he can do. And what I've learned, it's a little bit like the the great man or the great person theory of history. It is amazing what a difference one person can make at a business. And now it can become dangerous because then the company becomes synonymous with Jamie or but you know to look at what you know Jaime and I started in business almost the same time. I mean, I owned uh invested and met Jamie when he was the CFO of commercial credit and that became Primica and that became uh Travelers and then Etna and then uh uh City and had Solomon and Solomon Smith Barney and Jaime leaves there and goes to Bank One, which I had studied but not owned and writes one of the best first annual reports and ends up at JP Morgan, which has completely lost its way. I mean, it's gone from preeminence to almost irrelevance uh by that time, and turns it into a company that's not even in the same category as most of its peers. And you know, if you were to look at Peter Lewis at Progressive, uh you know, people like that. So, I think that I place way more value, I think, than most people investing, not just on on the the bold-faced leaders, but just, you know, you go and visit a company and, you know, I was just visiting six or seven energy companies and you meet one person there who is just they they're just better. It's like watching, you know, LeBron play as an 18-year-old and thinking, "Oh, yeah, he's different." Um, and I think people underestimate that in business. You know, they equate Capital One with other banks without saying, "What is it about Rich Fairbanks that he could start a bank with no brand, no branches, and build it into the fifth or sixth largest bank in the country and still be running it?" And, you know, with essentially no branches. I mean they have a small retail presence and no brand right they don't they basically just use Visa but just by looking at it differently so a little bit like Moneyball and you know I I love that that idea of and so that might be my it's certainly my favorite part of the job and there's a risk of hero worship but I hate the I hate the opposite more than hero worship. I hate this proclivity we have to tear down people that have built, you know, incredible uh incredible businesses that employ tens or hundreds of thousands of people that provide services that delight their customers and then we want to vilify their success and crazy. >> Good stuff. Thank you very much, Chris. Really enjoyed it. >> Oh, of course you guys, I've loved speaking with you. I always find I never know where the conversation's going to go, but I always enjoy it. So, thank you so much. >> Thank you for tuning in to this episode. 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