Overview of Beating the S&P For Generations with Davis Funds Chairman Chris Davis
In this Bloomberg Masters in Business interview, Barry Ritholtz speaks with Chris Davis, chairman and portfolio manager at Davis Advisors, about how his firm has outperformed the market for decades. Davis traces his path from an unconventional education in Scotland to Wall Street, explains how Charlie Munger and Warren Buffett influenced his thinking, and outlines the firm’s core investment process: own durable businesses, pay sensible prices, and think like a long-term business owner rather than a stock trader. The conversation also covers financials, culture, AI, market risks, and why he believes today’s environment is reshaping what works in investing.
Chris Davis’ Background and Family Legacy
- Davis came from a family deeply rooted in investing:
- His father founded Davis Advisors in 1969.
- His grandfather, Shelby Cullom Davis, was also a prominent investor.
- His education path was unusual:
- He attended the University of St. Andrews in Scotland.
- He earned a master’s degree there without a separate undergraduate degree.
- He originally planned to become a veterinarian.
- Early experiences shaped his worldview:
- Walking dogs as a child taught him responsibility, small-business thinking, and the power of compounding earnings.
- Living in Scotland and France broadened his perspective on religion, community, and culture.
Early Career and the Road Into Investing
- Davis’s first professional experiences included:
- Working as a pastoral assistant at the American Cathedral in Paris.
- Taking an entry-level accounting role at State Street Bank.
- Later joining Graham Tanaka’s firm as an analyst.
- He emphasized that his investment education came from:
- Real-world business exposure
- Accounting training
- Curiosity about how businesses and people work
- His family encouraged financial literacy early, but not inheritance dependence:
- He says both his father and grandfather believed children should be financially secure, but still motivated to earn their own way.
Mentors: Buffett, Munger, Father, Grandfather, and Tom Gayner
Davis names several key mentors:
- His father and grandfather
- Taught him investing, discipline, and stewardship.
- Charlie Munger
- Became a major mentor after a business pitch led to a long conversation and ongoing relationship.
- Davis says Munger taught him integrity, wholeness, and how to think broadly.
- Warren Buffett
- A major intellectual influence, especially on long-term ownership and rational capital allocation.
- Tom Gayner of Markel
- Cited as a model of principled, durable stewardship.
The Davis Investment Philosophy
Davis repeatedly returns to two central questions:
- What businesses do we want to own?
- How much should we pay for them?
Core principles
- Buy businesses, not just stocks.
- Focus on:
- Durable competitive advantages
- Strong returns on capital
- Sound balance sheets
- High-quality management and culture
- Hold for the long term:
- The goal is to own businesses “forever,” or at least for very long periods.
- Use valuation discipline:
- Estimate intrinsic value and owner earnings.
- Build an internal rate of return framework rather than relying on short-term price moves.
Why culture matters
- Davis argues culture is one of the most important and hardest-to-measure sources of advantage.
- In financials especially, culture affects accounting choices, risk behavior, and long-term resilience.
- He believes AI will not easily replace judgment about character.
Why Financials Have Been a Sweet Spot
Davis explains why financials are a major focus for the firm:
- Financials can contain “growth stocks in disguise.”
- Large financial companies can compound for decades without outgrowing their industries.
- Many financial businesses have similar-looking valuations but very different underlying quality.
- Culture and risk discipline create wide performance dispersion within the sector.
Examples he likes
- JPMorgan Chase
- Wells Fargo
- Capital One
- American Express
- Progressive
- Markel
Key point on financials
- He says some firms boost short-term profits by taking hidden risks, especially in credit, duration, and accounting.
- Better firms understate near-term earnings but build long-term resilience.
Thoughts on Markets, Valuation, and Risk
Davis says the market environment is shaped by psychology and changing perceptions of risk.
His current market view
- He sees broad market valuations as elevated.
- He’s uncomfortable with complacency and momentum-driven enthusiasm.
- At the same time, he feels his own portfolio is attractively valued.
What he worries about
He sees three major structural shifts that increase uncertainty:
- Monetary regime change
- The era of falling rates and “free money” is over.
- Geopolitical change
- Globalization and functional peace have weakened.
- AI
- A powerful technology with both opportunity and disruption.
AI: Transformative, But Not a Free Lunch
Davis says AI is real and transformative, but likely overhyped in the short term.
His framework for AI
He breaks companies into categories:
- Emerging winners
- High-risk, high-speculation names.
- Enablers
- Picks-and-shovels beneficiaries like semis, chips, and natural resources.
- Users
- Businesses that can apply AI to improve productivity.
- Protected businesses
- Firms unlikely to be disrupted.
- Walking dead
- Businesses whose economics may be undermined by AI.
Examples he mentions
- Enablers:
- Texas Instruments
- Semiconductor equipment firms
- Samsung
- Natural gas and copper producers
- Users:
- Large banks and other labor-heavy knowledge businesses
- At-risk businesses:
- Some payment networks and SaaS-like models
Indexing, Passive Investing, and Active Management
Davis argues that the rise of indexing creates opportunity for active managers who remain disciplined.
- He believes the market is increasingly dominated by:
- Passive investing
- Closet indexing
- Momentum strategies
- That creates inefficiencies for thoughtful active managers.
- He says low fees, aligned capital, and long holding periods help Davis Advisors stay competitive.
- He also argues that “liquidity risk” is becoming more important in a fast-changing market, making private equity and long lockups less attractive than they once seemed.
Business Structure and Alignment
- Davis says the firm is run with a family-office mindset.
- He and his colleagues have substantial personal capital invested alongside clients.
- That alignment helps the firm:
- Stay rational during bubbles
- Resist momentum chasing
- Focus on business quality over short-term performance
- He emphasizes trust:
- Clients stay with the firm because they believe in its process, not just its recent returns.
Books, Reading, and Personal Interests
Books he recommends
- Alchemy by Rory Sutherland
- Useful for understanding irrational human behavior and marketing.
- The Psychology of Money and The Art of Spending by Morgan Housel
- He suggests treating them as one combined lesson on money behavior.
- Americana by Bhu Srinivasan
- A history of American capitalism that he thinks helps investors understand long cycles of innovation.
Sports and hobbies
- He watches very little TV and little sports, except:
- Ice hockey, which he loves
- Family note:
- His mother’s family helped found the NHL and the Boston Bruins.
- He also values:
- Reading
- Long-term thinking
- Visiting companies and studying culture firsthand
Key Quotes and Takeaways
- “What sort of businesses do we want to own? And how much do we pay for them?”
- “We view ourselves as business owners.”
- “Growth is a component of value.”
- “As human beings, we don’t welcome fear and panic, but as investors, we welcome the bargain prices that those emotions tend to produce.”
- “Character will not show up efficiently in the AI world.”
Final Takeaway
Chris Davis presents a highly disciplined, long-term, owner-oriented approach to investing. His edge, in his view, comes from combining business analysis, valuation discipline, cultural judgment, and patience. He believes today’s market is being distorted by passive flows, momentum, and overconfidence in both AI and the old low-rate world order. His solution is simple but hard: own excellent businesses at reasonable prices, align with clients, and stay focused on the long game.