100 Year Thinkers: Chris Davis and Robert Hagstrom on Holding Great Companies, Index Risk and Who Really Wins From AI

Matt Zeigler (0:02)

You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. This is the 100 Year Thinkers. I'm Matt Zeigler. Bogumil Baranowski of Talking Billions is with me. We are joined by Robert Hagstrom of the Warren Buffett Way and CIO at EquityCompass. Say hello, Robert.

Chris Davis (0:21)

Hey, guys.

Robert Hagstrom (0:21)

How are we?

Matt Zeigler (0:23)

And we have our esteemed extra special guest with us today, Chairman and Portfolio Manager at Davis Funds, Mr. Chris Davis. How are you doing, Chris?

Chris Davis (0:30)

I don't know why. I'm esteemed when Robert's the one that's written three books or four books or something.

Matt Zeigler (0:35)

No. I'm starting right here, though, Chris. We got to help Robert out. I'm not pandering, Robert. Don't blush.

Robert's got a little bit of a Bill Miller complex here. You got to put the guy at ease. Say something nice about his books for him.

Chris Davis (0:50)

Make Robert feel Well, one thing I want to point out is what Robert's wrote about Bill Miller from the beginning has proved to be exactly right. But because there was the financial crisis and the leg that changed the manager out, the general public has no idea how right Robert was. If you had been able to invest with Bill Miller from the time that Robert first developed the complex you referenced to today, we would all be very, very well off. It's one of the great investment records, even including the dip, which everybody thought was the ending, but it wasn't.

Robert Hagstrom (1:33)

Now, I thought, someone said to me, he said, Robert, you wrote your dissertation on Warren Buffett, and you did your practical training with Bill Miller. You don't beat the market. Shame on you.

It's more pressure than I think I want sometimes.

Matt Zeigler (1:51)

Let's dive in with this one, Chris. I'm asking you first because this is as fundamental as it gets. Once somebody finds a great business, and then they buy a little piece of it, what do you think goes wrong most often first?

Chris Davis (2:07)

Well, I mean, it's what goes wrong first, second, and third. Your question says they buy a great business, and so of course the only thing that could go wrong is they sell it, and that's what goes wrong. It is, by far, now, there's always a danger of learning what my partner, Janssen, calls a bull market lesson.

But by and large, if you have the right business, and this has dramatically been true for me, the biggest mistake you make is selling it, and you trim it at first, and then it looks so expensive compared to what you paid for it. You want the psychic pleasure of locking in that gain. Nobody ever went broke selling a profit, made taking a profit, and you continue to cut your flowers and water your weeds.

Bogumil Baranowski (3:02)

Chris, I learned the hard way that finding the right business, as Matt brought up, is important, but then how much you own of it is equally important. And from what I know, you went from a 5% position limit to roughly 10%.

So I'm curious, why stop at 10? Who can go above? And why do you call this decision one of your best decisions?

Chris Davis (3:24)

Well, that's a very hard question, because for my whole career, I've felt like what really matters is that we have this stewardship culture, so my money is invested in the funds alongside my clients. And I've always felt that that was the right alignment. And I think what it took me 30 years to recognize was that being in the structure of a 40 Act Mutual Fund, imposes all sorts of restrictions that you wouldn't have personally. But also by the nature of compounding, and some of those are by perspective, some of them are by statute. But then I also realized that of course, my circumstances and my willingness to take volatility may evolve as my own balance sheet grows, so that I may be a comfortable absorbing volatility in a way that somebody who is investing in their 401k plan may be uncomfortable. A part of our duty in managing outside client money is not just to maximize performance, it's also to try to minimize the consequences that come from self-inflicted bad investment behavior.

The investors wanting to get in after periods of good performance get out after bad periods of performance. Warren Buffett famously said, I prefer a lumpy 15 percent to a smooth 12 But in the structure of a mutual fund, it may be that the smooth 12 would translate to higher end return for the investors in that fund. So all to say that there was no magic at five except for almost 100 years of conventional portfolio management, prudent man practice at five percent position limits at trust banks and so on. So doubling that did make a big difference. But if you were to ask me why have it at all, I would say, well, if I had invested entirely was only running my own account, I wouldn't have had it. And part of those restrictions are practical and as I say, pragmatic based on statures, redic regulation and so on. But part of it are also recognizing that part of the stewardship duty is about trying to think about the end investor return, which includes the timing of their behavior and the cost of their behavior and therefore having a 20% or 25% or 30% position where we know you can have idiosyncratic factors that could take down any company stock in any given moment at 50% or so. I mean, look at Metta just a few years ago.