Chris Davis, chairman and portfolio manager at Davis Advisors and director at Berkshire Hathaway, recently shared his insights on value investing and stock picking in today’s market. Davis explained that the distinction between growth and value investing has become a significant talking point since the late ’80s and early ’90s. However, he believes this categorization is somewhat artificial.
“Essentially, growth is a component of value—a company that grows profitably is more valuable than one that doesn’t,” Davis said. He noted that in the bond world, there’s no distinction between growth and value. Bonds are priced to yield similarly regardless of their coupon rate, thanks to price adjustments.
This same concept applies to equities. Davis said that while he prefers the label “value investor” due to the price discipline at Davis Advisors, they don’t adhere strictly to conventional definitions. For example, they’ve invested in companies like Amazon using the same valuation principles that they apply to other companies, like Wells Fargo.
When asked why value investing has underperformed compared to growth in recent years, Davis pointed to the historically low interest rates since the Great Financial Crisis. This anomaly threw off the traditional math of value investing. A key tenet of value investing is the discount rate applied to future cash flows, which became negligible over the past decade.
Insights on today’s value investing
Moreover, the rise of tech giants created a scenario where future cash flows seemed almost certain, reducing their perceived risk. This environment wasn’t favorable for value investors but began to shift around March 2022.
With rates higher now, Davis said they look at two primary questions when identifying stocks: What kind of businesses do they want to own, and how much should they pay for them? Much like private equity firms, they value the entire business, including liabilities and undervalued assets. They seek businesses that are durable, resilient, and have sustainable competitive advantages with decent returns on equity over long periods.
These qualities are crucial, especially in today’s market, where we see a mix of economic transition and market complacency. Historically, Davis Advisors has leaned towards bank stocks. They prefer institutions like PNC and U.S. Bancorp for their stability and strong fundamentals.
As for Meta, their investment stemmed from recognizing its value despite market sentiment. This long-term perspective allowed them to see opportunities where others saw risk. In conclusion, the landscape of value investing is evolving with market conditions.
Davis’ approach, blending a disciplined price strategy with flexible growth considerations, provides a roadmap for navigating these changes.
