In his recent Semi-Annual Review 2021, Chris Davis discussed his strategy of selecting a few businesses that combine the best characteristics of both value and growth to achieve the best results. Here’s an excerpt from the review:
Our ability to take advantage of this dispersion derives from our willingness to be highly selective. Selectivity means that we invest in fewer than one out of every 15 companies included in the S&P 500 Index. Just as with the best universities or best companies, the ability to select from a large pool of applicants creates the opportunity to choose only the most exceptional candidates and reject those that are average or worse. Our research efforts comb through hundreds of potential investments, seeking those whose business and financial characteristics can turn long-term investments into compounding machines.
In particular, we look for durable, growing businesses that can be purchased at attractive valuations and reject businesses that generate low returns, are stagnant, overvalued, overleveraged or competitively disadvantaged. While funds that passively mirror the S&P 500 Index are forced to invest in all companies, including those that we view as significantly overvalued or competitively challenged, our selective approach allows us to reject such companies. In this environment of wide dispersions, the ability to selectively reject certain companies and sectors from our portfolio may prove just as valuable as the ability to selectively invest in others.
While the growth/value categorization discussed above is helpful in illustrating both mania and opportunity, the best way to build wealth is by finding those select few businesses that combine the best characteristics of both categories. After all, categories do not build wealth. Nor do average businesses. Instead, generational wealth is built by investing in those select few businesses that combine durable and resilient growth with attractive valuations.
As can be seen in the adjacent table [below], by being extremely selective, we have built a portfolio that has the best of both growth and value. While the earnings of our portfolio companies have grown approximately 3% per year faster than average, they can currently be purchased at a 36% discount to the average. We consider this a value investor’s dream, as companies that grow profitably over time are more valuable than companies that don’t.
To find such an attractive combination, our research goes beyond simplistic categories to identify growth businesses with attractive valuations, as well as value businesses with attractive growth.
You can read the entire review here:
Chris Davis: Semi-Annual Review 2021
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