Chris Davis: Unveiling the “Cost of Foolishness”: Why Risk Culture Drives Investment Success

Johnny HopkinsChristopher DavisLeave a Comment

In his recent interview with Value Investor Insight, Chris Davis discussed how he has outperformed the market by focusing on financials and avoiding common mistakes outsiders make. He emphasizes the importance of assessing a company’s “cost of foolishness” regarding risk management, as this can significantly impact their performance.

Here’s an excerpt from the interview:

When we started Davis Financial Fund more than 30 years ago we thought that through expertise and selectivity we could outperform the S&P 500 with a portfolio that was 100% invested in financials, and we’ve done that.

I think there are a few things “outsiders” can get wrong. One is that they tend to be interested in the sector when things are going well and look first at the companies that are growing the most.

Experience teaches you, however, that if you simply underprice risk, money will find you and you can produce almost any rate of growth you want for a period of time. That typically leads to disaster.

A second related thing people can get wrong is that a low valuation always indicates the best value.

The stocks of companies that have taken on too much credit or interest-rate risk can for a time look very inexpensive.

When the tide goes out, as it inevitably does, what looked like a cheap stock can look like anything but that fairly quickly.

The last thing I’d mention with almost any company that is trying to make a spread on money is the difficulty in assessing what we call the cost of foolishness.

For a bank that’s making loans that don’t get paid back, or for an insurance company it’s writing insurance policies that prove to be uneconomic.

Minimizing that cost of foolishness often comes down to the company culture with respect to risk and reward, which is established over a period of many years. Assessing that is incredibly important with financials, and those who hop in and out of the sector may be less able to do that well.

You can read the entire interview here:

Chris Davis Interview – Value Investing Insight

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