In his recent interview with Barron’s, value investor Chris Davis discusses two key investment questions: the type of businesses to own and the price to pay for them.
Viewing investments as business acquisitions, not just stock purchases, Davis highlights evaluating liabilities, undervalued assets, and long-term durability over short-term gains. He contrasts today’s market dynamics, marked by a transition from “free money” to higher costs and technological disruptions, with widespread complacency fueled by unrealistic economic policies and high market valuations.
Davis stresses the importance of identifying resilient, undervalued businesses with sustainable competitive advantages, capable of weathering economic shifts and delivering consistent returns in an increasingly disconnected and volatile market.
Here’s an excerpt from the interview:
Davis: Well, we really think about it in the sense of there’s two questions. What sort of businesses do you want to own, and how much do you pay for them? Because, of course, we don’t think of ourselves as buying stocks; we think of ourselves as buying the business. Very much like a private equity firm—well, but with important differences, which I’ll come to—but we value the entire business.
Now, what that means is, of course, we’re buying the equity, but we have to think about the liabilities. We have to think about the senior calls on cash flow, debt, and unfunded pensions. We also have to think about there might be assets that are undervalued—they might have real estate at cost. So, a lot of that is approaching as if we were buying the entire business.
When we think about what kind of businesses we want to own, well, we want to own businesses since, unlike a private equity firm, we’re not thinking about our exit strategy.
We [inaudible] own businesses that have these qualities of durability, resiliency, sustainable competitive advantage, and decent returns on equity that we think are sustainable over long periods of time. We’re not so worried about if they’re lumpy; we’re worried about whether they’re durable.
So that, to us, has always been a core part of what we do, but it’s even more important when you’re in this disconnected world that we’re in today.
What I mean by disconnected is there are two themes happening at the same time in the economy and the market. One is this huge transition—this transition from free money to money having a cost, this technological disruption which is roiling through this transition, and the magical thinking that no matter how much money the government prints, it doesn’t matter if you’re the currency standard of the world, that somehow you can lower taxes and spend more indefinitely, carry deficits indefinitely.
This is all magical thinking, right? Sooner or later, it catches up to you. So there’s this big transition happening on the one hand, and on the other hand, there’s this enormous complacency.
Markets just go up. There’s a New Yorker cartoon that said, Astronomers find a meteor that’s about to destroy the Earth this morning, but in the afternoon, the Fed cut rates and markets rallied.
It’s that sort of complacency that means you have a very segmented market and a very high-valued market on average. So that is a dangerous recipe, and for us, the stock-picking challenge is to navigate between those—to identify those businesses that are durable and resilient and, at the same time, undervalued.
You can watch the entire interview here:
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