#123 - Chris Davis: Stewardship, Patience, Value Investing

27:41Chris Davis:You would say, that's pretty good. I'm getting seven and a half percent on my money. Now, if somebody comes along and says, hey, Alex, I'll buy your building for$8 million. You wouldn't think you had lost money. But if that was a stock, it would be down 20%. But you wouldn't be rattled if somebody offered you$800 ,000. If they said, Alex, you got to sell that building today. And you said, well, I can't find anybody that'll pay me more than$7 million for it. You'd say, but I'm not going to sell it. Because I'm making 7.5%. By the way, I think that$750 ,000, I'm going to raise rents next year. I put a new roof on.

28:22I think it's going to end up being at$1 million of earnings in two years. So why the hell would I sell it for$700 ,000? I mean, for$7 million. You'd be like, I'm not going to sell it for$7 million. Screw you. And you wouldn't feel so rattled. But with stocks, people feel very rattled. You know, if we buy, you know, MGM at 40 and it goes to 33, I'm not uncomfortable with that. I know the business. I know the people. I know the assets. I don't particularly understand. I'll look with humility. Is the market seeing something we're missing? We will always revisit our assumptions. But very often, you know, what the market is doing is they're miscategorizing a business.

29:11Right. My grandfather coined the phrase about his favorite insurance companies that they were growth stocks in disguise. And, you know, we don't we don't need them to be the business will reveal the growth. We don't need multiple expansion. We don't think about that as part of our investment approach. We may get it, but it's nowhere in our models. We think of our return just the way you would on that apartment building. We're getting$750 ,000 a year of after-tax rent and after-expense rent, and we think that's going to a million, and we think ultimately it's going to a million two and to a million five.

29:50We're very happy that we – we're very comfortable that we paid$10 million for that asset. And if we could sell it at five, we're not interested. Now, if somebody comes along and says, I'll pay you 25, well, that's a trickier question.

30:04Chris Davis:You know, what's interesting about that example is it makes it clear the difference when you focus on what numbers are in front of you. So when you own the apartment, the value of it doesn't show up on your phone, doesn't show up in a monthly statement that you see fluctuate, where the value that you see is the amount of income that's going into your account. Whereas with a stock, the price goes up and down and you see, you know, you lost a million dollars today. You gained, you know,$2 million last year. That's what's in front of you. As opposed to the earnings of that company, you have to dig in a little bit to get that.

30:37Chris Davis:So it is interesting how that plays into the psychology. Hugely. I mean, that, you know, the description that Ben Graham did of Mr. Market is so useful, right? It's this idea, if you owned that apartment building with a partner, so you each had put in 5 million. And now you have this$10 million building. You own 50, your partner owns 50. And every day your partner comes to you and names a price. And at that price, they will buy your interest or sell you their interest. And you don't have to do anything. If your partner comes and says six, you're like, I'm not interested. Now, if your partner comes and says 20, you might say, okay, you can buy me out at that valuation.

31:21And so Warren and Ben created this model of Mr. Market. Your partner is Mr. Market. And Mr. Market names this price. And of course, they went on and said, what sort of personality would you like Mr. Market to have? And Warren's snide answer was a heavy drinking manic depressive, right? That the more crazy Mr. Market is, the more money you're going to make because you focus on the value and Mr. Market focuses on the price. But you're right. People look at that price and they confuse it with value. Even you did when you were saying, you know, they see the value has gone down. The value hasn't gone down.

32:02They see the price has gone down. And so that fundamental, that bedrock distinction, you know, that was one of those four legs on the stool or on the chair, you know, from my dad and grandfather was always separating price and value, but trying, you know, Rudyard Kipling in his famous poem, If, you know, he says, you know, if you can keep your head when all about you are losing theirs and blaming it on you, it goes on. But it has a wonderful thing where it says, if you can keep your head when all about you are doubting you, but make allowance for their doubts as well. And that's our job. We have to make allowance for their doubts.

32:42Are they seeing something that we're not. What is the short thesis? What is our pre-mortem? Where could we be wrong? And are we open and sensitive to looking for that data? Because we're in a world of probabilities. And the story I like to tell about probabilities is, it came from Warren. I was asking him about a loss they had on an investment. And Warren said, well, I don't think that's a mistake and I'll tell you why. Take out a coin from your pocket and I'll bet you a billion dollars on a coin toss if you give me two to one odds. And what that means is he was willing to take a 50 % chance of losing 100 % of that investment.

33:32And so he said, I wouldn't bet you 10 billion. I wouldn't bet you$50 billion. But at two to one odds, a billion is about the right amount relative to the net worth that I have and so on. So, you know, recognizing that we can be right in our analysis of a company and still have something go terribly wrong in the business. And it doesn't mean we are wrong to buy it. The odds were in our favor, but we have to be open to seeing, well, but the thesis evolved this way, and now we have another decision to make. And so it's a wonderfully dynamic process.

34:10Chris Davis:So when you look back, are there any parts of the traditional value investing process that you feel have become less effective as they become more widely known and followed? Well, certainly the process of the meaningfulness of book value has been wildly distorted by changes in accounting and irrationalities in accounting, but also by the nature of how companies earn their money, the type of capital, intellectual capital, brands, and so on that don't show up. I think some of the parts analysis can be a little bit misleading or dangerous because people often don't think about what are the value of the underlying parts.

34:55They know what the price is, right? They say, oh, you own this much of this public company. And I'll give you a famous example was, I think it was Sears that owned Allstate and it also owned CompuServe. And there was a point at which people would say, well, if you buy Sears, you're getting the retailer for free because the value of the Allstate and the CompuServe are worth more than the market cap of the company. So that sounds like a great idea as a value investor to get something for free. But of course, it was only free because the CompuServe was so grossly overvalued and it collapsed. And so you actually ended up losing even on a sum of the parts basis, like 40 or 50%, because the CompuServe was 80 % of the NAV and it went down more than in half.

35:52Chris Davis:Well, because the focus is on the price as opposed to the sum of the fair value. Exactly. Exactly. So, you know, the nature and I think there are companies that can be very cheap on a book value, but the nature of the underlying business is that they are forced to invest at low returns. So if you have a, you know, a crappy business that is trading at 80 % a book, but the business is going to continue to invest capital at a 5 % return on equity or a 4 % return on equity, then buying it at 80 % a book is not a great recipe. In other words, the biggest mistake I think value investors confuse is that value investors often say, well, I'm a value investor, so I'm a long-term investor.

36:47If you're a long-term investor, you need to be far more sensitive about the quality of the underlying business than if you're a short-term investor. The longer you own that business at 80 % a book with a lousy return on equity, your return over time is going to approach the return on equity of the business, no matter what your starting price is. Isn't that amazing? You could buy it at half a book, but if they are continuing to reinvest at 4%, over time, your return is going to approach 4%. And similarly, if you buy a business that is reinvesting 100 % of its earnings at a 20 % return on equity, and you pay three times book for it, well, that sounds like that can't be a value, right?

37:38And three times book would be, in that case, you would, at a 20 % return on equity, you'd be starting well let's say you paid four times book let's make the math easy you'd be start that would be mean you're paying 20 times earnings and you're getting a five percent yield on your cost right if you bought it a book you'd be making 20 but you paid four times book so you're making five but if that company is reinvesting at 20 then the next year you're going to make five plus 20 % of five, right? So you're going to make six. And the next year, you're going to make 7.2. Then you're going to make 8.5, right?

38:21And then you're going to make almost 10. So that business is going to be a compounding machine, even though it didn't look like a value in the beginning. And the longer you own it, the more you're going to make, the more your return will converge on that 20%. So value investors can get trapped in cigar bucks, in value traps by buying it at a cheap price and then holding this lousy business year after year after year. And that becomes a value trap. And value investors can actually end up buying an amazing value, but they had to wait three or four years before it became obvious what a great value it was.

39:01Chris Davis:Yeah, because you want to focus on the business first, right? Buy a great business at a good price. Exactly. As opposed to a bad business at a cheap price. Exactly. And the bad business at a cheap price is great if there's a catalyst, right? If the company's going to liquidate or, you know, private equity or new management's going to come in and sort it out. I mean, there are lots of things that can make that bad business at a great price a good investment, but they take something happening, right? It's like a vulture has to become, it has to go out and kill something. So otherwise time is not your friend.

39:38So -

39:39Chris Davis:Yeah, because it may be a bad business today, but you have visions of it becoming a good business. So you're effectively buying a future good business today. Yeah, yes. But you need to, then there needs to be a reason why that's gonna happen. Right. And that is, you know, it can't happen. And we've played a part in it happening sometimes. I mean, we're not known as activist investors, but we certainly actively engage with the companies that we're invested in. And sometimes that means being involved in proxy voting in a way that's hostile to management or talking to other owners and getting their opinion and their perspective and sharing ours.

40:18Chris Davis:You touched on this a little bit earlier, but how do you think about stewardship when people are trusting you with their life savings rather than just capital on a spreadsheet? I think in my first year or two, I didn't quite understand how important that was. And for me personally, but even to the business that we are, it was really taught to me more than anything by Tom Gaynor, who is a man I admire greatly. And I don't know if you've ever spoken with him. I can't. He's the CEO of Markel. When I met him, he was just a crank in the investment department at Markel. Uh, we met in Omaha in the early nineties, maybe more than 30 years ago.

40:58Uh, we just happened to be sitting by each other and struck up a conversation. And that conversation changed the arc of my life. I mean, uh, because I saw investing as a puzzle that we were always trying to solve. And I, all of the excitement that we talked about in the beginning about the businesses and living in the future. And I love that, but I didn't see wall street. as a high calling, right? Remember I'd been in seminary. And so a lot of my friends who became priests would sort of, you know, tease me about that. Like, oh, how are things in wall street? You know? And I felt a little sheepish about that.

41:36And in that very first conversation with Tom, Tom said, you know, how do you like the work? And I said, well, the work's great, but it's not a high calling. And Tom stopped me and he said, you are wrong. Stewardship is a biblical calling. I mean, it is a noble profession and a big responsibility. You're not in the investing business. You're in the stewardship profession. And that is a huge, that shift was really fun. Because as I said, my grandfather mostly managed his own money. My father was so dispositionally sort of an analyst and a portfolio manager that he didn't really think about that side of the business.

42:23It was, you know, he had started as an institutional investor. And so he just, the clients were sort of something over here. And Tom saying that was, it was one of the three or four most important conversations in my professional life. And so the stewardship really changed what we thought. You know, remember in the early nineties, we had a lot of insider money. We were a small firm. And people would say, well, why don't you just convert to a hedge fund? And you would make a lot more money, which is true. But I think our mindset was, and this is a little catty, but I felt like making rich people richer didn't feel to me as motivating as the idea that we have a school teacher's life savings.

43:09And, you know, being able to send that kid to college really matters. And I felt like the way our firm has unfolded, and of course, we're built in partnership with financial advisors. And within that community, the financial advisors that we have sort of had the opportunity to work with for 30 years are really the advisors that have their clients, they have their clients' kids, they have their clients' grandkids. They haven't taken a shortcut. And of course, that's also a community where there are people trying to pump and dump and all of that. And so I think our culture has reinforced the type of advisors that choose to work with us because the advisors that choose to work with us, trust matters greatly.

44:00It matters more than the hot dot in your alpha in this period and chasing whatever is great. So we have selected in to a group of advisors that's especially, in my view, especially high quality. And that focus on stewardship has helped create an ecosystem that I'm proud to be associated with. We're not, you know, we don't have salesmen out pumping, you know, whatever the hot product is. And one of the things we talk with advisors a lot about is the difference between a business and a profession. and you know in a business you sell a product to a customer and the number one and you gauge your success by profits and the number one rule of business is push the customer the way they want to go right in a profession you provide a service to a client and that sounds like semantics except when you realize that the only way you can judge the quality of a professional versus a businessman is by referencing client outcomes.

45:09So if you want to know, Alex, who's the best doctor, you could say, well, show me their tax return. That's not going to do it, right? You have to say, let me see the patient outcomes, right? You want to know who's the best teacher. You'd say, well, is it the teacher that's paid the most, right? Or is it, I have to look at student outcomes. What about the best lawyer? I need to look at a client outcome. And so the financial advisors, portfolio managers, we're in a profession and we need to be judged on how the end client does. And that doesn't just mean our performance. It also means when they get in, when they get out.

45:51Do you have a good stretch and then market like crazy and get everybody in? you know, in a bad, and so in a bad stretch, you know, do they hire high and fire low? So you end up with terrible dollar weighted returns. And so, you know, a big part of our work with advisors is that idea of how, well, I'll put it positively. How do we improve client behavior? How do we improve investor behavior? How do we save, you know, when I go to the doctor, you know the doctor doesn't say to me you know what you should do drink as much as you want you know he doesn't tell me what i want to hear right he tells me things i don't really want to hear but they're good for me and advisors you know in a sense are like doctors but they also have play a big role in getting the person to exercise getting the person to drink less In other words, behavior modification is an enormous part of the value they can add.

46:51And so the partnership that we have with advisors is really built with that mindset. And so I don't know how many financial advisors are in the country, but we deal with a tiny sliver of them. And to me, it's a sliver of them for whom stewardship, trust, and client outcomes is the reason they go to work every day versus, you know, the type of car they drive or how much money they can extract from their clients. And so it makes it a lot more fun to come to work. So going all the way back to what you said about stewardship, it's ended up being a wonderful feedback loop rather than just a, you know, a slogan.

47:37Chris Davis:And it is an important mindset because it is a tremendous responsibility to manage other people's assets. And I think what that inserts into your disposition and your view of the world is focused on the downside and thinking about resilience through time, as opposed to momentum and chasing the hot dots and trying to maximize profits. It's looking for asymmetric opportunities, which is a very different area of focus. Absolutely. And, you know, it helps. And, you know, if I had one piece of advice for investors, it's, you know, we don't invest in a single company where our, the incentives of management aren't aligned with our incentives as owners or our goals as owners.

48:23And it is amazing to me how many strategies and portfolios are managed by people that don't have their own money invested alongside their clients. And that is a huge part of our ethos and our culture is that alignment because we know it matters when we look at the end companies we invest in. We want to invest in owner operators, right? Because if we don't, then what happens is if their incentives aren't aligned, then what they're interested in is getting the most compensation possible. That's an expense for us, right? We don't like that. But if their incentive is to create as much value as possible, then we're aligned.

49:05So we want to look through it. Are they owners of the business? Are they fellow owners? Are they standing alongside us? And it's amazing in the investment profession how few people ask about that or talk about that or model that. We view that as a hugely important part of our commitment.

49:22Chris Davis:When you look at today's concentration in the large tech companies, what parallels do you see with the late 1990s? And is there anything that feels fundamentally different this time? I would say the similarities are bigger than the differences. You have a really exciting, world-changing new technology in the form of AI, as you did then in the internet. Amara's law is a wonderful way to conceptualize this part of a cycle. Amara said that new technologies are often overestimated in the short term and underestimated in the long term. And we are in the overestimating phase. And that's very powerfully similar to the late 90s.

50:08And the reason it's dangerous is everybody's spending all of their time trying to pick the winners. Who are the emerging winners? and in a fast changing emerging technology, that is a really dangerous game. And if I was just to look back at that period and say, there were three sure winners in the internet that everybody knew them. They were called the three horsemen, right? And it was Yahoo, AOL, and Cisco. And they were the dominant blue chip, absolute, the three horsemen of the internet.

50:40Chris Davis:And so, So, you know, if you bought Amazon in 99, you were down 70, 80 percent by 2002. You still did fine if you bought it in 99. But if you also had Yahoo, AOL, Cisco, you were killed. And so our view is that's the first point. All of the hype and attention is being spent trying to identify the emerging winners and driving them up to valuations where even good businesses have so much valuation risk built in. Right. And the second part of it is in that period of hype, people lose track of everything else. So you get a narrower and narrower market. And of course, in 99, if you predicted the bear market that was coming and went to cash, that was a mistake.

51:34Actually, you know, I think in the year 2000, the market was down, I don't know, 9 % or something like that. A lot of value managers, including us, were up like double digits. I mean, maybe you were up nine. We had managers we admire, Oakmark, they were up 15%, 18%, 20%. And by the way, they had a great five-year stretch. So we had decent returns for that five years from March of 2000 for the next five years. market had negative returns. And so that's the second element of a market like this, is that it gets so narrow that there's a lot of good, durable businesses that are considered boring and are sort of overlooked.

52:17So avoiding the hype, then trying to look and see what's been overlooked. And the third thing is recognizing if the trend is real, which we believe absolutely it is. I mean, AI is a real powerful technology. Are there other ways to invest in it that will be beneficiaries of the technology without the risk? So instead of just focusing on the emerging winners, can you focus on the enablers? What are the companies that will enable this technology? Today, you can think of things like Applied Materials or Taiwan Semiconductor or Samsung or Texas Instruments. But you can also think of companies like natural gas companies or copper companies.

53:04These are the companies that will make a lot of money, whether or not the returns on the capital being spent are good or not. So they're enablers. Then they're users, the users of the technology. So in the internet, who were the users that were able to benefit from this enormously powerful new technology, right? Think of Netflix as a dramatic example. Pivot their whole model to being able to deliver through the internet instead of sending DVDs everywhere. Well, think about the users of AI. Who are the obvious winners? Well, it's gonna be companies that have enormous data sets that have labor costs that easily lend themselves to providing better service at a lower price using AI that have the appropriate tech stack, that have managements that are willing to cross that chasm.

53:59So an example that jumps to the top of our list is Capital One Financial, right? Capital One is in the top 10 companies of all companies in the world for AI patents and machine learning patents. By some measures, they're in the top five, which is amazing. It's hard to get a clear date on that, but they are certainly in the top 10. And, you know, it's, it is, that is a data company and AI is going to be fabulous for them. So they're the users of the technology. Then there's a category that mattered again with the internet, which was, you know, who are the indifferent or the insulated, right? Who are the protected?

54:42And that's the famous Jeff Bezos question. People always ask me what's going to change. They ought to ask me what's not going to change. That's also a very important question. And, you know, Tyson chicken, not going to change that much, right? AI, neither here nor there for their business, raising chickens, you know, raising protein, I guess makes it sound a little more neutral. And then the last category in a time of change like this that we can go back to the late nineties and think about are who are the walking dead? Who's the Kodak of this era? You know, who are the newspaper companies? where the new technology is just so much better.

55:18And this is where I think index investors are in for a tough surprise, because I think that indexes adapt more slowly, even then they did, but now that the indexes might be 50 to 70%, you're gonna go down with the ship. And I'll give you a good example from back then. I mean, Kodak, I think 10 million, 10 million digital cameras had been sold when digital camera sales crossed film camera sales. So 10 million people knew that film was dead, right? I'm a photographer. The first time you used a digital camera, you knew you were never going back.

56:02Chris Davis:In fact, it wasn't even close. It was so crazy to go and buy this canister of film and take 36 pictures and then put it back in the canister and drive to the store and drop it off and drive home. And then three days later, drive to the store and pick it up. And then you see your kid's eyes are closed. You know, I got dang it, you know? And so if you were looking for a house or a car or a job, you know, I got my job at State Street Bank from the classified section of the Boston Globe, like going through circling jobs that I could apply for. And State Street was hiring into their accounting program, if you use that online search, you realized it was crazy, the old system of like reading, you know, dishwasher wanted, no, you know, trying to find the end or the zip code you're interested in or the type of car.

56:57So, but with 10 million digital cameras sold, Kodak was still in the top third of the S &P 500. And you just, you know, eight years, You knew it was sinking. You didn't know the rate. You knew they had a film business for movies that was pretty profitable. But you could just... So The Walking Dead. And I think the indexes and momentum investors and illiquid strategies, those three are going to be the three horsemen of the apocalypse, I think, in the next five years. I think people have underestimated how valuable liquidity is. They've locked themselves up in private equity, private credit, all of these pension plans, sovereign wealth funds, and they can't change their mind at a time when the world is changing fast.

57:48They're locked up. So I think that's very dangerous. I think momentum strategies that are based on this is what worked in the past, so it should keep working. Dividend strategies. This company's paid a dividend for 40 years, 50 years. I feel safe. Don't feel safe in times of change, right? Kodak had paid a dividend for 40 or 50 years. It can change fast. So those are all back in the index. These are backward-looking strategies, and they're slow to adapt when the world changes. It's an area where fundamental analysis, going all the way back, Alex, to where we started with my grandfather, we're looking through at the business and this can be a huge advantage.

58:33It's not an advantage when everything is driven by the momentum of the past. But when you get transition, then being anchored to the past can be very dangerous. So I think the dividend strategies, the illiquid strategies, the momentum strategies, the passive strategies, all could be very disadvantaged in the way we see the world unfolding in the next five years.

58:55Chris Davis:Serving on the board of Berkshire Hathaway, what have you learned firsthand about Warren Buffett's and Charlie Munger's approach that you feel might be commonly misunderstood? Well, what I'd say is what's so dramatic about Berkshire has been the culture of transparency. And, you know, I've been going to Berkshire annual meetings since like 1989 or 90. I've read every annual report and the partnership letters before that. The answer is not much is different on the inside than the outside. Because they're so transparent. Yeah. You know, the word integrity, it comes from the Latin, integre, is wholeness, right?

59:38It's wholeness. It's not one thing over here and one thing over here. There is enormous integrity in that organization. And so in that sense, I would have been shocked if I'd seen anything different on the inside. I would say a nuanced difference is the way in which that firm and it influences how we think. There's two pillars that are very central. And one is the idea that people have their life savings invested there. That's been a part of Warren and Charlie's ethos from the beginning, that their friends and neighbors trusted them, that Berkshire represents the lion's share of their net worth and their assets.

1:00:27And they have a duty to be protective of that far more so than the duty to outperform an index or whatever. That's job one. That goes back to stewardship. Yeah. And you feel that very much on the inside as well. And it relates to the second part, which is you can read every annual report, go to every annual meeting, and you will have an enormous sense of how Warren thinks about risk. I would say the only nuanced difference I would say from the inside is he really thinks about risk. And he thinks about risk in ways he imagines things happening that are from a common perception point of view would be unthinkable.

1:01:11But of course, if you even just look back at our life, lots of unthinkable things have happened, right? I mean, it's the norm. It's the norm. COVID, the financial crisis, the tech collapse, the oil embargo, the Cuban Missile Crisis, Vietnam, impeachment. And I think everybody's so interested.

1:01:37Chris Davis:I don't see it right in breach. But, you know, I think everybody's been interested reading the book about 1929. But somehow when you're out of that moment of chaos, people forget it. It's what you said. People just somehow it doesn't stick in their mind. And it really does with Warren. He really thinks about what if capital markets were closed for six months? What if, you know, we need to be able to make payroll. We need to make sure that we're on the other side. We need to be an asset to the country in a time like that. We can't be somebody that needs a bailout. And he thinks about that in a profoundly pervasive way.

1:02:21And I think I would have expected it, but I would say that's just a difference of nuance that I'm really just struck by.

1:02:31Chris Davis:So I know Charlie Munger was an important mentor to you. What lesson from him most deeply shaped how you think about investing? Well, actually, I'll do this. Let me see if I can turn this. There. So just so you can see Charlie behind me. And he's there for a psychological reason. It's not just an homage. He had a bust of Ben Franklin in his office. And he said it's useful to have the people you wouldn't want to disappoint looking over your shoulder. and uh the picture out there is is is my grandfather in the navy and and you know there's sense and that's a useful thing but well it i really can't to distill down charlie is is hard um i think all of the things we've talked about stewardship and rationality certainly uh are huge part, to the idea of constant learning, the willingness to really take an unpopular stand.

1:03:34I think the ability to bring so many models to bear in your thinking about people and to just maintain this enormous equanimity. And I think one of the things maybe that is most interesting to me about Charlie is he really didn't care at all what anybody else thought, but he cared deeply about doing the right thing. And that meant that sometimes people thought he was rude, or sometimes people thought he was mean, or sometimes they thought he was stubborn, but he was his own most fierce critic. He was his own grader. And most people, if they take a self-graded exam score pretty well, yeah, not Charlie.

1:04:19And there's something so admirable about the center that he holds. I mentioned the arc of my life that changed with Tom Gaynor and Charlie was the other. Those two where a single conversation, my life would have gone very differently if I hadn't just had this chance opportunity to meet Charlie when I was young and I was trying to sell him a business, which he had no interest in. But at the end of that meeting, he said, you know, if you find yourself in Los Angeles, I'll make time to see you. And I just started these routine pilgrimages, you know, every month or two, you know, just to spend time with him.

1:05:03Chris Davis:You often emphasize patience and we have today. Did you see it as a competitive advantage in a world that seems to be built around immediate gratification? Oh, absolutely. Absolutely. The quick feedback people. But it's dangerous, too, because, you know, it's given rise to a type of activist investor that is hugely destructive, value destructive to long term investing. And I really resent it. Right. The activist investor who gets involved, who says this company, you know, we talked about the low return on equity company that continues to pour money in. And, you know, an activist investor that's involved in that situation and says, we need to improve this business.

1:05:45We need to be more disciplined. Fabulous. That's great. But the ones that are there to sort of get a quick sugar high at the expense of long-term investing, I've seen it over and over. If activists had been able to get into Amazon in 2002, they would have fired Jeff. They would have kept the company focused only on books. If activist investors had gotten into Meta four years ago, they would have shut down all the work on wearables. They would have shut down the work on the Metaverse. They probably would have voted down the acquisition of Instagram. And yet that is a company where they are making investments for a decade or longer ahead because that's how the owners think.

1:06:31I spent last week, I was down in Texas, and I visited with the now retired CEO of Texas Instruments, Rich Templeton. Texas Instruments became one of our largest positions in the early 2000s when Rich became the CEO. And we had known the company before. The company got really hyper overvalued in the year 2000 as part of that internet wave.

1:06:59Chris Davis:it went down seven years later it was still below what it had traded for then and seven years after rich became head wall street hated it that you'd gone nowhere for seven years we had been buying year after year after year because they were making enormous changes in their business that were going to create huge value and it wasn't clear in the earnings because essentially what they were doing was getting out of the capital intensive parts of manufacturing semiconductors and focusing on this business called analog. But, you know, think of them as low priced chips that are important to customers, but you need to make a lot of them and they have a long life in the product.

1:07:46They go into toasters and phones and everything anyway. But the company was still running a huge amount of depreciation from when they had all these expensive factories through their income statement. So it didn't look like they were earning a lot of money. They were walking away from revenue as they got out of those businesses. And yet the cash was pouring in because their capital spending had gone way down. The core of the business was so good. So anyway, nothing for seven years. If an activist had got gotten in there and screwed that up and said, we're going to start building these big factories now.

1:08:22And, you know, we're going to go back to chasing unprofitable revenue. We're going to go back to being in iPhones, even though we don't make any money and blah, blah, blah. And instead, we got a triple in the stock in about 14 months because it took a long. Now I was with Rich recently. And in a way they're investing for the next 10 years in the opposite way. He said, everybody got so enamored of outsourcing manufacturing to Taiwan and everywhere else. He said, I think we need to build our own factories. This was five years ago. We need to build chip factories. We're going to build them in the US.

1:09:00And we are also at the same time going to change our distribution from going through the channel to going direct to customers. That meant that a lot of the channel was going to punish them and kick them out. And they were going to take enormous short-term pain. They were going to spend an enormous amount of capital building. And everybody said, what are you doing? you idiots. You're supposed to be capital life and you're giving up all this revenue. And we knew Rich and he's retired now. But, you know, I can I will bet a large. Well, I am betting a large sum of money that over the next 10 years, I don't know when it'll happen that all of these investments they've made will pay off.

1:09:42Whereas if an activist came in and said, But in fact, an activist did come in there and said, oh, you've got to stop this capital spending. You've got to, you know, go back to using the channel. And that is hugely destructive to long-term value. So I have a really, I hate what activist investing has become. It's become short-term. It's become, you know, let's, there were some activists got involved in Markel. We were talking about Tom Gaynor. It's insane what they were recommending to get a short-term fix, that they split up this incredible three engines they have that create enormous stability.

1:10:19They built up this wonderful portfolio of private companies. And they're like, you should sell those companies to private equity because you could get a good price for them. And it's like, well, if we could get a good price for them, it's because they're probably undervalued in here. We are judging those business because of the earnings they contribute, the stability they create with our insurance operations. and this activist is trying to get them to split up, it's insane and it would be hugely destructive. But there's no question if they announced they were gonna split up, the stock would go up 20 % for a short period of time and long-term investors would be screwed over the long-term.

1:10:56And that sugar high is a really poisonous part of capitalism that goes under the guise of activism, but is actually undermining to long-term shareholder returns.

1:11:06Chris Davis:Well, Chris, this has been a really fun conversation. I appreciate you sharing all your insights, your experience, and describing the way you view investing and being a steward for the assets. So I really appreciate that. And I really appreciate you joining us. Alex, thank you so much. It was an enormous pleasure to be with you. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast. If you have questions, feel free to email us at info at insightfulinvestor.org. And if you enjoyed the discussion, please subscribe to this podcast to ensure you don't miss future episodes.

1:11:51Chris Davis:And don't forget to forward today's conversation to others you think would enjoy listening. Important information. This podcast is provided for informational purposes only and should not be considered legal, tax, investment, or business advice. It is not a solicitation, recommendation, or endorsement. All opinions expressed by participants are their own and do not necessarily reflect the views of the Evoque Advisors Division of MAI Capital Management, LLC, or Evoque, its affiliates, or any companies mentioned. Information shared has not been independently verified by MAI or its affiliates. MAI Capital Management LLC, or MAI, is registered with the U.S.

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