Like Father Like Sons - Davis family of funds

Kiplinger's Personal Finance Magazine, June, 1999 by Robert Frick

S.C. Davis also passed along--or didn't pass along--another important legacy. He didn't leave a nickel to his son or grandsons. He thought inherited wealth was "debilitating," and he didn't want to rob his progeny of an opportunity to earn a living, says Chris. Granddad's money went mainly to a charitable foundation.

Shelby Davis Jr. went into the investment business right out of college, becoming the Bank of New York's youngest vice-president since Alexander Hamilton. He started his own investment firm and then his first fund, Davis New York Venture (there are now 11 Davis funds). Like his father, Shelby Jr. has not given and will not give his sons a free ride. They are buying their father's fund-management company. "We're up to our necks in debt," says Andrew, his hands leaving the wheel to strangle himself with theatrical hysteria.

Shelby Jr. didn't invite his sons to work for him until they'd proved their mettle elsewhere. Andrew rose to be head of convertible-securities research at Paine-Webber before joining his father's company in 1992 as co-manager of Davis Convertible Securities fund. Chris was an analyst at Tanaka Capital Management before becoming co-manager of Davis Financial fund in 1993.

Neither of the younger Davises--Andrew is 35, Chris 33--is a Shelby clone. Chris once considered becoming an Episcopal priest and even called himself a Communist during his college days. That led to some lively dinner conversation that didn't involve investing. And while Chris never referred to Dad as a "running-dog imperialist lackey," at one point Shelby did feel compelled to ban Communist sloganeering during dinner.

THE DAVIS PHILOSOPHY

Somewhere between Espanola and Taos a road sign indicates that Las Vegas (New Mexico) is not far away. Do the Davis boys ever indulge in games of chance? It's like asking if Granddad flew first-class. No, they don't. In fact, the Davis investment philosophy, carefully honed over three generations, is built around the idea of reducing risk. Says Andrew: "The first question we ask when making any investment is, `How much can we lose?' not `How much can we make?'"

As Chris explains it, investors always have the alternative of buying a bond with a risk-free yield. "If I buy a business that has risk, it better have a better payoff than the coupon yield of that bond." If they can't come up with an earnings model showing that buying the whole business would earn them more than the risk-free rate of return, they won't buy the stock. "We view our jobs first and foremost as stewards of capital for the long term," says Chris.

The trick, of course, is picking the right companies. The Davis strategy is truly a gestalt approach, looking top-down at themes such as baby-boomers' interests and the impact of technology, and bottom-up at management acumen and a stock's price. The ideal Davis stock has earnings growth of between 7% and 15% a year and has good prospects to continue growing at that rate for as far into the future as their models can project. Seeing into the future depends on evaluating company management more than any other factor. "My grandfather had a wonderful expression," says Andrew. "You want to invest in the doers, not the bluffers." (Chris and Andrew constantly refer to their father and grandfather in their conversations, as well as their investment guru, Warren Buffett.)