Like Father Like Sons - Davis family of funds

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

Another tenet of their philosophy: no fads. The car phone rings and Andrew answers. He listens for ten seconds, then says: "Flip `em. Absolutely. Get rid of them immediately. We don't want to own them. Thank you. Goodbye." Later he confesses to just making a quick $40,000 on bonds of market darling Amazon.com. The point is, he stresses, they'd never own anything like Amazon or its bonds--at least not for long.

Which isn't to say they won't own a stock with a high price-earnings ratio. Chris recalls when some investors freaked because his funds owned AirTouch Communications, a wireless-telecommunications company. "People said, `How can you look at AirTouch? It's at 50 times earnings.'" But the brothers' analysis showed that much like Grandpa's famous insurance-company play, AirTouch's future cash flow was masked by a big, up-front investment in building a network. "We're not so stubborn that we won't buy a high-multiple stock," says Chris. "What we won't buy is a business for which we can't model out the future cash flows to be bigger than the risk-free rate."

And by future, he means far into the future. The Davises hate to trade stocks. The turnover rate for Davis New York Venture is just 11% per year, versus 90% for the average stock fund.

Shelby Davis's multiple gifts of being able to grasp grand strategies and economic trends, judge character, and crunch numbers are qualities that his sons admit they don't yet fully possess, individually or collectively. Andrew is great with numbers, while Chris is more the big-picture guy. To compensate for his quantitative weakness, Chris has partnered with Ken Charles Feinberg, who co-manages Davis New York Venture, Selected American Shares and Davis Financial. "Together, Ken and I hope to somehow create a derivative substitute of my father."

`I JUST GET A FEELING'

Speaking of their father: The younger Davises miss the morning runs at Taos Ski Valley Resort, which is dominated by a mountain whose 2,600-foot drop is so steep it seems as if it will tip over and crush their modest condo at its foot. Inside the condo, father and sons exchange hugs, and after some small talk, a laptop computer is opened and dialed into the Internet. Chris sits at the keyboard. Shelby stands over his shoulder while positions are reviewed, news analyzed and some stocks bought and sold via a phone call to the company's traders.

From that vignette it's easy to believe Chris's remark earlier that "we agree 50% of the time. We agree with differing emphasis about 40%. On 10% of occasions we disagree." It's also easy to understand how the coach-quarterback relationship works between Shelby, who gave up day-to-day management of funds two years ago, and his sons, who execute his broad strategy.

Shelby's almost intuitive touch with trends and issues is something his sons envy. Whereas Chris takes a problem, holds it up to the light and can tell you all the different angles he's using to examine it, Shelby's mind seems to work like a cryptic Cuisinart. You feed data into the top, puree it, and out comes a lightning-stroke conclusion. "When you've been in the business for 30 years, your gut develops a much greater sensitivity and you begin to make better predictions about big things," says Chris. His father "will call and say, `Such-and-such looks cheap.' I'll say, `Here are the numbers, but I can't make it work.' He'll say, `Well, I just get a feeling something's going on.'"