During crises, it is important to separate emotional reactions from analytical frameworks to identify investment opportunities created by overreactions in the market.
The US banking system's decentralized nature and adaptability have contributed to its resilience and success in navigating crises.
While disruptive technologies pose risks, banks have historically been able to absorb and assimilate innovations while maintaining their core role in the financial system.
Deep dives
Handling Crises: Emotions vs. Economic Impact
During periods of crisis, such as 9/11, the financial crisis, and the COVID-19 pandemic, emotional reactions and economic impact play significant roles in shaping investment decisions. While some crises evoke intense emotional fear and risk, others have more financial implications. COVID-19 bridged the gap between these two types of crises, as it caused visceral fear and also had a significant economic impact. As an investor, it was vital to separate emotional reactions from analytical frameworks to identify investment opportunities created by overreactions in the market.
Banking: Resilience and Opportunity
The banking sector has shown remarkable resilience over time, adapting to changes and navigating crises successfully. Unlike many other countries where banks were nationalized, the US banking system's decentralized nature and entrepreneurial origins have contributed to its diversity and accountability. In addition, banks have demonstrated adaptability in incorporating changes in the economic landscape, such as financial crises and interest rate fluctuations. Despite the rise of the payment industry and disruptive technologies, banks have managed to absorb and assimilate these innovations, further solidifying their position in the market.
Disruption Risk: Payment Systems and Innovation
The rise of payment systems and disruptive technologies outside the traditional banking sector presents both a threat and an opportunity. As financial investors, disintermediation and disruption are crucial risks to consider. However, historical observations indicate that banks have been able to pull in disruptive innovation through inertia and regulation. Customer inertia and high retention rates, coupled with regulatory oversight, have enabled banks to adapt and incorporate innovations while maintaining their core role in the financial system. The growth of payment systems and other front-end technologies brings new challenges, but banks have a track record of navigating such disruptions.
Comparison between US and European business environments
The podcast discusses the different business environments between the US and Europe. While Europe has its advantages, such as safety and certain admirable qualities, it has challenges when it comes to bureaucracy, decision-making, and risk-taking. US companies, on the other hand, tend to perform better due to their entrepreneurial spirit, willingness to take risks, and accountability. The podcast highlights examples of Scandinavian banks as safer and cheaper alternatives, but overall, the speaker prefers to own businesses in the US.
The importance of management succession and the role of visionary leaders
The podcast explores the topic of management succession and its impact on businesses. The speaker emphasizes the significance of visionary CEOs in their ability to drive growth and create new business opportunities. They discuss the example of Jeff Bezos at Amazon and the value of his strategic direction. The speaker believes that certain businesses, like Amazon and Berkshire Hathaway, have well-established roadmaps and wide moats that can withstand mismanagement to some extent. However, the crucial question is whether new leaders can maintain the existing businesses' culture and innovation while creating new opportunities.
A year and a half into the pandemic, a lot has changed in the investment landscape.
Individual investors have been empowered, economies reacted in unpredictable ways, and we still have no clear idea of what is to come. At the same time, when we take a retrospective look, we can find parallels between the trends, behaviors, and reactions of today and events in the past. Today we’re joined by one of the great conversationalists in the community, Chris Davis, to share his perspective on investing in a time of COVID and his outlook for the future.
Chris Davis is the Chairman of Davis Advisors, where he oversees approximately $30 billion of client assets for both individuals and institutions worldwide. Chris joined Davis Advisors in 1989 as a financial analyst and has been a portfolio manager of the firm's flagship fund, the Davis New York Venture Fund since 1995. That fund has a very long history, having been founded more than a half-century ago. An investment of $10,000 at the fund’s inception would be worth $3.6 million as of June 30, 2021, versus 1.9 million for the S&P 500. Chris studied Moral Philosophy and Practical Theology at the University of St. Andrews in Scotland and is on the board of directors at the Coca Cola Company and Graham Holdings.
In this episode, Chris, Tano, and I discuss how the pandemic compares to past crises, Davis Advisors’ approach to triage as we entered the pandemic, why the banking industry offers more certainty to investors than other financials, the impact of low interest rates, the advantages US companies hold have over European companies, and so much more!
Key Topics:
The two types of crises Chris has seen over his career (1:53)
COVID in the context of past crises (3:48)
Davis Advisors’ approach to analyzing the long-term impact of COVID (7:48)
How Davis assessed key companies and industries as we entered the pandemic (9:38)
Structural changes in the banking industry in the past decade (13:39)
Why investments in banking come with a higher degree of certainty (15:18)
The inherent uncertainty associated with insurers (17:21)
Long-term dangers of the aggressive consumer bailout (19:36)
How Chris saw history repeating itself in the past year (21:30)
The biggest change in market structure (23:13)
What active managers need to understand about dispersion (26:05)
Factors that feed dispersion between Europe and the US (30:10)
How Chris views his European investments (33:31)
Two components of valuing a business (37:04)
Amazon as a modern-day Standard Oil (39:14)
Why successor CEOs should focus on preservation and protection (43:04)
The impact of low interest rates (46:24)
How banks have performed in the face of a significant headwind (49:03)
The high adaptability shown by banks (50:36)
Key differences between US and international banks (53:11)
The numerous disruptors that the banking system has absorbed (56:16)
How inertia and regulation protect banks from disruption (58:41)
Chris’ thoughts on the growth of the payments industry (1:00:27)
Viewing Bitcoin as a digital version of gold (1:04:29)
Why Chris’ opinion on Bitcoin has shifted (1:07:35)
Chris’ big takeaway from 2020/2021 (1:10:08)
The impact of China becoming the largest consumer economy (1:11:15)
Why state and federal government finances keep Chris up at night (1:13:16)
