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By Dan Culloton | 06-18-2014 02:00 PM

Davis: Value or Growth? We Want Both

Assessing growth as a component of value is a guiding principle that can lead to opportunities in different areas of the market, says Davis Selected Advisers manager Chris Davis.

Dan Culloton: Hi, I'm Dan Culloton, associate director of manager research at Morningstar. I'm here at the Morningstar Investment Conference with Chris Davis, manager of the Davis New York Venture Fund and Selected American Fund.

Chris, thanks for being here with us.

Chris Davis: Dan, it's good to be here. Thank you.

Culloton: Chris, according to Morningstar metrics over the last few years, the Selected American and Davis New York Venture funds have spent a lot of time in the growth area of the Morningstar Style Box. Does this mean that you and your team have changed your style?

Davis: It's such a great question, and you know, I feel unequivocally that Morningstar is a force of good in the world, but this is one place where to me, it can be misleading because I think often to investors, they think that growth and value are something different. And of course, a company that grows profitably is more valuable than one that doesn't grow. My father used to say, he never bought a company that he thought was going to be earning less money five years from now than when he bought it. So, growth is a component of value, and in that sense, I'd say well, we are growth investors because we think about growth as a component of value.

On the other hand, we are value investors for two critical reasons. One is that we think that growth is hard. We think one of the mistakes people make is projecting rosy estimates way into the future. And growth is hard because the economy shifts, the competitive environment shifts, technology shifts, or whatever it is. And the second reason is because the valuation discipline is central to what we do.

We always say we need to adapt to changing times and hold to unchanging principles, and how we assess growth as a component of value is one of those unchanging principles. So I think the philosophy, the discipline, and the methodology are all the same, but sometimes where the opportunities are shift.

And I guess, I was getting at the second part of the answer that always our goal is to buy companies that are cheaper than they look. So we adjust the earnings. We adjust the accounting. So companies that have big noncash charges like amortization of intangibles, we'll add that back into earnings. What that means is sometimes a company that looks optically expensive, which might put it in the growth category as a high P/E, when you adjust those earnings to reality, it's is actually a big value stock. So that's the second component.

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