Selected and Clipper fund manager Christopher Davis says extreme market volatility has led to more turnover as security prices and values diverged, but it has not damaged the idea of long-term investing.
Dan Culloton: I'd like to end with one more question. We've heard a lot since 2007 and 2008, a lot of people questioning whether buy and hold is actually dead. As a buy and hold investor, I think we already know your answer, but what do you think of that argument, of people questioning the wisdom of buying and holding through what has been a really harrowing market?
Christopher Davis: Well, I might surprise you in this answer, to say that buy and hold is not an investment discipline. All of what is essentially value investing is, is recognizing that there is a difference between value and price, and orienting your firm with the view that value can be independently determined through research. If the price of the business exceeds your assessment of the value of that business, you would be a seller of that business. If the price is well below what you assess the value, you would be a buyer.
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Now if we buy a business for $30 a share where our belief is that the intrinsic value of that business is $50, and the next day it trades up from $30 to $60, buy and hold would make no sense, right?
It's just that in general, business prices are more volatile than business values. But usually not so volatile that they swing from below intrinsic value to above intrinsic value in short periods of time.
Now the world that we've been in is somewhat different than that. We've been in a world where very high volatility has made it very likely that businesses will trade above or below what you assess the range of fair value to be. And therefore you would expect somewhat higher turnover or shorter holding periods in that sort of environment.
So I would say that there were a lot of investment tactics that people thought were investment philosophies. Buy the dips. Buy and hold. Now, having said all that, of course we are long term investors in the sense that we think over time we want our returns to approximate the returns of the underlying business.
And we feel generally businesses trade roughly within their range of intrinsic value. We try to buy when they're below, we try to sell when they're above, but most of the time, they're somewhere in that grey zone.
So our turnover will tend to be lower. Turnover has a certain cost and an uncertain benefit. And the certain cost in terms of taxes and transaction costs, false precision, all of these things tend to be something that you need to realize are real deductions from returns.
So putting that all together, the last thing I would say is that the chorus that cries out that buy and hold is dead will reach its crescendo at exactly the time that buy and hold should work going forward. In other words, when it looks worst in the rearview mirror is when it will be best in prospect.
Dan: Thank you for very much for your time today, Chris. I appreciate it.
Christopher: Thank you, Dan.
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