The Davis Investment Discipline
At Davis Advisors, we seek to purchase durable, well-managed businesses at value prices and hold them for the long term to allow the power of compounding to work.
The Davis Investment Discipline begins with the premise that stocks represent long-term economic interests in real businesses. With that in mind, our research process begins with two essential questions:
- What kind of businesses do we want to own?
- How much should we pay for them?
Identifying the Types of Businesses We Want to Own
To answer this question, we try to determine if the businesses possess characteristics that foster creation of value over long periods of time. These characteristics include:
- Proven management.
- Durable, financially strong business models.
- Sustainable competitive advantages.
To learn more, see What We Look For In A Company.
Determining the Price We Should Pay
Once we have identified businesses we want to own, we wait patiently for opportunities to purchase shares at a discount to our estimate of their intrinsic worth. We believe this provides a margin of safety that can enhance our potential return while mitigating risk. Components of our proprietary valuation methodology include:
- Calculate Owner Earnings rather than taking GAAP earnings at face value.
- Determine a company’s true Enterprise Value.
- Calculate the Owner Earnings Yield.
- Compare the Owner Earnings Yield to the risk-free rate.
To learn more, see How Much Should We Pay.