Selected American Shares: Stocking up on Financials

When Chris Davis says he invests for the long term, he means it. The average holding period of stocks in Selected American Shares, a member of the Kiplinger 25, is ten years. Davis is the third generation of a family that has been investing in "durable, well-managed businesses at value prices" since 1947.

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So we were curious about Davis's take on today's bearish and fearful markets, especially because Davis is a long-time fan of financial-services stocks, a sector that has been pounded since last summer.

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Davis' thinking goes something like this. There will always be financial crises with remarkably similar patterns. Since he started managing money in the 1980s, Davis says, he's lived through the junk-bond collapse, the savings-and-loan crisis, the emerging-markets crisis, the collapse of the Internet bubble, and now the double bubble of real estate and credit.

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The pattern, he says, is that when a particular asset class produces superior returns, it attracts enormous amounts of capital, increasing leverage and leading to deteriorating quality. Then the asset class collapses.
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So Davis invests in financials that he feels comfortable holding even through vicious cycles: "Every financial we buy we recognize we will own during a recession and period of rising financial costs."

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He invests with eyes open, focusing on the balance sheet strength, liquidity, diverse sources of funding, sales in multiple markets and risk-management orientation of his financial holdings.
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"In general, those characteristics describe American Express, Berkshire Hathaway, Wells Fargo," which are all among Selected's biggest positions. "Wells Fargo will have losses, but is the franchise at risk?" Davis asks. "Five years from now, will it be earning less than today?" He obviously doesn't think so.

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Besides, he notes that come hell or high water, there will always be customers for banks and insurance, which are businesses that don't become obsolete.

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The contrarian in Davis makes him sound almost cheerful and enthused by the opportunities that are presented by a bear market. He reminds us of an old Wall Street saw that he says emanated from his grandfather Shelby Cullom Davis: "You make most of your money in a bear market. You just don't realize it at the time."