Ed Note: The following is a Q&A with Chris Davis, portfolio manager and chairman of Davis Funds, in which he looks at today’s market, the U.S.-China Trade dispute and opportunities in the current environment both in the United States and abroad.
What Are You Telling Investors About Today’s Market Environment?
Chris Davis: I think the most important point is that this is normal. The period of low volatility that we had experienced is what is unusual. It is amazing to look at the headlines that come out: “Stocks Plunging,” “Markets Tumbling” and “Bloodbath in Stocks.” What happened in early October wasn't even in the top 300 days of largest percentage movers. In other words, on average over the past 90 years, there have been three or four days a year in which the market has moved down by a greater percentage.
We've been in a period of unusually low volatility, which breeds complacency. I think we forget that volatility and corrections are the norm. They are an unpleasant but regular part of the landscape. On average, you could expect a 5 percent correction every 51 trading days. You could expect a 20 percent correction every 630 trading days.
We’ve gone more than 2,400 days without a 20 percent correction. You can interpret that data and say, “We are way overdue,” or you could say, “We would have said we were overdue when we were at 700 days, 800 days and 1,000 days.” So the most important thing is not to try to predict when these corrections will occur, but rather to recognize that of course they will occur.
When pullbacks and corrections do occur, the media will overreact and use the language that I shared with you. As investors, we should welcome this—because volatility is when active management is expected to shine more. In an unusual way, this return to normalcy is something that we should welcome because active management may add more value.
How Do You Manage Risk In The Current Environment?
Davis: When we think about risk, the first thing to recognize is for most people risk really boils down to the loss of purchasing power over time, or a lower quality of life. It isn’t necessarily about volatility, which has a disastrous effect on investor behavior. When prices go down, the wiring in people is not to invest more, it’s often to invest less. When prices go up, people get more excited. That is an old story and one of the most important risks out there.
The best world for investors is a world in which they feel that markets are risky. People say, “That stock went from $45 to $30, it must be very risky,” and this is where you should invert it. There’s a simple truth: Lower prices may help increase future returns and decrease risk.
In a way, we should be rooting for more volatility. Long-term investors should be rooting for that 20 percent correction that is far overdue and is a normal part of the landscape. And when faced with periods of dislocation, when stocks prices don’t reflect underlying businesses value, I always think about what my grandfather told me: “You make most of your money in a bear market, you just don’t realize it at the time.”