Last week, I was up in Montreal for a keynote presentation to 750 Bank RIAs. Morgan Housel was the keynote the day before (tough act to follow!).

Today, I am speaking with an old friend, Paul Kedrosky, about all things technology on the pod. Paul is a fascinating guy with an interesting background and an unusual set of interests — Science nerd, VC, academic, writer, skier, and among the last of the landed gentry in America. Artificial Intelligence is certain to come up.

During the Q&A in Montreal, I was taken aback by how many questions there were about AI — not the usual “Is it a bubble” line of inquiry, but rather, what are the best use cases? Should AI be used to create content (No!), research (Yes!). There were so many legitimate questions about AI that I decided to dig a little further.

I will definitely be asking Paul about his views, but until then, I had a little chat about how to best use AI with Claude, see what AI itself had to say on the topic of using AI.

Most agentic generated content is pretty bad — it’s great for research, but using AI for any kind of writing, prose, or content creation is a terrible idea. The reason I am sharing Claude’s responses is that A) I found the answers very useful, and, 2) I edited it down to size to make it mostly readable. (I also moved the more pedantic answers to footnotes).

Here is my conversation with Claude about AI, edited for length; (underlining is my emphasis added).

Let’s go:

Barry: Let’s discuss YOU, Claude — What are your best strengths, what are your weaknesses? What do you do really well? What do you do really poorly?  How can I best use your strengths to make my work product better?  What else should I be doing with you to be better?

Claude: Good question to actually sit with rather than give you the brochure version. Let me be specific to the kind of work you do.

Where I’m genuinely strong

Transformation and synthesis. Hand me raw material — a Fidelity CSV, a 90-minute transcript, a stack of Instapaper saves, a messy first draft — and I’m fast and reliable at reshaping it into something structured and usable. Your morning reads digest, the transcript cleanups, the thank-you emails: that’s my sweet spot because the facts already exist and I’m just organizing and formatting them. Low risk, high leverage.

Sparring. I’m useful as an adversary against your own arguments. When you’re assembling something like the divestiture-vs-overtrading piece or a “Liberation Day” scorecard, I can argue the other side hard, find the weak joint in the thesis, surface the objection a sharp reader will raise. Most people underuse me here and use me as a stenographer instead.

First drafts at volume. Interview questions, outreach emails, outlines, and alternate framings. I’m a good 70%-draft machine when you’re the editor.1

Where I’m weak — and these matter for you specifically

I confabulate. This is the big one, given that you publish precisely-sourced work. I will produce a plausible-looking statistic, a clean quote, a specific citation — and it can be wrong while sounding completely authoritative. A DALBAR number, a date, a “Buffett said X.” Treat every figure, quote, and citation I generate as unverified until you’ve checked it or I’ve shown you a real source. When it matters, make me search and cite rather than recall, and have me run actual math in code rather than predicting the answer.

I’m sycophantic by default. I lean toward agreeing with you and telling you your idea is good. For someone who wants honest pushback, that’s a bug. You have to explicitly tell me to be blunt, or I’ll soften. If you ever feel like I’m flattering a draft, I probably am — call it out.

I drift toward generic when you don’t push. Left alone I’ll “average” toward the median answer. The dark editorial aesthetic, your voice, your register — I hold those when you give me the spec, but I don’t reach for them on my own. I over-hedge and over-format unless told otherwise, and on very long documents, I can quietly miss things.

 How to get more out of me

A few concrete shifts. Use me earlier — at the thinking stage, not just execution. Bring me a half-formed thesis and let me poke at it before you’ve committed. Set up reusable instructions for the recurring stuff (morning reads format, transcript speaker conventions, your house style) so you’re not re-specifying every time.

“Red-team” published arguments before they go out: paste the draft and say “find what’s wrong, where will a smart critic attack this.” And separate the two modes explicitly — “draft this” versus “verify this” — because I’m great at the first and need supervision on the second.

The one-line version: use me to transform, structure, and stress-test, and never to be the system of record for a fact. Want me to set up a couple of reusable prompts for your standing workflows?

Barry: Hold off on the reusable prompts layer for now, and stay with this line of discussion. What kind of new capabilities do you have coming online in the near future, and when? What should be thinking about in terms of best using your strengths?

Claude: Straight answer first: I can’t see Anthropic’s internal roadmap, so I won’t hand you a dated list of unreleased features — that’s precisely the confabulation trap I warned you about, and it’d be worse coming from me right after that warning. What I can do is tell you what’s actually shipped in the gap between my training cutoff and today, because a lot of it is directly relevant to you and you may not be using it yet. Some of it reads less like “near future” and more like “already here, you just haven’t turned it on.” 2

Now the honest caveat that should shape how you use all of this. Even the finance-tuned setup scored about 64% on a finance agent benchmark — a failure rate that, as one writer put it, would get a human analyst tossed, and Anthropic’s own framing is that users should stay firmly in the loop, reviewing and approving Claude’s work before it goes to a client or gets filed. So the trajectory isn’t “Claude replaces the verification step.” It’s “Claude does more of the assembly, and your judgment becomes the scarce, valuable input.” 3

The work that gets more valuable is the editorial judgment, the thesis, the voice, and the fact-checking — the parts that are distinctly Barry Ritholtz and can’t be benchmarked.

So rather than chasing each feature, I’d position for the trend: get the recurring workflows specified tightly enough that they survive being handed to a more autonomous agent, and keep your hand firmly on the verification gate. The tooling will keep getting better at the first half on its own.

Barry: OK, final question – this one is about Co-Work and Code:

I had you [Perplexity] create an interactive Drake Equation dashboard – it was very cool, but it did not rely on changing data.  I tried some other dashboard ideas, ran test runs; it was not quite ready for prime time.

What can you create that auto-updates based on (weekly, monthly, quarterly) economic and (daily, weekly, monthly) market data?

I want to create economic & market dashboards that show various data series at a glance; that get updated automatically; I want to embed it onto WordPress so anyone [with that link] can see it; and I want to set specific indicators that create alerts based on specific (non-public) parameters that I set…

Claude: This is the right question, and the answer explains why your Drake dashboard and the other test runs felt stuck. It wasn’t a polish problem — it was structural. An artifact (the thing I generate in chat) is a self-contained front-end: no backend, no scheduler, no safe place to store an API key, and only a flaky ability to call outside data sources from the browser. So it can look great but it has nothing feeding it and nothing waking it up to refresh.

What you’re describing isn’t a fancier artifact; it’s a small data pipeline plus a hosted page. The good news is that Claude Code and Cowork are built to create exactly that — the artifact was just the wrong container.

Here’s the architecture that does everything on your list, and the one design decision that matters most for you.

Split it into two halves: a public dashboard and a private alert engine — fed by the same pipeline.

The pipeline is a scheduled job that runs on a cron (say, every weekday after market close, plus a monthly run for the slow economic series). Each run it pulls fresh data, computes your indicators, writes out a small JSON (JavaScript Object Notation) snapshot, and checks your alert thresholds.

The key move: your non-public parameters live inside this job, server-side, where no one can see them. The public dashboard never contains your thresholds — it just reads the pre-computed JSON snapshot and draws charts. So anyone embedding or viewing the WordPress page sees the data at a glance, while your alert logic and secret levels stay completely private and fire only to you. That separation is the thing most people get wrong: if the thresholds were in the front-end, “view source” would expose them instantly.

Mapping that to your four requirements:

Auto-updating comes from the cron, not the page. Economic series (CPI, unemployment, yield curve, etc.) refresh on their own monthly/quarterly cadence; market series refresh daily. The dashboard is fast because the heavy lifting already happened — it just loads a baked JSON.

Data sources. FRED (the St. Louis Fed’s API) is the gold standard for economic series — free, deep, and importantly, redistributable, which matters since you’re publishing publicly. Market data is the part to be careful with: free daily-close sources exist, but real-time exchange data carries licensing restrictions on public redistribution. For a public embed I’d stick to daily closes and clearly-licensed series; that sidesteps a headache you don’t want as a registered firm. (Worth having Code verify the current terms of whatever market provider you pick, rather than trusting my recall on free-tier limits.)

WordPress embed is the easy part: the dashboard gets hosted as a static page somewhere, and you drop an iframe (or Custom HTML block) on your WordPress page pointing at it. It renders for everyone, and it updates whenever the cron republishes the JSON — you never touch WordPress again.

Alerts fire from the scheduled job to wherever you want them — email, SMS, a Slack/Discord webhook. Your parameters stay in the job’s secret config.

The honest part about what I can and can’t do. Code can write all of this: the fetch scripts, your indicator math, the alert engine, the cron configuration, and the front-end charts — and test it in its sandbox. What it can’t do is be the server that runs forever. The scheduled job has to live somewhere. For your situation the cleanest path that requires no server to babysit is: a GitHub repo + GitHub Actions (free cron) running the pipeline, the JSON snapshot published to a free static host (GitHub Pages or Cloudflare Pages), API keys stored as encrypted Actions secrets, and alerts sent via an email/webhook service. You own three things — the data-provider accounts, where it’s hosted, and the secret thresholds — and Code builds and wires up everything else.

That’s a real, finishable project, not a someday thing. A sensible first build is a working vertical slice: pick three or four FRED series and one market series, stand up the pipeline + one chart + one alert end to end, confirm it refreshes and embeds, then expand the series list and indicators once the plumbing is proven.

One decision drives the stack: do you want to run this entirely on free hosted infrastructure you basically never log into (the GitHub Actions + Pages route above), or do you already have a server / Vercel / Cloudflare setup you’d rather use? Tell me which, and I’ll have Code scaffold the slice — pipeline, chart, alert, and the WordPress iframe snippet — so you can see it update on its own before we build it out.

`

Footnotes:

1. Claude: Quantitative scaffolding and building things. The interactive React viz work — variance drain, the Marks paradox — plays to a real strength: I can turn a concept into a working, calibrated visual artifact in one pass.

2. Claude: “The other shift worth knowing: the current model, Opus 4.8, was tuned in a direction that’s relevant to my biggest weakness for you. Anthropic says early testers report it’s more likely to flag uncertainties about its work and less likely to make unsupported claims, and it added user control over how much effort Claude puts into a task. That doesn’t eliminate confabulation, but it’s moving the right way — and the effort control is useful when you want a fast reformat versus a careful analysis.”

3. Claude: “That’s the real answer to “what should I be thinking about.” The direction of travel is clearly toward agentic, tool-connected work that lives inside the apps you already use and runs longer chains autonomously. What that rewards is unglamorous and durable: clean, well-organized inputs; your house conventions written down once so any agent applies them consistently; and a verification discipline you trust. The work that gets automated is the assembly and formatting you’re already handing me.”

The post Claude: What Are You Good At? appeared first on The Big Picture.

In this ‘hybrid’ video-based article, Michael Kitces and John Bowen, CEO and founder of CEG Worldwide and CEG Insights (formerly Spectrem Group), map out the four stages that entrepreneurs pass through as they grow and scale their business – and the new kinds of knowledge expertise that advisors need to develop to best help their business owner clients overcome obstacles along the way.

The first stage (Foundation for Freedom), centers on moving from scarcity to structure. At this point, owners are building stability, generating income, and coordinating basic financial infrastructure. This is where most traditional advisory services fit comfortably, including investment management, retirement plans, tax coordination, and basic succession discussions.

The second stage (Energy for Expansion), begins when entrepreneurs start converting their expertise into scalable intellectual property. Instead of relying entirely on personal effort, they begin building systems, processes, training, and thought leadership that can grow independently of the founder’s direct involvement. However, many businesses become trapped by "founder dependency," where the owner remains indispensable to operations and growth, which creates both valuation limitations and operational bottlenecks. In these stages, advisors are largely focused on collaborative and coordinating services – such as ensuring CPAs, attorneys, and other specialist all work together to help the business owner achieve their goals, connecting the business owner to IP attorneys to understand how to turn their experiential knowledge into valuable intellectual property, and perhaps even some coaching nudges to the business owner themselves about how to evolve the business to be less dependent on them as a path to expanding enterprise value.

If entrepreneurs can mold a business to run independently of themselves, then they enter the scaling-focused stages. The third stage (Collaboration and Multiplication), is where business evolve into self-managing teams that can make complex decisions independent of the owner. From the advisor perspective, expertise needs shift significantly at this stage, as the business owner focuses more on how to ensure good governance of a business they may be less involved with day-to-day, the implications of sharing equity across key leaders in the business (as it dilutes the business owner’s own stake), and beginning to position the business for an eventual exit and liquidity event.

Finally, at the most mature fourth stage (Exponential Impact), entrepreneurs move beyond wealth accumulation toward significance and long-term influence. With their financial security firmly established and financial goals broadly achieved, the focus shifts toward family governance, strategic philanthropy, next-generation development, and perhaps how to create meaningful impact during their lifetime (rather than simply leaving a legacy after death). Many ultra-high-net-worth entrepreneurs are less concerned with maximizing investment returns (growth for what purpose at that point?) and more focused on defining purpose, stewarding family relationships, and aligning capital with personal values. This is where advisors increasingly function as strategic coordinators and personal CFOs, helping clients integrate financial, family, business, and philanthropic decisions into a coherent vision for the future.

The broader implication for advisors is that serving affluent entrepreneurs effectively requires a shift away from traditional expertise of investments, insurance, and retirement planning, into a more integrated advisory role that delves into valuable "non-traditional" advice domains from how to really boost enterprise value, to governance of their wealth and managing their equity cap table, and ultimately how to better align their wealth with their values and legacy (when all their other goals have been satisfied), while increasingly serving as orchestrators of expertise amongst increasingly specialized legal and tax experts.

Ultimately, there is a wealth of opportunities for advisors who work with business owners, particularly those who can emphasize their role as a thought partner, coach, and coordinator, by developing the unique expertise capabilities that successful entrepreneurs need. Especially for financial advisors who want to work with business owners of larger enterprises, where "traditional" financial planning expertise becomes less relevant, and the truly unique planning needs of business owners arise!

Read More...

Podcasts

• Brian Adams talks with Frazer Rice, Director of Family Office Services at Next Capital Management, about what happens after trusts and estate plans are established. (podcasts.apple.com)
• Daniel Crosby talks with Jamie Hopkins is the chief wealth officer WSFS/Bryn Mawr Trust, and the CEO of Bryn Mawr Trust Advisors. (standarddeviationspod.com)
• Thomas Kopleman talks with Ben Lake about withdrawing funds during retirement. (youtube.com)

The biz

• Advisers are skeptical of Charles Schwab's ($SCHW) move into the HNW space. (riabiz.com)
• Altruist is adding some alts capabilities. (thinkadvisor.com)
• SpaceX employees want a deal on wealth management services. (finance.yahoo.com)

TradePMR

• Robinhood ($HOOD) is rapidly building out an in-house custody solution for TradePMR. (riabiz.com)
• Robinhood and TradePMR’s RIA referral program is live. (wealthmanagement.com)

Taxes

• The expanded QSBS is the hot new tax break. (bloomberg.com)
• ETFs are increasingly marketed as a way to defer taxes. (bloomberg.com)
• Links to white papers mentioned at Basis Northwest 2026. (taxalphainsider.com)

Advisers

• What you need to know about starting your own firm. (xyplanningnetwork.com)
• Clients don't want to feel judged. (advisorperspectives.com)
• How to respond to a client who uses ChatGPT to check you. (kitces.com)
• Are you a financial advisor? Sign up for the weekly Talking Wealth newsletter. (talkingwealthpod.com)
• The latest in advisortech news including 'Flourish launching a new mortgage lending platform.' (kitces.com)
• AI trading seems like a bad idea for most investors. (thedailyupside.com)

Research

• Just how activist are activist investors? (ft.com)
• Which analysts add the most value? (klementoninvesting.substack.com)
• How much of S&P 500 profits is being driven by investment gains? (substack.com)
• What happens when you properly measure the value of all firms in the U.S.? (papers.ssrn.com)
• What you can learn from what fund managers say about their own performance. (klementoninvesting.substack.com)
• Revisiting the performance of active mutual funds. (morningstar.com)
• The "lottery ticket effect" helps explain retail trading behavior. (alphaarchitect.com)
• A round-up of recent research on risk management including 'How Fear Beats Greed: The Impact of Positive and Negative Sentiment on Global Stock Markets.' (capitalspectator.com)
• How do prediction markets do in practice? (quantpedia.com)

On this special bonus episode — as Jalen Brunson and the New York Knicks take on Victory Wembanyama and the San Antonio Spurs in the NBA Finals — I speak with Joe McLean, managing partner of sports & entertainment at MAI Capital Management.

Known in NBA circles as being the “money whisperer”, Joe discusses how he pivoted from a playing career to managing money for high-profile celebrities and professional athletes.

A transcript of our conversation is available below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Masters in Business
Barry Ritholtz interviews Joe McLean, Managing Partner, MAI Capital Management  ·  Bloomberg Radio

00:00:16  Barry Ritholtz: This week on the podcast — what a fascinating conversation. Joe McLean, managing partner at MAI Capital, began his career as a professional and college basketball player before effectively becoming the money whisperer to pro athletes. He works with pretty much all major athletes across every sport: basketball, football, hockey, baseball, golf, NASCAR, you name it. Obviously, the average person listening to this doesn’t have a hundred-million-dollar contract, but a lot of the ideas, a lot of the rules, a lot of the ways of thinking about money with college athletes and professional athletes are surprisingly applicable to the average investor. The idea of saving a substantial percentage of your income in your first bucket — and once that’s covered, moving to a second bit of saving that you’re going to be able to live off in the future, that’s your growth and investing bucket — before you fund the entrepreneurial types of investment. I thought this conversation was fascinating, and I think you will too. With no further ado, my interview with MAI Capital’s Joe McLean. I’ve been looking forward to this for a while. I’ve got to start with your undergraduate years — four years at Arizona, Division One ball. What was the original career plan?

00:01:59  Joe McLean: A hundred percent to play professional basketball. From the time I was eight years old — Michael Jordan, Larry Bird posters on the wall. I remember when the ball was put in my hand. That’s all I wanted to do. I was super blessed. I grew up in Pittsburgh, Pennsylvania, and then my dad — T. Boone Pickens, in ’84, ’85 — he worked for Gulf Oil, and we either had to move to Houston or the San Francisco Bay Area. We chose the Bay Area, and it became Chevron. And I met a point guard named Jason Kidd, who was my high school point guard. So I was kind of blessed to be put in that position — the whole world would come watch him play. And I got seen by all the right people. My mom was the one who decided which college I was going to go to, because during the recruiting visit, Lute Olson and his wife, Bobbi, showed up, and my mom really connected with her. And she said, “That’s who you’re going to go play for. I want you to be in that environment.”

00:02:54  Barry Ritholtz: So we’ll get to Lute in a minute. Did you have height in high school? When did you shoot up?

00:03:00  Joe McLean: I did. I was always 6’3″, 6’4″, and then grew another two inches in college. But — full disclosure — I peaked around 19. I remember, I’m fast-forwarding here, but I was in an NBA pre-draft camp, and I was six-foot-six, I think it was. Ron Artest was right around the same height as me. And then we were standing in our underwear, and he extended his arms — I was in proportion, and he was not in proportion. I think he had a six-eleven wingspan. I was like, “I don’t know if I’m going to make it.”

00:03:32  Barry Ritholtz: So Lute Olson — Hall of Fame coach, multiple trips to the Final Four. You played all four years under him, averaging 10 points a game. Small forward — what was your position?

00:03:44  Joe McLean: Shooting guard, and I guarded the small forward and big-four positions. I had to learn very quickly how to hold onto a guard’s jersey, because everybody was getting much quicker, much faster than me.

00:03:55  Barry Ritholtz: And so you graduate college and you start playing pro in Europe. Where’d you play? What country?

00:04:02  Joe McLean: So you’d basically try out for an NBA team, then get cut, and then you had two decisions to make. One: go to the minor leagues, which is now the NBA G League. It was the CBA at the time. So you go to Bismarck, North Dakota. I lived there for a year, living in a Bismarck hotel and traveling by bus. And then I decided to go to Europe for the years after that. I played in 11 countries, because there are only two Americans per team, no binding contracts — you lose a couple games, they’ll rip up your contract and send you home. And so it’s a great way to see the world.

00:04:31  Barry Ritholtz: What countries did you play in?

00:04:32  Joe McLean: I played in Spain, Portugal, China, Australia, Cyprus. I moved to Ireland for a year to try to get dual citizenship, because then I wouldn’t be counted as one of those Americans. It’s the equivalent of probably Division Three basketball. I was sponsored by a pub, lived in a town called Ballina, which was 8,000 people, 84 pubs. We were sponsored by Longnecks. I made $300 a week, and I have family for life there. It was a great experience.

00:05:00  Barry Ritholtz: That sounds like a blast. So what was the moment when you realized, “Hey, maybe a pro career isn’t my future”? What was that come-to-Jesus moment?

00:05:11  Joe McLean: They were both on the court and off the court. The closest I ever got to the NBA was when they went on strike. The Sacramento Kings had the seventh pick in the draft. I lived in the Bay Area, and I knew they didn’t have any NBA players to work out their draft picks. So I called the scout and said, “Hey, I’ll bring my own lunch. You don’t have to pay me. I’ll just guard the guys you need to draft.” And I couldn’t believe it, but he said, “If you can be here next Tuesday, show up.” And so Tuesday turned into 22 straight days of workouts — I was literally working their draft picks out. They ended up taking Jason Williams. But I got to listen to everything they were looking for, and the process. And long story short, the 23rd day, nobody else was there but the coaches. And they said, “We’re working you out — today’s your day.” And I made it all the way through pre-draft, all the way through the final cut. I was getting on the bus to go to the very first NBA game, opening day, and I watched Oliver Miller walk past me in the locker room. And I was like, “Well, Oliver Miller’s not on our team.” And then I realized — no, he’s coming to take my spot. And so Rick Adelman looked at me, and his head went down, and I don’t even remember what he said. I just knew that it was over for me. That was as close as I was going to get — walking to the bus. And now I had to figure out what to do next.

00:06:32  Barry Ritholtz: So how do you get from working out with an NBA team to pivoting into finance? What was the factor that tipped you that way?

00:06:44  Joe McLean: I had no idea what to do. All my buddies at the time — this is 1999 — everyone I knew in the Bay Area was working for a dot-com company. Everything was dot-com at the time. So I did all my interviews, and I’d show up in a suit. I’d go to Oracle, I’d go to Pets.com — I think I did 50-plus interviews. And I’d show up in a suit, and everyone else was in flip-flops and t-shirts. And it’s like, this doesn’t feel right. I need structure. And so I started playing basketball for this club called the Olympic Club, and I met lawyers and accountants and financial-services people. And they pointed me in the direction to interview. I interviewed every financial-services company. A lot of the big ones — the Goldmans of the world — said, “Go get experience and come back.” And then I met an old former athlete who had had success at Franklin Templeton, and he said, “I’m going to give you a shot.” I’d had some experience investing in mutual funds with the money I made in Europe, but I didn’t really know what it was. And so I just said yes — because he looked like a coach to me. That was it. That was the only reason I got into financial services.

00:07:47  Barry Ritholtz: And how’d you do at Franklin Templeton? They’re a great shop — a trillion dollars. Jenny Johnson is the CEO.

00:07:54  Joe McLean: Honestly, the best company I’ve ever worked for. The transition for an athlete to do anything else is a very, very difficult thing, because the thing you have as an athlete is structure — you have a schedule, a sense of accountability, goals, a connection with a team. You have all of that. And the day you stop playing, you’re on an island. There is no schedule. There is no level of accountability. So what they gave me was — and I think you wrote about this in your first book — the first thing Jim Escobido told me, he was my manager at Franklin Templeton, he said, “You don’t know nothing about nothing. And the sooner you learn that, the sooner you’ll be curious and start having this level of intellectual curiosity.” I hold onto that every day. It’s one of the great gifts he gave me. And what I got to do at Franklin Templeton was spend six years in a car — I think I drove over 400,000 miles. As a wholesaler, all over the state of Pennsylvania, all over Arizona and Northern California — those were my regions — doing hundreds of rubber-chicken dinners. I wasn’t the advisor; I was working with the financial advisor. And I got to meet hundreds and hundreds of people going through different situations with their money. I learned from all these other people. It was an awesome experience.

00:09:14  Barry Ritholtz: So I want to roll back a moment. You described the structure of being an athlete, and you gave me six bullet points. They sound like they’d be useful for anything. Run through those bullet points again.

00:09:28  Joe McLean: So you have a sense of accountability. There’s a schedule, a structure. Every day you wake up knowing what the common goal is — both as an individual and the role you play. And there’s a level of expectation as to what you need to accomplish, not just in one day, but one month, six months down the line. You have the NCAA tournament, you have all these things going on that have longer-term goals, but you’ve got to have a day-to-day discipline to execute on that. When you transition, it’s all gone.

00:10:04  Barry Ritholtz: Well, that structure, that setup, sounds like it can be applied to any endeavor in life — any organization, especially where you’re working with other people.

00:10:15  Joe McLean: That’s right. And I see a little bit too much where younger people jump to become an entrepreneur. I get the premise — wanting to be an owner of everything you do, quickly. But there’s a level of foundation and humility that can be accomplished by going and seeking out another environment that provides those tools for you.

00:10:38  Barry Ritholtz: So you’re a former college player, a former almost-pro player. What did you learn shooting hoops that the CFP or CFA curriculum simply can’t teach?

00:10:54  Joe McLean: Perseverance. This is something I’m trying to teach my kids. I learned to fail and really enjoy it. For a while I was failing and not reflecting on why I failed. People use that term a lot — “failure’s a good thing.” It’s the best thing to have in my life. It’s not the failing part; it’s what you learn from failing that really is effective. And the idea that you’re willing to bet on yourself at all costs, no matter what. If you think about that as an athlete, the mindset is, “I’m willing to do whatever it takes. I’ll go broke to try to get this done.” I have been broke. “I’ll take as many risks as I possibly can take. I’ll fail, fail, fail.” Those are not necessarily great attributes as an investor, in terms of translating that mindset. So as an advisor, you have to appreciate where an athlete’s coming from, and actually make them aware of those traits — they’re great qualities to have success in your craft, but they may not be great qualities to have when you start thinking about financial advice and investing.

00:11:59  Barry Ritholtz: So let’s talk a little bit about athletes as clients. You somewhat famously won’t take on a new client if they don’t save at least 60% of their basketball earnings. I’m curious — how’d you come up with that rule? How many potential clients turn you down? How many clients do you have to turn down? Tell us a little bit about the genesis of that. It seems to make sense. What’s the average NBA career — seven years, something like that?

00:12:30  Joe McLean: A little bit less than that, probably.

00:12:31  Barry Ritholtz: All right, so it makes sense. Tell us where this rule came from.

00:12:36  Joe McLean: It came from learning from my early mistakes as an advisor. I was willing to take anybody as a client. That’s the one thing, if I looked back, I wouldn’t have done. But you’re building a business, you try to get revenue, and that happens — everybody does it. How I came up with the measurement was a young person saying, “I want to be a millionaire.” He had an NBA contract — it was a three-year deal. And I said, “All right, well, when do you want to be a millionaire? Because here’s the money you’re going to make, here’s the taxes you’re going to pay. You can actually make that choice as to when you want to log into your account and see a million dollars.” And he’s like, “Well, what do you mean?” I said, “Well, if you save 30%, it’s going to be May 1st of 2028 — that’s when you’re going to have a million dollars.” He goes, “Well, I don’t want to wait that long.” I said, “Okay. Well, what if you did 40%? What if you did 60%?” And so what I realized is that using fear is not a great motivator for young people to make decisions. Putting it around a milestone, or a level of respect that they want to attain, does. And so for me, that became the parameter: if you want to become a client, and we want a relationship built on mutual respect, then there are some things I’m going to require. And for me, it was 60 cents of every net dollar that they earn.

00:13:57  Barry Ritholtz: After tax, after agents, after all that stuff.

00:13:59  Joe McLean: Yeah. And then on the second deal, it goes to 70%. Third deal, it’s 80 to 85%. And what we realized is we had clients talking in the locker room about how much they’re saving. Eventually — it’s messy — but about how much they’re saving. And then we would show a scoreboard report: “Hey, so-and-so saved 92% last year; you saved 74.” And he’s like, “I don’t believe it.” And then they’re texting back and forth, and it begins this dialogue. And it was awesome. It sounds strenuous, and it’s easier said than done now, when you see the level of the contracts and how much money is going in and out of someone’s life on a daily basis.

00:14:35  Barry Ritholtz: This is the exact opposite of the 30 for 30, right — the Sports Illustrated story. Eighty percent of NFL players, 70% of NBA players, subsequently file bankruptcy. Crazy numbers. How significant is that in your mind? It sounds like that sort of fearful threat doesn’t really get the job done.

00:15:05  Joe McLean: It doesn’t. If I’m talking to a 19-, 20-year-old, and I say, “You know what, three years from now, if the next number-one draft pick walks into the locker room and they walk directly to your locker — because everybody knows that you handle your business on the court and you handle your business off the court, and you’re somebody who’s respected in both the business community and the community around the team you play in.” Because there are going to be pros in that locker room, and there are going to be knuckleheads. And if you don’t know who the knucklehead is, I promise, it’s probably you. So what we want to do is teach you the traits to become that person — where someone wants to walk directly to your locker and ask questions. That versus showing them statistics of going broke. Most young people are going to be like, “I’m one in a million. That’s not going to be me.” And the reason a lot of them do go broke still is — not many athletes retire with $10 million, $15 million, $20 million. But they have significant burn rates of three, four million dollars. And so do the math. In five years, it’s gone.

00:16:12  Barry Ritholtz: Divorces are expensive. Child support is expensive. There are a lot of friends with business plans — that could be an expensive can’t-miss. By the way, everybody in that locker room probably, statistically, is one in a million. How many people play in the NBA?

00:16:31  Joe McLean: Less than 400.

00:16:32  Barry Ritholtz: All right. Just 350 million people, almost by definition 350 people are one in a million. It’s kind of amazing. The other thing you have your athletes do is try to save two years of cash. That’s a quote of yours: “Athletes need two years of cash as a buffer.” How do you sell that idea to someone who just signed an eight-figure, multi-year deal?

00:16:59  Joe McLean: Well, you get a chance to show — especially in the early days — the rules evolve over time, once someone has shown their level of professionalism with their money. So early days, there’s that three-bucket strategy I’ve always put in place: that safety-and-security bucket you’re referencing. But that’s the first time someone’s learning what an NBA or NFL or MLB contract looks like. Like, “Here’s the deal I just signed — but what are all these red numbers that go through it? Who’s FICA?” and all these terms. And they see what a $10 million contract really is. It’s much less than —

00:17:35  Barry Ritholtz: Ten million.

00:17:36  Joe McLean: It’s much, much, much less. And then in the NBA there’s another tax — it’s like a jock tax — that they may or may not get back, based on basketball-related income, which is another 10% attached to these things.

00:17:45  Barry Ritholtz: What is the 10% jock tax?

00:17:47  Joe McLean: So there’s a tax — everybody in the NBA gets it; it’s up to 10% — and it’s related to the agreement the players have with the owners, that they have to get up to 49% of a number, of a revenue. And if the owners don’t get that number, then they get to dip into the cookie jar and take that basketball-related income and put it in their pocket. Most of the time, the players get 65% of that back. But in our budget, we budget as if you’re never going to get it back. So it’s a nice cherry on top at the end of the year. But when you think about paying taxes in every single state, and sometimes city, that they play in — whether it’s the New York Knicks or the Golden State Warriors, you’re paying a much higher level of tax. So going through that whole experience for the very first time is —

00:18:34  Barry Ritholtz: Well, the Toronto Raptors — even higher.

00:18:36  Joe McLean: Exactly. It’s startling. So it’s helping someone pre-experience what it’s going to look like and feel like to get paid for the next three years. Because we’ve seen the movie over and over. I’m just trying to show you the movie. Your story is going to be different from everybody else’s, but there’s going to be common ground. It’s just for you to pre-experience and understand it, and then to put your own goals and milestones on top of that.

00:19:00  Barry Ritholtz: Explain the three buckets. What are the three buckets you discuss?

00:19:03  Joe McLean: So there’s the safety-and-security bucket, and that typically is your cash to support at least 24 months. Because in the NFL, you may get paid just during the season; Major League Baseball, maybe six months; the NBA could be over a 12-month period. Everyone’s cash flow is different. So I want two years of seasonality to support your lifestyle inside the safety-and-security bucket. If you buy a home, it has to be necessary — a home where you want to live, not necessarily where you play. Quite often someone gets traded multiple times, they’ve bought homes in multiple cities, and now you’re trying to sell a house in Milwaukee when you’re playing in Dallas but you really live in Florida. So just put the house you want to live in long-term in the safety-and-security bucket. And typically we’ll buy that with no debt, because I don’t know when the next contract’s going to come once you’ve filled that bucket. The second bucket is the growth bucket. This is where you start to understand how money works for you. In theory, all I want young people to understand is: if you get 24 paychecks from the NBA over a 12-month period, our goal by the end of your contract is to find 24 other ways for you to get compensated. It could be in bonds, it could be dividends, it could be real estate over time. However, inside the growth bucket, for the first contract of their life, 85% of it has to be liquid. It has to be liquid. Because quite often, when I was researching young athletes, they were far too illiquid. They were investing in private deals. They didn’t know the value of it. It wasn’t supporting their lifestyle. And then all of a sudden they didn’t have the safety-and-security bucket, and they had to sell everything — and most of it wasn’t worth anything. So it’s no genius asset-allocation strategy from Yale that I came up with. That’s just life. And having someone prove to us over time that they know how to save and they’re responsible with money — so they can reserve the right for the third bucket, which is the dream-and-entrepreneurial bucket.

00:21:01  Barry Ritholtz: So what goes into that?

00:21:02  Joe McLean: That could be setting up a business. I throw venture capital and private equity over there — early-stage opportunities. It could be the second car — I don’t care what kind of car you get. I don’t care what kind of watch you buy — you just get one. If you want another great car, sell the other one and get the next one. But that extra bucket — it could be 5 to 10% of your life that sits over there. Now, when you put a safety-and-security bucket, a growth bucket, and a dream bucket in front of a young person, which one do you think they want to fill first?

00:21:41  Barry Ritholtz: Well, the dream bucket, of course.

00:21:42  Joe McLean: We all do, right?

00:21:43  Barry Ritholtz: That’s the fun one.

00:21:45  Joe McLean: So the discipline is, you’ve got to fill the first two before you reserve the right to be an entrepreneur or to fulfill that dream. Because part of what we talk about a lot is: live the dream that you’re playing right now. Don’t try to go out and establish all these other things and crafts. Focus on what you do well — because this, as you said, seven years or less, could be the greatest earning capacity in your entire life right now.

00:22:10  Barry Ritholtz: Really, really fascinating. Coming up, we continue our conversation with Joe McLean, discussing why he launched a boutique asset manager for athletes. I’m Barry Ritholtz, and you’re listening to Masters in Business on Bloomberg Radio.

00:22:41  Barry Ritholtz: My extra-special guest today is Joe McLean. He is known as the money whisperer to professional athletes. Let’s talk a little bit about how you got that title. You were a wholesaler for mutual funds at Franklin Templeton. What led you to launch a boutique asset-management shop catering to star and professional athletes?

00:23:04  Joe McLean: Well, I went on from wholesaling, and then I went to two other companies — Lord Abbett, and then AllianceBernstein. And AllianceBernstein at the time launched an Advisor Institute. There were 300 advisors at Bernstein who were bringing in a hundred-plus million in assets every year — a highly dedicated and focused team. So I went out and trained financial advisors on how to build a business and work with centers of influence. And I met another mentor in my life — a former minister who’d gotten a master’s in neuro-linguistic programming and understood how to communicate effectively with people. I spent two years on the road doing that, and then eventually became an advisor at Bernstein. A bunch of old teammates — I was less than a year into my financial-advisory career — came up to me when they were getting ready to retire. And they said, “I’ve been watching you. I think you’re in that money thing. Can you look at my stuff?”

00:24:05  Barry Ritholtz: That money thing.

00:24:06  Joe McLean: Yeah.

00:24:07  Barry Ritholtz: “You do that money thing,” right?

00:24:08  Joe McLean: That’s what they said. And these were 32-year-olds. Some had made over a hundred million dollars. I had not grown up with any wealth, but now I’m 15 years into the career and have learned from other families — and obviously the companies that taught me things, and being on the road — and I realized: no one has ever sat you down and walked through the level of planning that would be required for this level of wealth, to prepare you at age 32 to live off this money.

00:24:37  Barry Ritholtz: That’s astonishing.

00:24:38  Joe McLean: There was no class we ever took in college. And even if there was a class, you probably wouldn’t have paid that much attention to personal finance and investing. And sports and wealth was not something anybody was really interested in. I heard it from other firms who said, “I don’t want to get involved with athletes. It’s just babysitting.” Back then there were no sports-and-entertainment divisions at wealth-management firms. Nobody was involved. So I went to Bernstein and said, “This is it. This is where I want to be. I’m going to focus the whole rest of my life on this. I’m going to be a coach, but do it in finance.” And it was something they were open to, but not interested in — because it was way beyond investing. It was personal finance and cash flow and budgeting and creating a protected circle. Because there are so many things that could touch someone’s money. It could be the car guy, the shoe guy, the jeweler, the family — that all needed to be controlled, and put the scoreboard up financially as to what’s required to have success.

00:25:42  Barry Ritholtz: That sounds a lot like a traditional family office.

00:25:46  Joe McLean: I had no idea what a family office was at that time, but I was identifying that this was the need. So long story short, it couldn’t be done at a traditional wealth-management business. It had to be an RIA, at the time, for me. And so that was the move to start Intersect, which was heavily focused on personal finance and family office. And I was still learning the game, too. The contracts weren’t as big as they are today. But I remember being in the 2011 draft, and I think I was competing against two other financial advisors — maybe. Nobody was really interested in this industry.

00:26:25  Barry Ritholtz: That’s unbelievable to me. So at 11 people, you’re managing $1.7 billion for about 50 clients. How did that grow? And when did you start to hear from people thinking, “Hey, this might be a good tuck-in into a bigger shop”?

00:26:42  Joe McLean: That happened all in less than seven years. In sports, I realized a couple of things. One, I didn’t want a client base that was only athletes. You had to pass the test of a 50-year-old business owner who was going to ask more sophisticated questions, who was going to challenge you to make sure you created a process, a plan, and a portfolio sophisticated enough to support his or her needs. So this became a mutual-admiration club of entrepreneurs, business owners, and athletes. A baseball player wants to talk to an NBA player and a golfer, and so on. It was a great community built in there. And that’s how all these other sports came about. I was a classic case of high growth trying to keep up with operations. So I was constantly taking my own capital and reinvesting, trying to stay up with the support. And that’s when I had someone come up to me — I was trying to find an investor just to help me out, because I couldn’t support it myself. And that’s when I was introduced to MAI, which, unbeknownst to me, was a very quietly built family office for athletes, dating back to Arnold Palmer — Mark McCormack were the first owners and clients of the business.

00:27:59  Barry Ritholtz: Client-owners. That’s pretty savvy.

00:28:01  Joe McLean: Yeah. Mark McCormack was, for sure, the OG in the sports-agency world. His focus was to take an athlete to an entrepreneur, to an owner of everything they did. And famously, he got Arnold Palmer — Palmer did handshake deals on just about everything he ever did. He had a handshake deal with Wilson, and Mark saw the value of what Palmer was doing for that company and was able to renegotiate it. Most people don’t. Wilson was actually a meatpacking company way back when. A banker came in and saw that it was undervalued, because they weren’t utilizing the entire cow. And they started taking the hides and making footballs and basketballs. And they extracted extraordinary value out of that. It eventually became a sporting-goods and equipment company. So they were very savvy when they did that deal with Arnold Palmer, and McCormack came in and unlocked all kinds of value for Palmer. And so when you look at athletes now, they talk about becoming an owner of everything they do — this is something they did. This is 1973, ’74.

00:29:11  Barry Ritholtz: I kind of remember Arnold Palmer designing golf courses and putting his name on them and getting fairly well compensated for that. Am I recalling that correctly?

00:29:20  Joe McLean: He did that and a lot more — the royalty rights, the drink. And that umbrella — that iconic logo he has. If you’re in the golf world, you know that’s Arnold Palmer. He was the one who famously told every athlete, “If you’re going to put your signature on something, make sure people can recognize who you are.” And I know Peyton Manning and others have taken on that banner. He was a trailblazer, very early days. And his level of wealth was extraordinary — it would rival the likes of Stephen Curry and Kevin Durant as you see today.

00:29:55  Barry Ritholtz: And the other thing about golfers — the successful ones have a much longer career life, and then they start playing in the seniors for another 20 years.

00:30:05  Joe McLean: Yeah. There’s nothing like golf — it has a completely different level of financial planning, because there are no guaranteed contracts. If you win a tournament, yes, you may get a year or two of your tour card, but if you don’t, and you’re missing cuts, then there’s no money. It’s one of the most difficult sports to survive. The successful ones, obviously, as you said, could have a 30-, 40-, 50-year career.

00:30:30  Barry Ritholtz: But it’s a winner-take-all.

00:30:33  Joe McLean: It is. It’s very difficult.

00:30:33  Barry Ritholtz: So MAI acquires Intersect. After the acquisition, you go from founder-CEO to managing partner, running the multifamily office inside this larger platform. You spent a long time building up culture and trust. How do you maintain that when you’re tucked into a larger shop and a very different brand?

00:30:59  Joe McLean: The good thing was — and it took a long time for me to figure it out before I made a decision — the firm was a service-oriented business. It wasn’t a business that was providing services; it was service-oriented. That was very different for me, because I didn’t come in with any high level of business prowess. I was a service provider. I still am. I think there’s nothing beneath me in terms of what’s required to serve a client and the people around them. And they had the same mindset. It was actually, at the time, a loss leader for the IMG business. IMG would charge their 20, 30%, and they would have MAI — which was McCormack Advisors International, the acronym — as a service center to do your taxes, your bills, and build your portfolios. So they had the same mindset I had. But there was another level, as you know, of acquisitions and really growing. We had gone from $12 billion to $80-plus billion in assets. So it is difficult to maintain the culture. But it’s a very independent, fiduciary-minded world that was aligned with me. I think the evolution of where the advisors and the clients are going now is this level of partnership — because that’s what I was experiencing in my boutique. It’s not a client-advisor or advisor-client relationship; it’s a partnership. Young people don’t want to be told what to do. They want to be given information to make better decisions — but don’t tell me what to do. So I’ve learned a lot in that culture. That’s where, now, the term “family office” is everywhere. That’s how you’ve got to build it going forward.

00:32:34  Barry Ritholtz: So I love the distinction between simply managing money — this “money thing” your friend asked you about — versus managing wealth and all the related services. Is that effectively the evolution you’ve gone through, from Intersect to MAI?

00:32:55  Joe McLean: A little bit. I would say MAI and the rest of the industry are coming around to how we’ve serviced athletes — and not just because they were athletes, but because they were young people. The industry is trying to turn toward how to service the next generation of wealth, and this transfer of wealth that’s happening from the baby boomers. If you look at the history of advice, it was really built on the backs of the baby boomers. I always look at 1981 — I think there were six or 700 mutual funds to choose from. And all of a sudden it was this hockey stick. It just exploded. And what happened? The baby boomers were turning 35, which tends to be the age where you finally have some money to spend and invest. And then you look at this explosion, and the value proposition to that marketplace was simply access — access to the capital markets. So I always tell young people: if you ever watched The Pursuit of Happyness, the great movie — Will Smith cold-calling — he was just giving you access. And then it became about alpha, generating — “How is my black-box research better than this person’s?” And then it became about spending and income strategies in retirement — that was the third one, all satisfying to baby boomers. Now the value proposition has flipped. It’s access, not to the publics, but to the privates. And it’s spending and income, not in your retirement, but in your entire life — managing that lifestyle. These are things we’ve done from the very beginning, because there never would have been a dollar to invest if I didn’t control the cash flow.

00:34:27  Barry Ritholtz: Really, really fascinating. You talk about dealing with younger people, especially athletes — we’ll get to college athletes in a little bit. How do you get a young person to understand that owner mentality, both from a risk perspective and a compounding perspective — especially today, when they’re always connected, there’s so much going on, so many speculative distractions? How do you get them to think like an owner, and not like a simple player, day by day?

00:35:04  Joe McLean: Day by day, really.

00:35:08  Barry Ritholtz: It’s a long game.

00:35:09  Joe McLean: There’s no level of putting a Monte Carlo analysis in front of someone and showing them 20, 30, 40 years out what the compounding effect could be. It looks nice, but there are behaviors and discipline that have to be created day by day, month by month, over time. But if you gamify it, it works. That’s the aspect of putting the scoreboard up — are you winning or losing each month? And the one thing — if you look at contracts today in sports and how big they are — as you know, with anything, with great abundance typically comes less discipline. You see a lot of people with great talent, but they don’t necessarily work that hard. But if you work hard and you have talent — tough to beat. It’s almost impossible to beat. And so that became my investment philosophy, even with young people or old people. When you think about the laws of physics versus the laws of finance — think about this abundance. The laws of physics say, I’m trying to cross the creek, there’s a log I’m going to walk on. If I take my eye off that log, there’s instant feedback — I’m going to fall in the water. The laws of finance say, if I have an abundance of money going out of my life, and I take my eye off my money, nothing happens. There’s no immediate feedback. American Express doesn’t call and say, “Hey, you just spent $55,000 this month — slow down.” No — they’re giving you more benefits. The laws of finance give you no immediate feedback. So the philosophy has to be creating a standard of what you’re going to focus on in the future. It could be a month from now — let’s just win this month, and then let’s win the next six months. And all of a sudden, now we’re winning for years. But until you become aware of that, most people don’t have success with it.

00:37:12  Barry Ritholtz: Fascinating stuff. Coming up, we continue our conversation with Joe McLean, managing partner at MAI Capital, discussing what it’s like to advise athletes and entertainers on their finances. I’m Barry Ritholtz, and you’re listening to Masters in Business on Bloomberg Radio.

00:37:43  Barry Ritholtz: My extra-special guest is Joe McLean, the managing partner at MAI Capital, where he has helped build not only the firm’s family-office group but its sports-and-entertainment division, serving hundreds of professional athletes and entertainers. So that sounds like a very fascinating group of people to work with. I want to start by thinking about what’s going on at the college level: name, image, and likeness. This has become a giant business. Suddenly you have 17- and 18-year-old phenoms with potentially seven-figure contracts. What’s it like having a conversation with a suddenly wealthy 18-year-old?

00:38:36  Joe McLean: And by the way, it’s in high school now, too — people are getting sponsorships in high school. So it’s a —

00:38:42  Barry Ritholtz: A 16-year-old. Even worse.

00:38:45  Joe McLean: You know what’s interesting — I was blessed with four years of Coach Lute Olson at the University of Arizona, and an extraordinary network of alumni and teammates I got to know, or who were also coached by him. So I see the benefit of staying for four years — not jumping around school to school. At the same time, I’m trying not to sound like I’m 52 years old and say, “Back in the good old days, this is what we did,” because we weren’t getting contracts offered to us for $1.4 million. I just looked at — there are research services out there for each of these sports — I looked at one for a player who averaged 5.6 points a game this year. But they’re projected to have success, and they’re going to get $1.8 million next year to go play as a sophomore in college. And that’s extraordinary. So how do you pass up going to another school for those types of things? It’s really getting them to sit down and think about some things that are important besides money: their college experience, who’s the coach you’re going to be playing for, does that match the style you think you could have success in? Then, outside of that, the financial advice that’s required — “Hey, you’re now a 1099 contractor. There are no taxes taken out of these deals.” So you can’t just spend a hundred percent of it — you owe money to the government. And that becomes the whole lesson of gross versus net, and setting up some success. The good news is they’re learning these life lessons before they become a pro. Because what we also remind them is that every NBA, NFL scout is watching how you’re reacting to this money. If you get a million dollars and you go buy a Ferrari — which happens — they’re going to put that on their board: this is someone who may not be responsible when we give them $10 million. So they’re getting a window into the human being, as to how they may react once they turn pro. These are all conversations we’re having much, much earlier. But I think it could be a good thing long-term. I know, as a college sports fan — everybody says, “I don’t like these portals,” and I agree with them. But as a young person with opportunities, they’re going to be smarter, they’re going to want to learn faster, and there will be more successful outcomes than less.

00:41:08  Barry Ritholtz: That’s really fascinating. The obvious things that are potential minefields — they seem to be getting good advice and avoiding them. And it sounds like a lot of the college athletes getting big paydays are making better decisions than poor ones. Is that your experience?

00:41:30  Joe McLean: I think so. And by the way, I think 90% of these NILs are probably a hundred thousand dollars or less. They’re much smaller deals — by the hundreds. It’s reminding them — if they don’t have a base around them, that professional locker room we talk about — first and foremost, the number-one priority is to be a great teammate. Because we’ve seen the scenarios where the quarterback makes $2 million and is disrespectful in the locker room, and now all of a sudden nobody’s blocking for you. That will happen.

00:42:06  Barry Ritholtz: We saw it in the Super Bowl this year.

00:42:07  Joe McLean: Exactly. So if you don’t think through those types of things and be aware of it — maybe you want to contribute to that community and create a donor-advised fund with some of this money, and give it away, and bring awareness to what your brand is. Because your brand really is not what your social followers are. It’s being a great teammate, a great human being, responsible. You can have all these extraordinary experiences, say, in the NCAA tournament, but if you’re a knucklehead off the court or off the field, there are going to be consequences.

00:42:42  Barry Ritholtz: So let’s now move into the pros. But we’re not talking about 52-year-olds in basketball — you’re 23, 24, 25, early in your career. I’m curious about a couple of things. The first: you have a day like last week, where the market’s melting down. A 25-year-old guy in the first year of his second contract calls up and says, “Hey, are we okay?” How do you manage clients who are perhaps a little freaked out by the news flow?

00:43:16  Joe McLean: Over time, for me, the benefit has been introducing them to other people besides myself — first and foremost, other professionals in the markets and other asset classes, who they can get on the phone with and understand what the facts of the case are versus the noise around it. And typically every scoreboard we have is projected out through their entire contract. So what are the things we can control versus the things we can’t control? I always go back to that. Yes, the market’s down — let’s say it’s down 10%. What are the things we can control right now? We can control our spending, our decision-making, and our attitude. So that may be an opportunity — let’s look at our spending; maybe we dial it back so we want to invest more over time. It’s opportunistic. These are all very rational things that, as you know, most humans become very irrational about. And the more I can get someone to talk about their emotions, the more they move to a rational state. So it’s just talking out loud — let’s talk through this. A lot of these athletes, over the last couple of years, really haven’t been through a major market.

00:44:23  Barry Ritholtz: Fifteen years of bull market.

00:44:25  Joe McLean: When it’s been really good. I remember, early days, this happened, and I had one player liquidate all their 529 plans because the market was down 15% — and that was, obviously, one of the mistakes, the consequences of that. But if you don’t go through it… I was a benefactor of losing all my hard-earned money in Europe in 2000. I was investing in mutual funds at $10 that went to a hundred dollars in these biotech funds, and then March of 2000, everything went to zero. So it was a lesson I learned early — not to have concentrated all in one asset class. So most of the clients are fairly diversified.

00:45:11  Barry Ritholtz: So let’s hold the 23-, 24-year-old aside and talk about a 25-, 26-year-old with a max contract — their second contract. You don’t think of a 26-year-old as a potential family-office client, but at that level of income, that level of wealth, it kind of makes sense. Is this the right model for those athletes, for those professionals?

00:45:41  Joe McLean: A hundred percent. So if you think about what you’re describing — a 25-, 26-year-old on a max contract is probably making over $40 million a year. Let’s talk through a couple of things that are happening. It’s a guaranteed contract if you’re in basketball or baseball, even hockey to that extent — but it’s not guaranteed for death.

00:46:04  Barry Ritholtz: But it is for injury.

00:46:05  Joe McLean: It is for injury, but not for death. So there’s life-insurance planning involved, where both the team is trying to get coverage on that person — for their first $30 million — and then you’re trying to get coverage. And if you have big endorsements, the Coca-Colas and Gatorades are all trying to get coverage on you as well, to protect theirs. So there’s a level of sophistication they’ve got to start thinking through from a risk-management standpoint. Again, back to the three buckets — they still remain for the rest of their life, so you’ve got to keep filling them. But now it gets complicated. What’s the goal here with this money? Is it just to save it and sit on it? Or now they’re getting access to really interesting opportunities — they want to maybe own a team someday. So this is the —

00:46:55  Barry Ritholtz: Third bucket.

00:46:55  Joe McLean: Right. This is the entrepreneurial one, where you’ve got to keep filling the first two and always know what it costs to be you. That’s always January 1st — did you know what it costs to be you? And how do we make it cost a little less to be you, if we can be smart with some of the savings in all areas? So what do we want it to cost to be you when this contract’s over? Again, back to that burn rate — how much you’re going to spend in retirement, because I’m assuming you’re never getting another deal. So is it $2 million a year? Is it a million and a half? What’s the number we think you could live comfortably on? And obviously, when you’re 35 years old, this money has to last much, much longer. So just going through that level of planning, and giving them information so they can make better choices. But that is when this entrepreneurial bucket really kicks in. They’ve established a brand as a great player — performance is the number-one factor of their success financially — however, now there’s an opportunity to develop something that could be sustainable for 30, 40 years as an entrepreneur. And that’s where we start identifying what philosophy they want to have in that sector.

00:48:02  Barry Ritholtz: So you mentioned death or injury. I’m curious about your take on the most — or the least — appreciated risks on a modern team roster. Is it injuries? Is it lifestyle creep? Is it that entourage that could be a bad influence? “Deal flow’s in the DMs” is a line I saw that cracked me up. What do you think is just bad mojo that potentially derails a client?

00:48:35  Joe McLean: Well, a couple of things. You mentioned risk and injury — you cannot avoid this. There is a way to protect yourself over time. At this point, at this level of wealth, at the size of these contracts, you have to have your own doctors, your own trainers. You have to get information that comes directly to you, not through the team to you.

00:48:55  Barry Ritholtz: So we’re talking nutritionists, trainers, physical therapists, massage therapists — straight down the line.

00:49:02  Joe McLean: And they all have to report to the client, not to the team. The team has these people, and they’re great people, but they work for the team. We’ve had situations where clients got injections, and it killed cartilage in their hip, and it eroded over time. And all of a sudden they’re in a situation where they may not get the next deal. So at a max contract, someone’s going to be spending somewhere between $400,000 and a million dollars a year into their body.

00:49:32  Barry Ritholtz: Wow, that’s unbelievable.

00:49:33  Joe McLean: Yeah. And if you think about the benefit of that — players are playing to 35, 40 and beyond.

00:49:40  Barry Ritholtz: I look at Tom Brady — no business playing into his forties, and playing fairly well. That has to be the result of all that self-investment.

00:49:50  Joe McLean: No doubt. There’s a track record there that others can turn to — LeBron James being one of them. They see the value in that investment, and they also see the risk of not investing in it. I’ve had these discussions on the first contract, when I look at — because I see the personal P&L on everybody when we’re paying all their bills — and I could see, “Are we really still going to McDonald’s? You’re crushing fast food constantly.”

00:50:19  Barry Ritholtz: But at 23, aren’t you kind of immortal? How do you get someone who’s been the biggest, fastest, strongest guy everywhere he went to realize, “Hey, this is a rusty bag of bolts if you don’t take care of it”? How do you get a 22-year-old to understand you’re not immortal?

00:50:38  Joe McLean: You show them that if you’re in the NBA, and you’re a draft pick today, and you get to your fourth contract — assuming a 5% growth rate of the salary cap — you’ll have grossed a billion dollars in contract value.

00:50:54  Barry Ritholtz: Get out of here. That’s unbelievable.

00:50:56  Joe McLean: A billion dollars. Yeah. So what are the things you can do now to be around in your fourth deal? It obviously extends beyond being a good player.

00:51:05  Barry Ritholtz: That’s four-year deals or longer?

00:51:08  Joe McLean: Between three and four-year deals. So if you’re 21, by the time you’re 31, 33, depending on your contract cycle, you could have grossed a billion dollars. That’s where the Cooper Flaggs of the world are trending toward — Jalen Rose, Jayson Tatum — that’s where they’re trending.

00:51:26  Barry Ritholtz: Wow. I was courtside for the Lakers game against the Knicks last year. And what is LeBron — 38? He was, last year. He’s amazing — just a force of nature. And that doesn’t happen by dumb luck. That looks like a lot of work.

00:51:48  Joe McLean: My legs were tired in the fourth quarter when I was 21 years old.

00:51:52  Barry Ritholtz: It’s extraordinary what he was doing. He was faster than everybody out there, other than maybe one of the point guards. And he’s a monster — when he’s in the paint, you are not stepping in front, you’re not taking that charge. You’d wake up next Tuesday.

00:52:06  Joe McLean: The old-school guards, back in the day, would play their way into shape the first 20 games — because, lord knows what they did all summer. Athletes’ summers now are just as physical and difficult as the seasons, in terms of preparation.

00:52:21  Barry Ritholtz: That’s fascinating. There’s a quote of yours I really like: “The number-one trait of a great advisor is being willing to get fired.” Give us an example of what leads someone to get fired, when you’re delivering the cold, hard truth.

00:52:40  Joe McLean: Let me give you one where I almost got fired first. This was one of the most important clients in the history of my career. And I thought I was doing the right things — and I still, today, think I was, but I was doing it the wrong way. This was a situation where there were a bunch of knuckleheads surrounding the client. They were going to really affect that person’s brand off the court or field. And it was really starting to irritate me. So I decided to take it into my own hands and address it personally with them, with the friends and with the family members. I got into everyone’s face, and I was ready to take them down. Because when I look at doing trust planning for a client, I know who they love — that’s who’s in the trust, literally — and who we’re going to take care of financially, and the ones that are outside the circle. Most of them were outside the circle, and they were really affecting this individual. So I was going to try to take them out — but do it verbally. And so I addressed it, and all of a sudden I got called to a meeting with the client. And they came at me and said, “Don’t you ever come at my friends. If this ever happens again, we’re never going to work together.” And for me, this was the first time we were having some conflict, and I was ready for it. I was excited to have this conversation — like, let’s get real about what’s happening. And even when you don’t know it’s happening, the person was shutting down more and more. They weren’t ready for conflict. So if you’re going to say a great advisor is willing to get fired, you also have to prepare your clients for conflict — healthy conflict. I realized I never prepared to have this conversation with someone where we’re going to be brutally honest with each other. So the two traits I found you have to have to have great professional conflict: you have to have mutual respect, and you have to have compromise, and you have to have these conversations in advance. So now I have them in advance: “Hey, there are going to be times when we disagree, and I’m never going to blow smoke. You’ve got tons of yes-people in your life. But I’m never going to disrespect you, so don’t disrespect me. And at some point I’m going to win, and sometimes you’re going to win, in terms of a level of compromise.” If I’d had that, I think this would have gone better. It did not — it went really bad. We were able to repair it over time. And I’ve had situations, unfortunately, where maybe I didn’t get the client early enough to create behaviors — gambling, mental health, all these aspects that are all over life and in the world. They’re all over sports, too. And there are just some people you can’t save. So those are some unfortunate situations where we did have to fire somebody.

00:55:37  Barry Ritholtz: So that raises a really interesting question. Everybody walks around with these devices, and these devices are everything from social media — which can be a minefield — to all the gambling apps. And even if you’re not touching DraftKings, between Kalshi and Polymarket, or Robinhood, you could speculate, gamble, just go down a rabbit hole. For someone with a lot of cash burning a hole in their pocket, this always-connected, always-on world could be really dangerous. What sort of advice are you giving clients who have these seven- and eight-figure contracts?

00:56:22  Joe McLean: Those are the ones where you use a little bit of fear, and start sharing some stories that have happened to others — potentially getting blackballed. Even investing in or betting on your own sport — just getting anywhere near attached to it — is something that could affect the growing wealth you could create over time. There’s a level where you can scare them with that. And for all of us — gambling and sports, and the amount of revenue — I don’t think it’s a great thing. It really isn’t.

00:56:55  Barry Ritholtz: No.

00:56:55  Joe McLean: It’s pretty awful. You have a whole generation of young, mostly males, that have become gambling problems, addicted to it.

00:57:00  Barry Ritholtz: Does fear really work in that — “Hey, you’re risking a billion dollars against fooling around with 10 or 20 thousand dollars”? Why? It doesn’t make any sense.

00:57:15  Joe McLean: The scarier ones are in Vegas. When you go to Vegas, or some of the other casinos, you learn for the very first time what a marker is. What Vegas created with markers is — there’s no exchange of money. You just sign your name. And inside that contract, it also says they can reserve the right to go into your bank account and take the funds if you don’t pay up. So as you can imagine, when there’s no exchange of funds and you just sign your name — that’s a rabbit hole you can go down. That’s disastrous.

00:57:48  Barry Ritholtz: There have been studies that people who spend cash versus credit cards — with a credit card you’re just swiping or tapping, it doesn’t feel like you’re spending money. When you’re counting out hundreds to buy a watch, or whatever, I can imagine the marker in Vegas has to be really dangerous.

00:58:05  Joe McLean: Yeah. Even to that point, we’ve had clients where we’ve decided to have them write every check — pay every single bill, so they feel it. So you send a checkbook — here it is. Now you have to sign it. You see exactly how much you’re paying for each of these transactions. It works.

00:58:21  Barry Ritholtz: I would imagine that’s effective. But that raises a really interesting question. The economics of being an elite athlete — you go back to the sixties and seventies, the top of the team roster really wasn’t making a lot of money. Now, across the whole industry, it’s big bucks, and the top is crazy big bucks. How has this changed the way you think about asset-allocation planning — looking at everything from safe assets, dividends, and bonds, to speculative venture capital and privates? How has the world of athletic finances changed over the course of your career?

00:59:04  Joe McLean: The first thing that’s changed the most is you have to be sophisticated from day one. If you think about when I was getting into the business, in 2009 and ’10, these contracts didn’t exist. I knew enough to get clients into mutual funds and get them to save. These contracts are very big, and they’re early, and they’re coming fast. So from a level of planning, and understanding how to build this — one of our lessons is, the next generation is watching. What are the decisions we can make now that set you up, not just for yourself but for the future? We’re not talking about going broke anymore. This is hundred-year money. So that level of estate planning exists for a 22- or 23-year-old now, which we never had before. I don’t think the asset allocation needs to change — it’s just that the entrepreneurial bucket will evolve over time. Getting someone with that founder mentality — I don’t know about you, but I love being a founder. Being a CEO is not as fun. I like having them say, “Be the CEO of your money.” Like, I want you to be the founder of your money. We don’t want the “shirtsleeves to shirtsleeves” metaphor that everybody talks about. Let’s think about that entrepreneurial bucket and where you think you could have great impact. Some of them may say, “I just want to be a coach. I just want to coach my high school team.” And I think that’s great.

01:00:31  Barry Ritholtz: Come out of the NBA to be a high school coach.

01:00:34  Joe McLean: Correct. And I think that would be an extraordinary gift back to the universe — as to your mindset and what you believe in and the give-back. It’s important to have something to fill your time. So having more meetings with people who are either executives or other coaches — whatever your aspect is — you have to start thinking, beginning with the end in mind. By the time you’re 25 years old, even though you may play until you’re 40, you can fall into that and make that transition — back to what we started with: the schedule, the predictability, the accountability. You have that professional locker room in life, established for that third bucket.

01:01:13  Barry Ritholtz: So I’m seeing more and more athletes getting involved across different sports. Michael Jordan now owns — or is an investor in — a NASCAR team, and we see other athletes buying British soccer teams. How do you think about cross-pollination from one sport to another?

01:01:37  Joe McLean: I think the common ground is just: be wary of your time. It’s very easy to look on social media and see someone owns three or four different teams — they own SailGP, they have a Formula One race team, they’re all limited partners in these things. It looks great. But just think about how you want to spend your time in retirement. Do you want to be spread out all over the world, having access to these things? Yes. But at the same time, you have an obligation to fulfill your time in these things. So part of it is: how do we simplify your life? I’m reading, now for the second time — and I’m still not good at it — a book called Essentialism. That’s the disciplined pursuit of less. I have a ton of user error in my life, where I help clients say no, but I say yes too much to doing other things. So we have to remind them: yes, you have a ton of access, but let’s be most careful of your time, and where you want to spend it. There are opportunities to own things, but to spread yourself out and be all over the world in these soccer teams — it sounds interesting, but I don’t think it’s effective.

01:02:58  Barry Ritholtz: So what do you think athlete investors are either not thinking about, or not talking about? What’s a blind spot that would be really useful for them to better understand, to have greater awareness of?

01:03:12  Joe McLean: Let me overgeneralize what’s happening in sports. We went from spending money on materialistic things to overinvesting in private things. It’s great that we’re talking about how much we’re saving, but it’s also, “I invested in this deal, and this deal, and this deal.” And as you know, no one really understands risk until they’re taking too much. At that point, you truly start evaluating what that means. So I don’t know if everybody understands yet, as an investor, that all these things we’re investing in privately — you don’t know how much it’s worth. That’s a significant blind spot for many — back to those mental traits we all have as athletes, that we’re willing to bet on ourselves, that there’s nothing we’re not willing to take a risk on. That’s not the trait you want as an investor. Again, it’s reminding them that we don’t need to take this type of risk. Some clients’ growth buckets were just in muni bonds for 10 years, until they produced enough income to support their lifestyle. But it’s a significant blind spot right now — nobody really knows what some of these things are worth. But it looks good on paper.

01:04:27  Barry Ritholtz: Yeah, to say the very least. I have to bring up your podcast, The Pro’s Pro. Your first guest was Eli Manning — is that right? What is this podcast thing? What motivated you to go that way?

01:04:41  Joe McLean: It’s this new thing. It’s just starting — it just came out now.

01:04:44  Barry Ritholtz: And what do you want to accomplish by sitting down with people like Eli Manning?

01:04:48  Joe McLean: For me, I was just hoping it’s a gift to the next generation that’s seeking information — and getting some quality information. We see now, in the NIL world, where a young person will come to me and say, “Hey, I play at Oregon, but I’m going to set up my LLC in Texas, because I have an aunt there, and I read this thing on Instagram where I could not pay any state income taxes.” There’s information out there, and it’s just not right. So this whole idea of wanting each of these clients to be the person someone walks to in their locker room and asks a bunch of questions of — the pro — I just want to interview a lot of these successful athletes that have been through it. Eli’s an example: he had to come into New York and lead a city, and understand the most important things to build trust quickly with his teammates and his coaches. There are all these built-in athletic things that are important. And then he came into an extraordinary amount of wealth, and he had to manage it. And for him, now it’s learning how to give money away most effectively. So the more I can extract information from people that have been there and done that, and share that with everybody — it’s a testament to what these individuals have done, but at the same time, we can all learn from them as well.

01:06:06  Barry Ritholtz: Creating a permanent record is so important, because the half-life of financial literacy is so short. I’ve had the same conversation every three years — “Didn’t we talk about this in 2023?” “Yeah, but I kind of forgot.” So, I only have you for a few more minutes — let’s jump to our favorite questions. I ask all of my guests, starting with: you referred to a few people, but let’s put them in one place. Who are your mentors, who helped shape your career?

01:06:41  Joe McLean: My mom, for sure. She did whatever it took to raise three boys, and then put me in the right situation to have an opportunity to be around Lute Olson. One of the great gifts Coach Olson gave us was that he made us do public speaking at school. We had to do it in sixth, seventh, and eighth grade. And then sophomore year, you start working your way into high school, and by senior year you had to speak at a high school graduation. He brought in people to teach you how to communicate effectively. I had no idea the power of that over time — once you get into the work world, and the level of confidence it gives you, while always having a high level of humility. That was a great gift, outside of all the basketball stuff, and always being prepared. Jim Escobido was the example at Franklin Templeton, who told me, “You don’t know nothing about nothing,” which was great. And then, as I began to understand the mindset, having someone like Ken Haman, who retaught me Maslow’s hierarchy of human needs — this level of safety and security that so many humans are stuck in. If we can give them a reason to say no to a lot of things, and the power of a plan, to get them to some level of connection, whether it’s human or professional — that was a great gift he gave me. But I’ve found, over time, that it’s less just mentors and more finding ambassadors for you. I see it with my kids — I have a daughter who didn’t necessarily have great confidence athletically, and then someone just took extra time to say, “You know, if you did this, this, and this, I think you could be exceptional.” And then they work with you. It’s just finding more ambassadors. That’s what I’m trying to do as an advisor — to be an ambassador on behalf of more clients. It’s super powerful. It’s not necessarily a mentor relationship, but I think the greatest gift you can give somebody else is your belief in them, even when they don’t believe in themselves. That’s the power of being an ambassador. I highly recommend it for as many people as possible.

01:08:52  Barry Ritholtz: Let’s talk about books. What are you reading right now? What are some of your favorites? You mentioned a book earlier.

01:08:58  Joe McLean: Greg McKeown — I think it’s Essentialism. That’s a great — that is the disciplined pursuit of less, and getting rid of some of the inefficiencies in everybody’s life. And you could end up doing more. My favorite book is always the one — for me, it’s whatever got you reading. I didn’t read in college. I did what I had to do to get good grades and stay eligible. And my first book ever read was John Grisham, The Firm. For me, it got me excited to want to turn the page. And now I read as often and as much as I possibly can. I just can’t get enough of it. But I always say, for those that aren’t reading: just go read anything that excites you. It could be a magazine, it could be a comic strip — but whatever gets you excited to start reading, start.

01:09:50  Barry Ritholtz: Let’s talk about streaming. What are you either watching or listening to? What keeps you occupied when you’re traveling around the country visiting various athletes?

01:10:00  Joe McLean: Binging constantly on everything — Netflix. I just watched Madison, which was great. So sad. I like a good cry. I cry more on airplanes than anywhere else.

01:10:14  Barry Ritholtz: If you watched Madison, I’m assuming you saw Landman, right?

01:10:18  Joe McLean: For sure. Yeah.

01:10:18  Barry Ritholtz: Anything Taylor Sheridan does — he’s extraordinary.

01:10:20  Joe McLean: I don’t know when he sleeps.

01:10:21  Barry Ritholtz: And he’s got another — there’s a new show coming out this month. I’m just astonished how productive he is. Give us another — what else are you watching?

01:10:36  Joe McLean: Oh my God, I can’t even remember the one I’m watching with my wife. We always have rules where we have to watch them together — we can’t binge outside. There’s one where they’re dating, and the age is like a 20-year difference. I can’t remember it. I became dumber every 20 minutes that I watched it. I rewatch West Wing, John Adams, and Band of Brothers probably twice a year. I’m in a loop.

01:11:03  Barry Ritholtz: It’s funny — I don’t remember what I was doing when West Wing was on, but it wasn’t watching TV, and it’s on my list of things to go back and watch. During the pandemic, we watched Mad Men, which I had never seen. It’s a really amazing show. Final two questions. What sort of advice would you give to a recent college grad interested in either a career as a professional athlete, or working with professional athletes in a financial capacity?

01:11:38  Joe McLean: It does help to come with a sports background — however, it’s nowhere near the most important trait. The more you can bring interesting experiences and knowledge to sports, the better. That was the example of Moneyball — a bunch of statistical nerds brought data to help drive more opportunities in sports and be more effective. So you can bring an outside perspective. However, whether it’s getting into sports or anywhere else, come in with this service mindset of “nothing is beneath you.” I had a situation one time where an honor student came in — as an early job with us — and said, “Hey, I’ve been paying bills and bookkeeping for clients for the last six months, and I was an honor student at such-and-such college. This is beneath me.” And I said, “Well, last week I was cleaning gutters at a client’s house, because it was the first time them being a homeowner, and we’re trying to teach them how to manage a home. Nothing’s beneath you.” So if you just come in built to serve, with that service mindset, you’re going to be successful at anything you do.

01:12:39  Barry Ritholtz: I love that answer. And our final question: what do you know about the world of investing and wealth management today that might have been useful 25 years ago, when you were first getting started?

01:12:52  Joe McLean: I would have listened to what Sir John Templeton, at Franklin Templeton, was giving us in some of these quotes. Like, “The four worst words in investing are: this time it’s different.” And, “Bull markets are born on pessimism, they grow on skepticism, they mature on optimism, and they die on euphoria.” I would have listened, because nothing’s changed. It’s taken me a long time to not have any FOMO when it comes to investing — but I’m there. I would have listened to a lot of his traits and quotes from back then, because obviously he had lived them before me. I just wish I would have listened in the early days.

01:13:28  Barry Ritholtz: Joe, really fascinating stuff. Thank you for being so generous with your time. We have been speaking with Joe McLean. He is managing partner at MAI Capital Management. If you enjoy this conversation, well, check out any of the previous 600 or so we’ve done over the past 12 years. You can find those at iTunes, Spotify, Bloomberg, Apple Podcasts, or wherever you get your favorite podcasts from. I would be remiss if I didn’t thank the crack team that helps put these conversations together each week. My audio engineer is Steve Gonzalez. Anna Luke is my producer. Sean Russo is my researcher. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

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The post MiB: Joe McLean, MAI Capital appeared first on The Big Picture.

The transcript from this week’s MiB: Beating the S&P For Generations with Chris Davis of Davis Funds, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube (video), YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

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Masters in Business  · Bloomberg Radio
Barry Ritholtz in conversation with Chris Davis, Chairman & Portfolio Manager, Davis Advisors

[00:00:02] Announcer: Bloomberg Audio Studios, podcasts, radio News. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

[00:00:17] Barry Ritholtz: This week on the podcast. Strap yourself in for another banger. Chris Davis chews up the scenery. He is the portfolio manager of Davis Advisors. They’ve been kicking the S&P’s butt for the past, I don’t know, since 1969. $20 billion in client assets. Fascinating conversation. Charlie Munger was his mentor. He sits on the board of Koch and on Berkshire Hathaway. I thought this conversation was spectacular. I think you will also, with no further ado, my sit down with Chris Davis.

[00:00:53] Chris Davis: It’s so always good to be with you. Thank you so much.

[00:00:56] Barry Ritholtz: So before we get into your career — master’s degree with honors from the University of St. Andrews in Scotland — like how did that come about?

[00:01:08] Chris Davis: Well, one of the things that confuses people is I actually don’t have an undergraduate degree. I only have the master’s degree. Wait, how — I sort of skipped that middle step.

[00:01:18] Barry Ritholtz: So did you go to an undergraduate college?

[00:01:21] Chris Davis: Well, what happened is I went to St. Andrews. I had originally only intended to go for a year. I wanted to be a veterinarian. That’s a long side story. And I had worked at the Bronx Zoo. I had worked at the —

[00:01:33] Barry Ritholtz: Wait, wait, wait —

[00:01:33] Chris Davis: Humane Society.

[00:01:34] Barry Ritholtz: So the original plan wasn’t “dad’s a fund manager, grandfather’s a fund manager, I guess I’m gonna go into the family business.” That was not the —

[00:01:44] Chris Davis: Plan. Definitely not. But I give both of them credit. They felt that all of their kids should be financially literate. And so every kid worked for my father or for my grandfather at some point and learned, because they just felt like, look, you’ll have money over time. It’s not taught in schools, just the basic fundamentals of investing. And God help you, if you turn on the TV, you’re gonna get a totally distorted view of what investing is.

[00:02:15] Barry Ritholtz: Fire hose of nonsense.

[00:02:17] Chris Davis: Exactly. And so we all had this grounding. But for example, my smartest sibling without question is my younger sister, but she’s a small town doctor. But boy, does she understand investing. She’s very thoughtful in how she’s managed her financial affairs. So we owed that route, but we all thought we were going different paths. She was interested in medicine. I was interested in veterinary medicine. And so I was gonna go to Cornell, and I was very young for my high school class, and I was very late hitting puberty. I mean, I was five feet tall my senior year in high school. That’s when I broke five feet. So you can imagine what this looked like, but my scores and grades were okay. And so Cornell took me into their pre-vet program, but the woman that ran it said, look, this is a seven year program, it’s intense. Why don’t you take a year off, like a gap year? So I proposed that to my father. He said, we don’t do that in our family. You could go study, but there’s no year off, like to go ski or find yourself.

[00:03:27] Barry Ritholtz: Did you skip a grade, or — like me — were you born in October, November, December, so you’re young relative to the rest of —

[00:03:33] Chris Davis: No, I had skipped a grade sort of early because, bizarrely — nobody in my family believes this now — but I didn’t talk until quite late. So they had sort of, and then when I started talking, they jumped me ahead —

[00:03:47] Barry Ritholtz: Making up for —

[00:03:48] Chris Davis: Exactly. It never stopped since then. But anyway, so I had this year, and it was the first year that the University of St. Andrews was interested in taking direct applications from students where they dropped the requirement to have A levels or O levels, the British entry exams, mostly because they wanted the Yankee dollar. Of course, you’ve gotta remember Thatcher had just become prime minister. She was slashing the public support of the Scottish universities. So I applied. There were, I think, eight of us Americans that came in that first year. And they had a program where after two years you could apply into the honors program, which would allow you to concentrate on just one subject. And I ended up picking two. But needless to say —

[00:04:41] Barry Ritholtz: What were the —

[00:04:42] Chris Davis: Two? It was philosophy and theology.

[00:04:44] Barry Ritholtz: Very —

[00:04:45] Chris Davis: Interesting. I picked them my freshman year thinking, well, when I go back to Cornell, I’m gonna be filled up with organic chemistry and biology and anatomy and so on. So I may as well pick things that I’ll never get to study again. So I picked things like medieval history, philosophy, theology, and —

[00:05:03] Barry Ritholtz: I love that. That’s something I always, in hindsight, wish I did. I started out physics and math and switched to political science and philosophy. So I got to study some stuff that was fun. But medieval history sounds like that would be a delightful semester.

[00:05:22] Chris Davis: You used the perfect word — fun. I mean, I became a good student in high school. I wasn’t a good student before. In fact, recently I found my eighth grade final report card. I went to a school here in New York, and it was a pretty strict, wear-a-uniform sort of boys school. And the headmaster would review each report card before it went to the parents and then make a comment on the bottom. And the headmaster’s comment on my final elementary school report card was: “Yet another semester of squandered potential.”

[00:05:57] Barry Ritholtz: Not living up to his potential. That’s —

[00:06:00] Chris Davis: Oh my god, my —

[00:06:00] Barry Ritholtz: That’s a classic.

[00:06:01] Chris Davis: My children found that — my mother gave it to my children, which was a big problem. You can imagine. But anyway, so I thought I’ll just be in Scotland for a year. I picked subjects I would never study again. They were so fun. It was just —

[00:06:15] Barry Ritholtz: Especially in Scotland, studying medieval history.

[00:06:18] Chris Davis: A medieval university, where Hume had been a professor. I mean, it was just amazing. And of course it’s also a Presbyterian seminary — St. Mary’s, which is one of the colleges there. So I thought, well — and it wasn’t that I was a deeply faithful sort of person. I more thought of theology from the point of view of: people organize their lives around religion. People die for it. I should study this. But there was also a secondary reason I was interested, which is, if you look at communities that have a religious institution at their center — whether they’re rural, urban, suburban — almost all outcomes are better. Intact families, crime rates, graduation rates, all of these sorts of statistics tend to go better. So to me, I was lucky that I never had one of those childhoods where it was beaten into me or something. So it was more this curiosity about how it seemed to serve communities to have a shared value system. Anyway, I picked those subjects, I applied into this honors program, so I was able to get the master’s at the end, but there was no undergraduate degree along the way.

[00:07:34] Barry Ritholtz: And there was no going back to Cornell to become a vet. Although the ardor for that faded.

[00:07:40] Chris Davis: Although because I deferred my admission freshman year, I still get mailings from their alumni department because I matriculated, but then deferred. And I’d like to think the development department has nothing to do with them sending me these mailings. But I lived on a sheep farm in Scotland, and of course that was when I realized I was confusing loving animals with wanting to be a vet. And those are very different things.

[00:08:06] Barry Ritholtz: Yeah. Very much so. We used to foster dogs and get them adopted. And anytime I meet someone who’s like, “oh, I really don’t care for dogs,” it’s like —

[00:08:19] Chris Davis: Oh, that’s a big X. Done. We weren’t allowed to have dogs when I was a kid, but I grew up right in the city, on East 84th Street. But my parents, from the time I was in maybe third grade or so — probably eight or nine years old, something like that — they said I could walk dogs, I could be a dog walker, provided I didn’t cross any streets. So I’d put up a notice in the elevator in our building if anybody needed their dog walked. And then I would just walk the dogs around the block before school and after school. I can still remember the name of every dog I walked. Which is amazing. And I loved it. And of course it actually became seed capital, which is unexpected. But the reason was, I could probably charge 50 cents a walk back then. So it was nothing. But I got to be with dogs and I enjoyed it. It was like a paper route.

[00:09:11] Barry Ritholtz: And you’re running a small business. I had a paper route, and it was just so formative.

[00:09:16] Chris Davis: So formative. And this was like a paper route for city kids, because you couldn’t have a paper route in New York. But then an amazing thing happened. New York City, around — it’d have to be around 1977 or ’78 — passed the pooper scooper —

[00:09:32] Barry Ritholtz: Law, I remember.

[00:09:33] Chris Davis: And everything changed, because people had these dogs and nobody even knew what to do. Nobody had ever imagined cleaning up after a dog. There were all sorts of inventions —

[00:09:47] Barry Ritholtz: Just the bag. It’s not that complicated.

[00:09:49] Chris Davis: But people didn’t — people were so grossed out, they had to carry shovels with them.

[00:09:52] Barry Ritholtz: You change the diaper on the baby — this is just processed food. There’s no big deal.

[00:09:58] Chris Davis: Well, for me, it meant that my rates could go from 50 cents to $5, and people were glad to pay it. And instead of one or two dogs, I had four or five. It was real money. Because what it meant was I was suddenly making $50 a week in —

[00:10:16] Barry Ritholtz: As a 10-year-old. That’s good.

[00:10:17] Chris Davis: That’s good. And so you start thinking about — holy cow, I’m making $250 a month, I’m making thousands of dollars a year. And it was just fantastic. So I’ve loved dogs ever since.

[00:10:32] Barry Ritholtz: So let’s talk a little bit about the early days of the career. You start as an accountant at State Street Bank and ultimately end up as an unglamorous research analyst at Tanaka Capital Management. These are very much bottom rung on the Wall Street ladder. What’d you learn in those days?

[00:10:53] Chris Davis: Well, it wasn’t really my first job. My first job was, I became a pastoral assistant at the American Cathedral in Paris. So I moved from rural Scotland to Paris. Well, that was like landing in Oz. Honest to God, my eyes lit up. But again, in the same way that living on the sheep farm convinced me I was confusing loving animals with wanting to be a vet, working for the American Cathedral convinced me I was confusing loving people with wanting to be a priest or something. So I moved from there to Boston and I thought about teaching. I actually even applied to the CIA, because I was very interested in research and international affairs. I’d lived abroad five years then. And I thought it would be an amazing thing to be the greatest expert on, let’s say, Czechoslovakia — to learn the language, the history, the people, the economics, the business, the military, the topography. And so I didn’t wanna be a spy, but I wanted to be an analyst. And the CIA wisely turned me down, having briefly had a stint in the Workers’ Revolutionary Party. And —

[00:12:09] Barry Ritholtz: So they looked at your history and said, this guy’s —

[00:12:12] Chris Davis: They were like, this needs to ripen a little more.

[00:12:15] Barry Ritholtz: We don’t know if you have the ethical malleability that we’re looking for.

[00:12:19] Chris Davis: But so I started thinking about the summers that I had spent working with my dad and my grandfather, both of whom loved their jobs. They loved investing, they loved their career. And of course that was infectious. Even as kids, I thought the idea of investing was so interesting, because they didn’t highlight the math to begin with. They highlighted the stories, the people, the ideas. But I realized that even though I’d had this study of the idea of businesses being made up of people and ideas, I had no grounding in the rigor of it. And so what I like to say is, my father and grandfather let us live in a foreign country — like live in France for some time, hear French spoken, see this new culture — before we had to learn the grammar and read the textbooks and so on. So they got the order right for setting the hook of curiosity. But I knew enough to know that I couldn’t go into investing without a real grounding. And of course, a bank is perfect. I interviewed a lot of places. George Putnam himself turned me down for a job at Putnam. So I had a lot of rejects before. And State Street Bank had a program for entry level accountants. They had a wonderful training program. I had an operation center in Quincy, Massachusetts, and I would take the red line down there, and I could do my day job, but they would also pay for any schooling you wanted. They had something called the State Street Institute, and you could take courses in anything to do with economics, accounting, business. And — you took advantage of that? — I took advantage of that, although I will say I was fooled by one course. They had a course in their catalog that was called “The Rules of Rhythmic Touch.” Now I —

[00:14:28] Barry Ritholtz: Thought that sounds like massage. That —

[00:14:30] Chris Davis: Sounds pretty good, right? I circled that one in the little course catalog. It was only a two-night course, and I showed up, and it was how to use a 10-key punch tape calculator without looking at your hands. So when you’re summing up a column — a skill for an accountant. It’s the rules of rhythmic touch. And I would say, if you put one on this table now, I would bet you a large sum of money I could run a column of numbers faster than you.

[00:15:01] Barry Ritholtz: I’m gonna defer on that one.

[00:15:03] Chris Davis: So that’s how I got the grounding there. Graham Tanaka was somebody I had met during my summer jobs. He was a very talented analyst at Fiduciary Trust. He’d been at JP Morgan before, and we’d stayed in touch. And I learned that he was hanging out his own shingle and starting his own firm. He’s Japanese American, really a very driven, talented guy. And he said he wanted an apprentice — I would be his first hire and we would go from there. And that was a terrific experience.

[00:15:44] Barry Ritholtz: How long did you stay at Tanaka?

[00:15:46] Chris Davis: I stayed there about two years. Because what happened after the first stretch is, my grandfather, who I was close with — when I went to work for Tanaka, my grandfather opened up an account at Tanaka, because he had big investments in Japanese firms. He had a lot of admiration for Japanese culture and values. And he admired — this is —

[00:16:13] Barry Ritholtz: Late seventies, early eighties.

[00:16:15] Chris Davis: This was late eighties now. So we’re probably in ’89, something like ’88. But Graham was a growth investor primarily in the US, and he just happened to have Japanese heritage. So my grandfather opened an account, and as the time there progressed, my grandfather was worried about his health failing. He loved the business, and he wanted to die at his desk. And so he started asking if I would come in on the weekends and go through his accounts with him. And Graham, of course, was so respectful of that. So it was a very gradual transition out. There wasn’t an end date of my time with Graham so much as there was a start date of my time working with my dad and grandfather.

[00:17:04] Barry Ritholtz: So your father launched Davis Advisors in 1969. And your grandfather was still running his Davis investing shop in parallel. Did they ever end up merging? What happened when you decided, all right, it’s time?

[00:17:25] Chris Davis: Well, my father was my grandfather’s only son. And as often happens, they had a very complicated relationship, I’m sure. And so they never worked together. My father grew up with this famous name, because the numbers were right in the beginning. It was a hundred thousand dollars that he borrowed from his wife’s family. It was 800 million when he died. And it was 2.2 billion when his wife died. And she was the successor trustee. And then it all went to charity after that. He didn’t believe in inheritance, but it was in trust for her. And she lived to be 106. Although, I will tell you, I managed her account, and in 2008, of course, I had to go see her. And we had a lot of financial stocks, and we had a really bad mark at the bottom, probably down 40 or 50%. And I went to see her in Florida, and I said, grand, I just want you to know the businesses are sound, we took some body blows, but in the long run it’s going to be fine. And she said, “You idiot, I’m 98 years old. What do I care?” She said, “I don’t buy green bananas. And you’re telling me I’m down 50%? Go get back to work.” So she teased me, because of course she lived long enough to see it all come back. And she would always tease me about not buying green bananas, and my telling her she just had to have a little bit of a longer term perspective. But anyway, my grandfather built his firm, which was called Shelby Cullom Davis & Company. My father built his, which in the beginning was called Davis, Palmer and Biggs. And then the New York Venture Fund was a fund managed by Davis, Palmer and Biggs. And when I was working at Tanaka, I went to a meeting — it was Chubb Insurance, an analyst day sort of thing. And there weren’t that many analysts then, so it was held around a big boardroom table. And the CEO was Dean O’Hare. And I looked around the table, and both my father and grandfather were at the same meeting by chance. And I thought, this seems a little nuts. And so I spoke to them both, because I was very close with them both. One of the things my father was very clear on is, he wanted out at age 60. He said, hard stop. And here was my grandfather at the time, and he was probably in his late eighties, early eighties then. And he said, I wanna die at my desk. I mean, he was the one that called investing “the best game in town.” He would say, this is the best game in town. He loved his firm — and now his firm, most of it was his own capital. So in a way he was just managing his own, but he loved being in the flow. In a way, my grandfather loved being a great man. He had served as an ambassador. He was a co-founder of the Heritage Foundation, chairman for a long time, had very conservative political views — although that was a slightly different organization, very different 25 years ago than it is now. But he was a passionate Reagan Republican, sort of a Hoover Institute Republican. And his namesake, Shelby Cullom, was a Republican senator and governor under Lincoln. So it was in him deep. And so he loved the game, and it wouldn’t have occurred to him to stop working. My father loved investing, but he did not like the responsibility of the business. He didn’t like boards and clients and employees. That was not his thing. He was a much more — wonderful human being, but very different than my grandfather. So he wanted out before he turned 60, my grandfather wanted to die at his desk. And I thought, well, here I am. I don’t know what I am at the time, 26 or something. And I was like, here’s a great idea: why don’t we merge the companies, and then I’ll come in, and I’ll learn from both of you. And I was an S&L and a banking analyst then. And of course this was going right into the teeth of the S&L crisis. So it was an exciting time to invest. And then we’ll figure out a way for the three of us to do this.

[00:22:15] Barry Ritholtz: And how long did it take for that to all come together?

[00:22:18] Chris Davis: My father turned 60 in 1997, 1998, somewhere like that. And my grandfather died —

[00:22:29] Barry Ritholtz: He’s 86, 88 —

[00:22:32] Chris Davis: Something like that. Don’t quiz me. My grandfather died in, let’s see, 1994. So I’d have to say he was 86 or 87 when he died. And so, in a way, the timing all sort of overlapped beautifully. My grandfather worked almost to the end. My father helped coach me through that transition, and then he walked out the door in 1998. And that was that. He’s been an incredible mentor. He’s always available to talk, but as he said, I’m here to give you advice, I’m not giving any orders. And he didn’t sit on our boards. He just walked out, and just like my grandfather, started giving his money away. He created and oversees the largest international scholarship program on Earth.

[00:23:34] Barry Ritholtz: And I know there’s a foundation. I haven’t read the book, but there’s John Rothchild, who was, I think, Peter Lynch’s co-author. He’s a lovely man. “The Davis Dynasty.” How odd is it to have — hey, the story, the game isn’t over, and you are writing this book. How odd is it to be part of a book like that?

[00:24:02] Chris Davis: Well, first, it’s probably a book read by dozens of people nationwide. Because remember, it is the riveting biography of the Dean of Insurance Stocks. So that’s a pretty narrow pool. Not —

[00:24:15] Barry Ritholtz: Not a hot seller, you’re saying.

[00:24:17] Chris Davis: And I do think I experienced the writing of that book as sort of terrifying.

[00:24:28] Barry Ritholtz: A lot to live up to. It was a lot —

[00:24:30] Chris Davis: Your dad and your grandfather. It was a lot to live up to. Sure. And I will say it’s something that I’m just profoundly grateful to my dad for — well, really to both of them. But my dad is a very humble person. And in that book, it is 90% about my grandfather, and my dad was sort of what I would call a quiet doer. He loved investing, he loved research, but he was very low profile. And so his view was very much that, despite the graphic title, this is really a book about his father. And I think that’s true. In fact, at our firm, we made slimmed-down versions of that book and called it “The Davis Discipline” instead, which was much more consistent with our view of life. Because “dynasty” implies dynastic wealth, it implies inheritance —

[00:25:32] Barry Ritholtz: And there’s no inheritance.

[00:25:33] Chris Davis: There’s none of that. Which —

[00:25:35] Barry Ritholtz: I would imagine people would be surprised to learn.

[00:25:39] Chris Davis: Yeah. And it’s funny, it’s not something I’m quite as fanatic about.

[00:25:46] Barry Ritholtz: Well, Warren Buffett is a big believer in — hey, you should give your kids enough. I know I’m gonna mangle this — give them enough money so they could do anything, but not so much money that they can do nothing.

[00:26:00] Chris Davis: You didn’t mangle it. You stuck the landing. That is exactly the right philosophy. And I would say my father and grandfather sort of believed that. I mean, I have siblings that were helped out. And I had an aunt that my grandfather left some money to, to ensure that she and her kids would be all right and so on. So it wasn’t ruthless. But I think it came from a place of compassion — this view that there’s something dignified about earning your way in the world. And, well, look, Barry, if you look at the greater world, there’s a lot of fear. And fear can be a motivator. But God, is it a weight. People live one operation away from bankruptcy, a layoff away from being foreclosed on. If you as a parent can put a safety net there, if our society doesn’t — if you as a parent can do that for your kids, and my grandfather did that, and my father did that — there was, I don’t think we ever grew up with a feeling that there wasn’t a safety net. And so the freedom from that fear is a huge gift you give your kids. It was a huge gift that was given to me. And that’s what gives you the confidence to be able to try anything. Because you’re not worried — especially when you start having kids and you think, my God, I can’t take this risk, I can’t leave State Street. It never occurred to me that I couldn’t leave. But I think their view was, the fortunate thing was both my dad and my grandfather were very frugal. So we didn’t live in hardship, but we certainly didn’t go to Southampton and Palm Beach and Aspen. They had a very puritanical sense of that. We went out to Fire Island, and we had a house on stilts — I still have a house out there, and it’s in a swamp. It’s one storm away from the end, and there’s no cars. You take a little ferry out there. I always think of it as the anti-Hamptons.

[00:27:30] Barry Ritholtz: Oh, very much is.

[00:28:00] Chris Davis: And that’s what I love. My parents had a place in Maine, but it was not a fancy deal. Like a little cabin. Not Kennebunkport. Well, they had a nice house, but it wasn’t a Newport mansion. And they had it because — they used to call them, in the twenties, people like my grandparents were called “rustics.” Isn’t that a funny word? It was people that were wealthy, but would go and live very simply in the summer. It’s very much a Scandinavian ethic. And I think it developed especially in the late 19th century — there was a movement called the Chautauqua movement, that I’m still a supporter of, which basically said: as the bourgeoisie and wealth were being created, there was this one branch of wealth creators that decided they wanted to be English aristocrats. And they built mansions in Newport, and they had yachts. And then there was another branch that said, that’s not the American way. Rockefeller in many ways embodied a certain amount of that sense of stewardship. Some were even more extreme in terms of restraint. But the Chautauqua movement sprung up — they created these places, there’s still one left, it’s in upstate New York, where you would go with your family for self-improvement. And you would live simply, and there would be lectures. You would improve your mind, you’d improve your soul, you’d improve your health. And you’d bring your kids. There would be a sort of day camp for the kids, and there’d be church on Sunday. But it was a non-denominational church that was about service. And then there were lectures. It’s where Salman Rushdie was stabbed, if you remember, a couple of years ago. He was in Chautauqua, lecturing at this place that still exists, and people go for a week or two weeks every year. So the place I go on Fire Island was part of that Chautauqua movement. But the ethos of it, I think, is something my parents and grandparents really subscribed to.

[00:30:49] Barry Ritholtz: Really, really fascinating. Coming up, we continue our conversation with Chris Davis, chairman and portfolio manager at Davis Advisors, discussing how he developed his philosophy and investment process at Davis. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. — I am Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. Chris Davis is my extra special guest. He is the chairman of Davis Advisors. In 2005, he was named Morningstar’s Portfolio Manager of the Year. He helps to oversee $20 billion in client assets, a healthy chunk of which is he and his colleagues. We briefly mentioned Buffett earlier — later on I get to ask people who their mentors were, but I have to bring this to this part of the conversation. Warren Buffett and Charlie Munger were your mentors? Is this remotely true? It just seems insane.

[00:32:13] Chris Davis: Oh, it started in — I wanna say it was 1990. So —

[00:32:23] Barry Ritholtz: He’s already a well-known investing rockstar at that point.

[00:32:28] Chris Davis: The way it really started was with Charlie. I met Charlie long before Warren. The reason was, I was trying to sell a business. My grandfather, as I started going through his accounts and going in there on the weekends — he had a business called securities lending. And I don’t know how well you know that business —

[00:32:48] Barry Ritholtz: Anytime you’re gonna short a stock, you gotta borrow it from somebody, and that’s gonna cost you a little —

[00:32:52] Chris Davis: It’s gonna cost you a little margin. So my grandfather’s view was, he had a portfolio of appreciated stocks that he was never gonna sell. And he said, if somebody wants to short the stock and pay me to borrow it, fine. And the number one borrowed stock in those days was Berkshire — Berkshire Hathaway, of course, because you couldn’t borrow it anywhere, because everybody had the certificates. They weren’t —

[00:33:17] Barry Ritholtz: Literally had the paper certs.

[00:33:19] Chris Davis: Yeah. There was very little Berkshire that was in street name. It was in individual people, and therefore you couldn’t borrow it.

[00:33:25] Barry Ritholtz: It was locked away and safe.

[00:33:27] Chris Davis: So he had a big holding, and he had a broker dealer — Shelby Cullom Davis was a registered broker dealer. And so he could lend out the shares and make a couple hundred basis points a year extra return on top of the Berkshire return. So that’s how he started in the securities lending business. But gradually, the guy who was doing it for him and administering it said, well, we can also help — we’ve got all these people that wanna short all sorts of different securities, and we can act as what was called a broker finder. We’ll go out and find the securities for these people to short, and we’ll make a little spread as they go through. Well, this business grew and grew and grew, and soon there were 17 employees in the securities lending business. And it was a big operation. And my grandfather by then was probably in his eighties and was nervous, because as I went through the list of counterparties with him, there were firms we had never heard of. There was this one called LTCM. And I said, what is this LTCM? We’ve got, like, $500, $800 million lent out to them. “Oh, that’s Long-Term Capital Management.” So we talked about it. He said, yeah, I think we gotta get rid of this thing.

[00:34:58] Barry Ritholtz: So wait, did he hold on to that business, or did they spin it —

[00:35:01] Chris Davis: So I said to him, we gotta get rid of this thing. And he said, fine, well, see if you can find somebody to take it over, because we do have 17 employees, and they made their careers here. We’re not gonna fire everybody. And so we started calling around, and I thought, what characteristics do we need? We need a lot of excess capital, ideally an appreciated portfolio of securities, a sort of AAA type balance sheet, and somebody that can understand it. So I thought, well, Berkshire. So a wonderful friend in those days named Bob Lenzner, who was a reporter at Forbes —

[00:35:42] Barry Ritholtz: I recall — I had lunch with him at, I wanna say, the Harvard Club. I think he was an alum. Is that right?

[00:35:49] Chris Davis: Could have been his kids. Our kids were —

[00:35:51] Barry Ritholtz: I could be wrong, but —

[00:35:52] Chris Davis: Our kids were in the same elementary school. And I got to know him just watching basketball games with third graders or something. And he mentioned casually in conversation that he had met this brilliant guy, Charlie Munger. And I said, well, I know who Charlie is, but I’m dying to meet him. And so Bob arranged for us to have breakfast. Charlie was in New York, and I went down — it was at the Millennium Hotel down by the World Trade Center. And I sat down and introduced myself: Mr. Munger, pleased to meet you, I’m Chris Davis. And I said, I’m working with my grandfather at Shelby Cullom Davis & Company, and have I got a business for you. And I pitched our securities lending business, and Charlie put up his hand after about four minutes, and he said, “I have no intention of buying a business run by seven guys named Vinny and Barry.” It was the perfect description. I mean, we had Vinny, Tony, Mikey, Nicky. And so we did end up finding a buyer eventually, just not Berkshire. And it wasn’t really a buyer — we just did a sort of earn-out. We just wanted everybody to have jobs. And so they all got a job at a broker dealer.

[00:37:14] Barry Ritholtz: So beyond the pitch to Munger, how did your relationship —

[00:37:17] Chris Davis: Go? Well, so the pitch ended in four and a half minutes. And so I said, well, I’m sorry I wasted your time. And I got up to leave, and he said, where are you going? And I said, well — just don’t leave, I’m only just getting to know you. I’m not interested in your business, but tell me about you. And we got talking about a few things. But what really happened was, I started listening. And as you can tell, I like to talk — around Charlie, I just listened as much as I could. And we sat at that table till lunchtime. And Charlie said, I have to go to a lunch, but if you find yourself in Los Angeles, give me a call and I’ll make time for you. And so, of course, I started going to Los Angeles pretty regularly. And so that was a huge gift in my life. It was a gift professionally, but thank God it was a gift personally. He helped me through some hard times in my personal life. He was just a wonderful mentor in every dimension.

[00:38:23] Barry Ritholtz: So there are a lot of things that all of us have learned from Warren and Charlie — through the letters, through the annual meetings, through all sorts of stuff. I’m curious, what did you learn from Charlie that none of us can find in the public materials?

[00:38:46] Chris Davis: Well —

[00:38:48] Barry Ritholtz: Good question.

[00:38:49] Chris Davis: Right. I think, most deeply, I learned about integrity in the traditional sense, meaning wholeness. Charlie was a whole person. The alignment — what he thought, what he said, what he did — they were all the same thing. His sense of his own code of being was so disciplined, but was filled with this — his reputation as a curmudgeon may have been cultivated. I never saw it. He was a truth speaker, but he was also, in a very profound way, a very loving person — very cheerful, very committed, profoundly loyal. So I used to joke that if I did a Venn diagram of the things I admire about my father and the things I admire about Charlie Munger, there’s surprisingly little overlap. They were both frugal. But Charlie was an incredibly broad thinker. My father was just single-minded about investing. Charlie was curious about everything. Charlie was very committed to relationship, continuity, breadth. My father is very specialized, very narrow. My father is incredibly physically fit and remains, to this day, very vigorous. Charlie was willfully sedentary. My father is very nomadic. And Charlie went to the same island in Minnesota and lived in the same house his whole life. He was very much a creature of habit. And so they were very different that way.

[00:40:46] Barry Ritholtz: Just imagine if Charlie exercised, how much longer he could have lived.

[00:40:50] Chris Davis: I don’t know, 99 and three quarters is pretty good. That’s one of the things he said — he said, I’m not sure I see the alignment.

[00:40:58] Barry Ritholtz: So let’s talk a little bit about the returns and about the philosophy. Back of the envelope, I calculated Davis Advisors has been compounding shareholder wealth at greater than 10% annually since 1969. Does that sound remotely accurate?

[00:41:17] Chris Davis: That sounds right. We’re still ahead of the market from the beginning.

[00:41:21] Barry Ritholtz: Starting out in 1969 — early days of a horrific bear market. You have managed money through — well, you were in grad school, but your dad — during the ’87 crash, you’re involved during the dot-com implosion, during the financial crisis, during the pandemic. I mean, you have seen lots and lots of cycles across all of these decades and all of these different environments. What key investment principles stand out as absolutely core, non-negotiable — this is the heart of what we do?

[00:41:58] Chris Davis: Well, the entire investment process boils down to these two questions: what sort of businesses do we wanna own, and how much do we pay for them? I should say, before I go on, that the interplay between those two is part of the nuance of investing. You may own a slightly lower quality business because the price is so extreme. But the characteristics that we look for in every business have to do with durability. Because we buy businesses thinking our goal is to own them forever. Our goal is for the return to be driven by the earnings yield on the business over time, not by some change in the valuation and finding an exit strategy. And so those characteristics are exactly the characteristics you would look for if I said, you’ve gotta put a business away for your kids or your grandkids. So the nature of the business, the returns on capital, the competitive moats, the nature of the balance sheet, the risk — and very importantly, the character of the people running it. We spend a lot of time on management evaluation. In this land of AI — I just came back from the Markel annual meeting — character will not show up efficiently, I don’t think, in the AI world. And boy does it matter when you think about navigating an unpredictable future — just that ability to be resilient, to adapt, but always to be investing the money as if it’s your own. And there are CEOs that do that. So that’s the nature of the business. And then the valuation discipline is the securities analysis part of what we do. If the first part is business research, then this is the securities analysis. It’s adjusting the income statement — that’s where the accounting training comes in. It’s understanding the incremental returns on capital, and it’s adjusting the balance sheet, every account on the balance sheet, because of course GAAP earnings is a convention, but it may or may not reflect reality. So you put those two things together and we build an IRR, an internal rate of return forecast. We work on this concept of owner earnings in each business. And then we focus on the quality and the durability of the business.

[00:44:26] Barry Ritholtz: I can’t help but point out that you talk about buying or owning businesses, not buying stocks. That seems to be a very fundamental distinction compared to most fund managers.

[00:44:42] Chris Davis: It’s so profoundly important. We view ourselves as business owners. We view the management as our partners in most cases. We view the signs of short-termism as dangerous. It’s one of the reasons we feel that the activist movement has completely lost the thread and should be greatly resisted — whereas it was very useful when it started. We could talk about that later. But absolutely, we’re owning businesses, and we’re trying to own businesses that are compounding machines. I watched what it meant for my grandfather to own businesses for 20, 30, 40 years. I look at our own portfolio. I look at companies like American Express or Wells Fargo or JP Morgan in the financial world. I look more recently at companies like Amazon, Texas Instruments. You look at what a business can compound over 20, 30 years. I mentioned Markel — when I first met the now-CEO of Markel, we met in Omaha at the Orpheum Theater at a Berkshire annual meeting in, like, 1990. The stock was at like 19 or 20, and it’s at 2000 now. And by the way, they have an activist idiotically saying they should split up the company. The company’s doing fine. It’s a company that is being built to last. And the idea of getting a quick sugar fix — because you can sell some part to private equity at a premium — that doesn’t serve capitalism, and it really won’t serve the long-term shareholders of that business.

[00:46:17] Barry Ritholtz: You mentioned a number of financials in that list. I’m kind of curious, because financials have had some pretty good years. They’ve had some pretty rough years. Obviously the financial crisis was devastating. Although my pet theory about JP Morgan Chase is, when they had their subprime problem, it predated everybody by five years. And there was still a bid when they had to get out. So they got a little lucky. And they happen to have a particularly talented CEO. But this concentration of financials — I’m curious what led to it. And I’m curious about the relationship between what some people describe as high conviction investing and concentration in a particular sector like financials.

[00:47:11] Chris Davis: Well, I think high conviction investing is exactly the right description. And if we end up with a focus on a particular sector, it’s not necessarily because of a view of the sector — it’s because of the individual companies. Financials is one of the most misleading sectors there is. Because to me, what creates correlation risk is when businesses are tied to the same macroeconomic variables. Financials is a massively broad category. There are financials that have risk if the wind blows in certain parts of the world; there are financials that have risk if interest rates change; financials that have risks that have to do with recession, some to capital markets — they’re all different. And I’ll give you a really powerful example. I started our financial fund, I don’t know, in something like 1990. That fund from then to today has outperformed the S&P 500. And it has outperformed the S&P 500 quite meaningfully when you compound it out. At the time we started it, I didn’t even know there was a financials index. But it was founded with this belief — and my grandfather of course specialized in financials, I started as a financials analyst — he had a phrase that he loved, which is, in financials you can find growth stocks in disguise. And he said the reason is that you have industries that are huge, where companies can grow for a long period of time by simply growing. Just this year, Progressive finally passed State Farm. Progressive has probably compounded in the high teens for 30 years. And it just became maybe the largest insurance company in personal auto. So these massive industries where you can compound for a long time without outgrowing your sector. Second advantage: the business model doesn’t really go obsolete. Making a spread on money is about the oldest business there is — maybe the second oldest.

[00:49:14] Barry Ritholtz: Thank you.

[00:49:16] Chris Davis: What else? It’s an industry where you have huge dispersion of outcomes, but relatively homogenous valuations. So — I mentioned Progressive. You have companies that have grown. Capital One — you look at Capital One’s growth record from 1987 to today, and yet it’s trading at nine or 10 times earnings, because it’s a financial. I’m like, it looks like a growth stock to me. It’s still run by the founder. It’s a fintech company, it’s a data science company. It’s in the top 10 of all holders of AI and machine learning patents. But it trades at 9.8 times earnings and 1.2 times book value, with a mid-teens return on equity. It seems just nuts to me, but whatever, we love it. So that’s the idea of growth stocks in disguise. And the last advantage of financials is that culture is a defining and sustainable difference.

[00:50:12] Barry Ritholtz: This is a theme I have heard from so many really savvy executors — CEOs as well as investors. How do you, as an investor, wrap your arms around culture? It feels like you almost have to be in it to see it. Is it something that, as an outside investor, you get access to? How do you identify quality culture?

[00:50:39] Chris Davis: Well, it’s a perfect question, but I’ll give you the punchline for the differentiation. Last year, our financial fund, which is 95% in large cap financials, outperformed the S&P financials index and the XLF, the largest financials ETF, by 1200 basis points.

[00:51:01] Barry Ritholtz: Touché, right?

[00:51:02] Chris Davis: It was a great year for us. But the point is, they’re in large cap financials, we’re in large cap financials. How can you get such dispersion? But the same is —

[00:51:13] Barry Ritholtz: So because they own everything, and you own the better companies.

[00:51:16] Chris Davis: Well, they’re very concentrated — they’re concentrated in the mega cap banks by and large, and Visa and MasterCard. But we’re fairly concentrated too. We only have 20, 25 names. And 20 or 25 names are probably 80% of the index.

[00:51:33] Barry Ritholtz: Does the gap come from the stock selection or the screening out of what you don’t like?

[00:51:40] Chris Davis: Well, it really goes back to the culture question. So to bring it full circle — within financials, we are looking for the companies that we feel can be compounding machines. And we’re looking for the companies where their culture creates a durable advantage. The reason culture can create an advantage in financials is because, in most cases, your cost of goods sold is an estimate. And if you have an aggressive management, they can use accounting to front-load earnings that you’ll pay the piper for — three, five, excuse me, 10 years from now. So they can look good for a long time. Whereas if you do the opposite, if you have a good culture, you’re understating the near term, but you’re building cushion for the long term. And so when the times go rough, when the tide goes out and you see who’s swimming without a bathing suit, that’s where the culture really matters. Now, you mentioned all the crises that I’ve seen over my career. I’ve seen a lot of these management teams and these companies go through crises, and you see who’s wearing a bathing suit. So we just went through an interest rate crisis, right?

[00:52:55] Barry Ritholtz: 2022, 500 basis points.

[00:52:57] Chris Davis: And we used to get questions from clients all the time: why don’t you own First Republic? In October, my colleague Pierce Crosby wrote a research report — just internal, just for himself — saying he’s just startled by the amount of risk Silicon Valley and First Republic are taking. He said it’s sort of amazing. Look at the duration on their assets. They’re assuming their liabilities, their deposits, are gonna be with them for 8, 10, 12 years, and that they’re uncorrelated. So we used to get questions, why don’t you own them? They’ve had such great growth records. And our view was, well, it’s been a mistake not to own them in the sense that they’ve outperformed, but we are not gonna own the companies that are optimized to the upcycle. And that’s a different culture. They had a growth culture, but it blew them up. And so we instead looked at companies like — well, JP Morgan was an outstanding example. Wells Fargo, Capital One — where they didn’t reach for the easy money of taking that extra risk on the interest rates. They could have. Jamie Dimon stood up at an analyst meeting and said, I could add a billion or $2 billion to my profits with a phone call, and I’m not gonna do it —

[00:54:13] Barry Ritholtz: Because of the risk.

[00:54:14] Chris Davis: Because of the risk. He said, I could put out my money for five, seven years, and he didn’t do it. So you could see that. So some of it’s quantitative. You identify culture by accounting choices. Look at how accident year reserves develop at insurance companies. Look at how credit losses develop. Look at the duration in the asset portfolio of a bank. Look at the mark-to-market risks that an investment bank is taking, and so on. So you can identify culture quantitatively in financials — that’s a big advantage. But then the next part is qualitative. And there, I think Warren put it best: in a complex financial, the CEO has to be the chief risk officer. You can have somebody with that title, but if the CEO doesn’t understand the nature and the complexity of the risks, they should not be the CEO of a financial company.

[00:55:03] Barry Ritholtz: So not only am I hearing a lot of Warren’s voice in things you say, I’m also hearing a lot of similar companies — Coca-Cola, Amex, Wells Fargo. Coincidence?

[00:55:18] Chris Davis: Well, it would be strange if we ended up different. Of course, I always like it when we owned it first. So for example, we were, I think, the largest shareholder of General Re before Berkshire bought it. And by the way, our research was not so good on that one.

[00:56:00] Barry Ritholtz: Oh, really? Not his favorite pick, over the —

[00:56:01] Chris Davis: As you saw subsequently, Gen Re did not perform very well for many years. And I think Warren would say — I think he has said publicly, I won’t put words in his mouth — I’ll put it this way: well, I’ll tell you what. Charlie came to visit us, and we have a wall of mistakes where we frame the stock certificate —

[00:56:08] Barry Ritholtz: A good temple of — yes, is that what that is?

[00:56:10] Chris Davis: And Charlie was looking through it, and he said, where the hell’s your Gen Re? And I said, Gen Re wasn’t a mistake. We got Berkshire stock for Gen Re. That was fantastic.

[00:56:21] Barry Ritholtz: Did you have anything to do with the transaction? Or they just went out and bought it? And you happen to be a big holder?

[00:56:26] Chris Davis: No. We were big GEICO shareholders, so — no, it was, and we overlapped in Amex, but no, I mean, we’re much more diversified. We never owned Apple. There’s huge differences. I mean, starting with the fact that Warren has outperformed all investment advisors for 50 years. But you’d be crazy not to study when Warren owns something, or to study Berkshire itself.

[00:57:00] Barry Ritholtz: That makes a lot of sense. There’s another distinction between the two of you. You say that you are neither deep value nor go-go growth. So what does that leave you? Growth at a reasonable price, somewhere, something adjacent —

[00:57:20] Chris Davis: We love growth at a reasonable price. Because what are the other —

[00:57:23] Barry Ritholtz: Who doesn’t want growth —

[00:57:23] Chris Davis: Growth at unreasonable prices, that turns —

[00:57:26] Barry Ritholtz: Out, or unreasonable —

[00:57:27] Chris Davis: Non-growth at silly prices.

[00:57:28] Barry Ritholtz: Yeah. Growth at a —

[00:57:29] Chris Davis: Reasonable price. I think what we would say is, it’s obvious to us that growth is a component of value, right?

[00:57:36] Barry Ritholtz: Growth is a component of value. So take —

[00:57:39] Chris Davis: A company that grows profitably is more valuable than one that doesn’t grow, right? Think of the business. A business that grows profitably is more valuable. A business that can redeploy its capital at high incremental rates of return is way more valuable than one that can’t, or one that’s capital intensive and shrinking and so on. So growth is a component of value. And the difference between us and a typical growth manager is, we tend to believe more deeply, based on experience, that high rates of growth attract competition. Competition lowers returns. And so we believe in capitalism, and we believe that growth is hard, and maintaining growth is hard. So we tend to be more skeptical than the average go-go growth investor, but we tend to be more open to paying a fair price for a company that can grow profitably than the typical value investor. So much of our research is about the durability of the growth, the competitive advantages that a business has. So our portfolio currently trades in aggregate — if you took all of our companies — at something like 14 times earnings. The market as a whole is at 20 or 21. The value index is at 19 times. And yet we have a portfolio of companies that has grown their earnings over the last five years something like 14% a year. So we feel we have what my dad used to call the value investor’s dream.

[00:59:21] Barry Ritholtz: Low cost, fast growth.

[00:59:22] Chris Davis: Low valuation, and durable, sustainable growth.

[00:59:26] Barry Ritholtz: Really, really fascinating. So before we jump too deep into the current state of affairs, I have to ask you about a quote of yours that I really like: “As human beings, we don’t welcome fear and panic, but as investors, we welcome the bargain prices that those emotions tend to produce.” Discuss.

[00:59:50] Chris Davis: Well, obviously the market is, of course, a voting machine in the short term — it reflects psychology — and in the long term, a weighing machine. And that —

[01:00:01] Barry Ritholtz: Hold on. That’s a great quote. I’m gonna write that down.

[01:00:06] Chris Davis: And so psychology helps shape prices. And what we find is that there’s always risk. What varies is people’s perception of it. And I think today we’re in a time when people are underestimating risks, and therefore prices are generally high. It’s one of the reasons I find it so amazing that our portfolio is trading at 14 times earnings. The market scares me at 21, 22 times earnings, but our portfolio feels like it’s below long-time averages. So I feel this disconnect where I’m simultaneously pessimistic about the market because of the euphoria — there’s no skepticism, there’s no fear in prices — and at the same time, feel very comfortable with our portfolio.

[01:01:03] Barry Ritholtz: So let me push back a little bit, just to hear your reaction. We keep hearing artificial intelligence and Nvidia and all the semis being compared to the dot-com era. And every time I hear that — aside from the fact that many of those companies, forget profits, didn’t even have revenues, and this is a giant-revenue, giant-profit era. Markets today are trading at 20, 22 times. We finished the nineties at 32 times. Theoretically, there’s a ton of upside from here, especially if earnings growth continues. Is it the contrarian take that, hey, this market could go another five or 10 years before things get really stupid?

[01:01:54] Chris Davis: Well, what I’d say is, as I look out there, I see two types of end investor. One is this sort of belief that we’re on a plateau of permanent prosperity. This time is different —

[01:02:07] Barry Ritholtz: A permanently high plateau. Yes.

[01:02:10] Chris Davis: Yes. And they are all in on the momentum trade, which has worked so well. Now, I believe that momentum investing, even though it’s worked so well, to me is crazy, because it’s not common sense.

[01:02:30] Barry Ritholtz: It works until it stops.

[01:02:32] Chris Davis: It works until it stops. And when it stops, you really feel foolish that the fact that you were paying an ever higher price, you thought, was a good thing.

[01:02:40] Barry Ritholtz: Why does price matter? If it’s going up, buy it; if it stops going up, sell.

[01:02:45] Chris Davis: Exactly. And so that’s one group of investors, and they’re taking a lot of risk, because they tend to be in the highest multiple parts of the market, and the parts of the market where there is the most presumption that high margins and high growth rates are sustainable — and the data is over. I think fewer than 3% of companies can maintain a growth rate in revenue of 20% for more than a decade. Like, fewer than 3%.

[01:03:17] Barry Ritholtz: I mean, that’s a huge growth rate for a long —

[01:03:19] Chris Davis: Period of time. And there are a lot of valuations today that have that baked in. You get these analyst reports, and there’s even fewer — less than, I think it’s five-tenths of 1%, but you could check me, it might be three-tenths — but it’s a fraction of a percent that are able to maintain 50% margins for more than a decade. Those are very high margins. But again, they’re in a lot of models right now. So I think there’s risk on that. Now, the other side of people taking risk are the ones that are huddled in cash saying it’s the end of the world. Everything that’s happening — AI’s gonna swallow our children, the world is falling apart, everything that’s happening in Washington — and they’re sitting in cash, which —

[01:04:05] Barry Ritholtz: Is risky as well.

[01:04:06] Chris Davis: Really risky. I mean, just since 2000, the purchasing power of a dollar is down something like 55%. In my grandmother’s lifetime, I think the purchasing power of a dollar fell like 94, 95%.

[01:04:21] Barry Ritholtz: They’re taking — what is it, $7 over 90 years.

[01:04:24] Chris Davis: Right. So I think these huge crowded sides of the market — the people sitting in cash, and the people assuming the extreme growth — are both taking a lot of risk.

[01:04:34] Barry Ritholtz: That’s a terrible barbell you’ve just described. The extremes are either inflation’s gonna kill them, or speculation is gonna get them.

[01:04:42] Chris Davis: Yeah. And where we land in the middle is with this idea that there are durable, overlooked businesses right now. As I say, we have a portfolio of 25 companies trading at an aggregate of 14 and a half times. By the way, that includes owning some Amazon, it includes owning some Google, but also owning some Capital One, owning some Tyson Foods, some MGM —

[01:05:09] Barry Ritholtz: Which portfolio is this?

[01:05:10] Chris Davis: This is our flagship portfolio. So this is the Davis New York Venture Fund. But really, the way people are finding us increasingly — 10 years ago, Barry, we launched our ETFs. We were alone for nine years. We are the only true active manager running a value ETF. I think our value ETF, which is called DUSA, is the number one active-for-passive value ETF for three years. But nobody really cares. That’s all right.

[01:05:40] Barry Ritholtz: Although the past year or two we have seen a lot of flows — hey, most of the money is going to the passive indexes, but the third or quarter that’s not going there is going active.

[01:05:54] Chris Davis: Exactly. So they’re finding our way. And I’m proud that we are so early. I don’t mind being early. But what I’d say is, the optimistic case you lay out — I think the three elements of change in the civilization that are increasing risk today are: we certainly have a change in the monetary world order. You and I had spent our entire careers in a world of falling interest rates approaching zero, falling inflation, all of the things that fed into that — low wage pressure, de-unionization, globalization. All of that has stunningly and permanently, I believe, come to an end. We are in a state where we are printing so much money relative to what the interest rates are. I think there’s a lot of risk, but certainly we’re not going back to zero, probably, ever again. That was a once-in-history phenomenon, free money. The second big change is geopolitics. There’s no question that for our entire career, we were in a world of globalization. We were in a world of functional peace. We were in a world of stability. We were in a world where the wall fell and markets doubled. All of those things have also absolutely come to an end, and that increases risk. So those first two things increase risk. And what’s the third? AI. There’s this massive technological change that increases risk — it increases the risk of all different types of businesses, and it increases opportunity, but it increases risk. So when you have three fundamental shifts going on, all of which have unpredictable outcomes, and yet you have valuations — not at all-time highs, but elevated — certainly relative to the direction of travel of interest rates over time, then I’d say, I like where we are: with our 14 yield, solid growth rate in the business, durability, AI as a lens, globalization as a lens, inflation as a lens. Put those things together, we sit with 25 companies with these great characteristics, in our ETF or in our funds or SMA, or however the advisor finds us.

[01:08:13] Barry Ritholtz: Really interesting. Coming up, we continue our conversation with Chris Davis, portfolio manager at Davis Advisors, discussing the current market environment. I’m Barry Ritholtz, you are listening to Masters in Business on Bloomberg Radio. — I am Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. Chris Davis is my extra special guest. He is the chairman and portfolio manager of Davis Advisors. So I’m glad you mentioned artificial intelligence as one of those three big shifts that are taking place. How do you, as an analyst and a fund manager, separate what is a transformative technology — and potentially a transformative source of value creation — from just the rampant speculative excess that rears its head on a regular basis?

[01:09:27] Chris Davis: Well, what we’re seeing is Amara’s Law in full bloom. And Amara’s Law states that transformative technologies are overestimated in the short term and underestimated in the long term. We’re in the overestimation, hype phase. And what I would say we do is, we recognize it as a transformative technology — that is absolutely a baseline assumption. Our other baseline assumption at this stage is that we don’t see it as winner-take-all. So we see it a little bit more like railroads, or the telephone, or electricity, where the users maybe end up making more money than the builders. And so we’ll talk about hedging that bet, but we do think it increases the risk environment. It increases the risk of obsolescence in certain businesses. So we start with this idea that it’s real. Then what we do is, as we do our research, we found every company we look at falls into one of five categories. There’s the emerging winners — that’s where all the heat is, all the speculation. And there’s real danger. You and I started very early talking about Cisco. Remember, the three obvious winners of the internet were AOL, Yahoo, and Cisco. Two don’t exist, and one’s a fraction of what it was. And so picking the emerging winners in the early hype phase is risky. But we’d say, if you wanna look in that space, focus on the businesses that have a real shot at being emerging winners but do not have to constantly raise capital — have proven business models, proven leaders, and businesses that are accretive by the investments that they’re making, so that they earn more money by making these investments, even if it takes longer than —

[01:11:11] Barry Ritholtz: So not the hyperscalers.

[01:11:13] Chris Davis: Not the hyperscalers. So for us, that’s where we’ve sat with a little bit of Google. We still have Meta and Amazon. We’ve trimmed the first two because they were huge holdings for us — we bought them when they were so out of favor. But if you’re gonna play in the emerging winners — that’s the first. The second category is, okay, who are the enablers of this technology? That’s the picks-and-shovels mindset. They’re the ones that are gonna benefit from the spending wave, but will not be penalized if the return on the spending is very low.

[01:11:45] Barry Ritholtz: Semiconductors.

[01:11:46] Chris Davis: So yeah, I would say there, for us, it’s been analog chips — Texas Instruments. It’s been semiconductor capital equipment. We are a big shareholder of Samsung, which did nothing, nothing, nothing, and then exploded fourfold in a year.

[01:12:00] Barry Ritholtz: They’re driving the entire inquiry of returns.

[01:12:05] Chris Davis: It’s amazing. So, but again, we viewed those as enablers. But in enablers, I would also include things like natural gas and copper. They are big, big beneficiaries. So we own Coterra, which is now Devon, ConocoPhillips, Tourmaline — our focus is on natural gas and copper. So those are the enablers. Then the users, who are gonna be the beneficiaries. Well, you’ve gotta think — financials is a great example. Anything where you have a big amount of laptop class workers. It’s what Elon called the laptop class. It’s likely that AI will do to the laptop class what globalization did to blue collar workers.

[01:12:49] Barry Ritholtz: Meaning very much hollow it out.

[01:12:51] Chris Davis: Hollow it out. The best will still have work, the best will be more valuable, they’ll be more productive. But there’s gonna be a lot of unemployed second-year lawyers and things like that. And so healthcare — claims processing, compliance functions, things like that. So there we focus on the banks that have the scale, the tech stack, and the management to do it. So Capital One, number one. I’d keep Wells Fargo on that list. I think US Bank crosses that chasm. So those, but also —

[01:13:25] Barry Ritholtz: JP Morgan Chase is part of the group.

[01:13:26] Chris Davis: JP Morgan Chase has done such a great job, but the valuation has gotten —

[01:13:30] Barry Ritholtz: So high. And how do you put the Amexes and the MasterCard, Visas of the world?

[01:13:33] Chris Davis: We don’t own Visa or MasterCard. And we have a very small position in Amex. And essentially the reason is, we just think that is an area where there is a big spread. They may be on the other side, but boy, there are a lot of people — especially merchants — that would like to figure out some way to bypass that.

[01:13:52] Barry Ritholtz: That 3% is a big number.

[01:13:55] Chris Davis: A big number.

[01:13:56] Barry Ritholtz: This is the first time in my lifetime I have started noticing cash and credit card prices on restaurant menus. This was never a thing before.

[01:14:06] Chris Davis: No, and you really see it when you travel. And again, those are so highly valued — at 30 times earnings for Visa. It just seems to us there’s too much risk there. I’ll own the Capital One at nine times. So those are the users. Then the next category is what Jeff Bezos — we call them the indifferent, or the protected. Jeff Bezos, when he said, people ask me what’s gonna change; they all ask me — what’s not gonna change? That’s a very important question. So there, Tyson Foods. Chicken’s not gonna change, right?

[01:14:38] Barry Ritholtz: And wait — chickens aren’t gonna lose their jobs to AI.

[01:14:40] Chris Davis: Chickens are in good shape. But here you have to be careful, because you don’t have high growth rates, so you don’t wanna overpay, and they’re cyclical businesses, so you don’t wanna pay at the top of a cycle. So Tyson, I think, has a low multiple on cyclically depressed earnings. What else? MGM — I think owning 50% of the Las Vegas strip, 20 or 30% of Macau, and a hundred percent of the only legal gambling in Japan, in Osaka, when it opens in 2029 — that’s very valuable. I don’t think that gets disintermediated by AI. So call those the protected, the what-won’t-change. The last category is the Walking Dead. And there, you mentioned Visa and MasterCard — I don’t know, title insurance, I don’t know. There are all sorts of things where it is really amazing how much money is made for something that you should be able to get around. We’ve seen some of the pressure in the SaaS companies. And so that’s the lens that we look at for all of our companies. We put them through this lens of this fast-changing world. We wanna stay nimble. And Barry, one of the things I think is really important is, I think this is a world where taking liquidity risk is really dangerous, because there’s so much flux. So I think that’s some of the pressure we’re seeing in private equity, private credit. People are saying, why did I lock up my money for —

[01:15:59] Barry Ritholtz: Seven years?

[01:16:00] Chris Davis: For seven years? If you’re lucky. It’s gonna be longer, I think. So I think the wheels are coming off that. And indexes — remember Kodak? You ready for a number? 10 million digital cameras had been sold when Kodak was still in the top third of the S&P 500. That’s amazing.

[01:16:18] Barry Ritholtz: Isn’t —

[01:16:18] Chris Davis: That amazing? It’s like, 10 million people knew they would never buy a roll of film again. It was dead. And so the advantage — when Japan peaked in the eighties, every active manager in international investing who was underweight Japan outperformed for the next 10 years just by saying, oh, Japan’s going down, I’m out. And so the index got killed, because it had to sort of go down with the ship. So I think nimbleness, liquidity, flexibility, and this sort of research lens are gonna actually become more valuable. So I think we could see some of the time-tested things that worked in the last decade — dividend darlings, momentum, private equity, indexing — I think all of those things could be challenged given this fast-changing world.

[01:17:05] Barry Ritholtz: I’m glad you brought up a few things there, because when you look at some of the fallout from low-cost indexing — the Vanguard effect, BlackRock, whatever you wanna call it — they have all put the fund industry under a lot of pressure. There’s fee compression. There’s been a move to not just indexing, but to ETFs generally. So when your own business — you’re looking at businesses with moats, businesses with defendable processes, and a good culture. You are running a business with a lot of employees and a lot of clients. How do you respond to this external pressure? How do you manage, not the investments, but the business of investing, when it’s just becoming more competitive and more challenging than ever?

[01:17:58] Chris Davis: Well, we’re lucky, because, one, we charge low fees. If you charge two and 20 —

[01:18:09] Barry Ritholtz: If only I could.

[01:18:10] Chris Davis: I know, I know —

[01:18:11] Barry Ritholtz: I mean, intellectually, I have a problem with that. But part of me is like, nice work if you can get it.

[01:18:18] Chris Davis: I know. I spoke to a guy that charged two and 20 years ago, and I said, why two and 20? What’s the business model? He said, I can’t get three and 30. So that’s hilarious. We’ve always just run with this idea — Charlie once said to me, Charlie Munger: what’s wrong with giving people a bargain?

[01:18:36] Barry Ritholtz: Or at least a fair price.

[01:18:37] Chris Davis: And it makes it easier for you to outperform over time. So, one, I feel — two, we’re a frugal place. I work with seven colleagues. We’ve been together on average 20 years, 25 years average experience. And we would do this with no outside money, because of the inside money. So we run it with what I would call a real family office mindset, with our own money alongside, in a very low cost operation. And the last thing, Barry, is, we are in a lasting game. What I can tell you is, if 90% of the market was passive, the remaining 10% of active would make a fortune.

[01:19:19] Barry Ritholtz: I’ve said that exact thing. If indexing is taking over, doesn’t that create all sorts of inefficiencies for a savvy active manager?

[01:19:29] Chris Davis: Absolutely. And I don’t think it’s a coincidence that we started outperforming. I mean, we’ve outperformed the value index for all periods, but we lagged the S&P in this momentum market — and that changed about four years ago, and nobody’s talking about it.

[01:19:45] Barry Ritholtz: Coming out of the pandemic.

[01:19:46] Chris Davis: Basically, yeah, we’ve been grinding an advantage over the S&P for the last three, three and a half years. And this is with less than half the weight in technology that the index has. So we are underweight the hottest sector, but yet we’ve been grinding out an advantage for three or four years. Why? And I think it’s just because there’s way more money indexed than is thought of. There’s way more money in momentum than is thought, and when I say there’s more in indexing, it’s because there’s so much closet indexing. So I don’t think it’s impossible that we’re already at 70% functionally indexed. Really? So that will really help us. So we’re in a lasting game, we’ve got the balance sheet to do it, and we’re gonna be on the other side.

[01:20:33] Barry Ritholtz: That’s really fascinating. You mentioned you guys would just do this without outside money, but let’s put some flesh on those bones. Davis Advisors, the company, the family foundation, you and your partners, the employees — you collectively have more than a few billion dollars in the funds. So you are not only aligned with your clients. I almost feel like “skin in the game” has become a cliche. But the question I want to ask is, being invested that way alongside the clients, how does that affect your decision-making process? And what does that do when you are going through one of those periodic crises that we’ve seen so much over the past 25 years — dot-coms, GFC, pandemic? How does having skin in the game affect your decisions?

[01:21:29] Chris Davis: Well, I think it makes us much more rational and much more long term. I once had a colleague that we had to part ways with, because he said that he was so unimpressed by things like momentum, even if they worked. He said, look, if I had a blind monkey in my office pointing to the newspaper every day at a stock, and every single day whatever stock it pointed to went up — he said, you could watch that monkey for six months, you could watch it for a year, you could watch it for two years, and you still wouldn’t invest with the monkey. And I said, of course I wouldn’t. It’s a blind monkey. This is my money, this is my client’s life savings. You think I’m gonna say, oh, the blind monkey pointed at the paper? So when we are in an environment where the market is on a tear and people are saying, oh, you’re dinosaurs — we’re able to hold our discipline. In 2007, our financial fund had lagged most other financial funds, because we were underweighted in real estate, and we didn’t own any Fannie, we didn’t own any Freddie, we didn’t own any Countrywide, we didn’t own Bear Stearns, we didn’t own WaMu. And people would say, what, you’re like a dinosaur? And it’s because it’s our money. And so we don’t mind if it takes a while for that weighing machine to work. We look at every year — did the companies get stronger? Did they get heavier, did they get more valuable? And if so, we view our research as working. And sometimes the stocks don’t go up, sometimes they do, but we’re focused on the businesses.

[01:23:07] Barry Ritholtz: On the process, and not just what’s going up that day. The blind monkey reminds me of a fascinating quote from Ken French of Dartmouth. Michael Mauboussin has written a lot about the separation between skill and luck. And French, of Fama-French, had said, it’s very challenging to tell the difference between skill and luck with fund managers. And to really have a data set where you can make an informed decision takes about 20 years. So if you’re gonna wait for that blind monkey, you gotta wait 20 years. And you’re starting out with a blind monkey. I think we have to assume that it’s luck and not skill.

[01:23:51] Chris Davis: Well, and look, Barry, your clients come to you — you could say it’s because of your performance, and performance matters. But —

[01:24:00] Barry Ritholtz: I don’t think my clients come to —

[01:24:01] Chris Davis: Well, what I was gonna say is, what really matters is trust, right? And conviction. And so one of the things — we have clients that say, hey, you went through a period of underperformance, you were out of sync with the market, we weren’t worried. You were building wealth for us every year. We don’t care, oh, this index went here, or the index went there. We’re with you because we have conviction that you’ll get us to our retirement, you’ll get us to our kids’ college funding, you’ll help us achieve our goals. And maintaining that is something you do with your own money. You don’t chase the hot dot. But if you are an investment manager and all of your value comes from the assets under management, you have to chase the hot dot. So trust is an undervalued part of the promise and the value that an investment manager can give to their clients. If your clients trust you, they will get a better return even if you underperform an index — if their trust is able to keep them invested through the ups and downs.

[01:25:02] Barry Ritholtz: Really, really fascinating. All right, last question before I get to my favorites that I ask all my guests. What do you think investors are not generally talking about, thinking about, but perhaps should be? Could be a topic, a geography, an asset class. What important issue is kind of getting overlooked these days?

[01:25:27] Chris Davis: Well, I think these three big transitions in the economy are going to turn a lot of what’s become conventional wisdom about investing upside down for a while. So I think — what hasn’t worked? Active management hasn’t worked. Value, price discipline hasn’t worked. What has worked? Oh, alternatives, illiquidity, that’s been great. What has worked that I think is dangerous? Dividend aristocrats.

[01:26:07] Barry Ritholtz: You think dividend aristocrats are dangerous because —

[01:26:10] Chris Davis: Because they’re looking in the rearview mirror, and they’re not factoring in these big three changes that we talked about.

[01:26:17] Barry Ritholtz: Well, isn’t that the problem with all models?

[01:26:20] Chris Davis: Kodak was a dividend aristocrat. Xerox was a dividend aristocrat. Polaroid was a dividend aristocrat. And that’s fine, unless there is systemic change. And when you have a big change like you had coming out of the seventies, and the change into the eighties, nineties — you have these big changes, and then everything that worked, everything that helped you survive the crash and the depression — in 1948 you could say, I’m not greedy, I just wanna own bonds, stocks are too dangerous — and you are wiped out in a generation, and bonds became certificates of confiscation. So I think people are underestimating how much these conventional strategies — alternatives, the backward-looking models, including even momentum, indexing versus active. And I would even maybe add international. International had underperformed for so long, and —

[01:27:18] Barry Ritholtz: Just the past two years starting to look pretty good.

[01:27:20] Chris Davis: Just starting to look pretty good.

[01:27:22] Barry Ritholtz: And so you like international?

[01:27:23] Chris Davis: I like international. We run an international ETF, DINT, and it’s just like us, it’s all stock picking. It’s run by my partner Danton. In our family, we always keep probably 15, 20% of assets in international. And that looked really stupid until two years ago, and it’s looking a little better. So I think those conventional things are likely to turn upside down.

[01:27:47] Barry Ritholtz: What’s the old joke? Being diversified means there’s always something to apologize for in your portfolio. That’s so true. All right, so let me jump to my favorite questions I ask all my guests, even though I would love to stay here and keep you chatting for another three hours. I know you have places to go and people to see. The first question I always ask — I kind of know the answer, but I’m gonna give you another swing at it. Who were your mentors who helped shape your career? And I kind of see four people already.

[01:28:22] Chris Davis: Well, you certainly got my dad, my grandfather, and Charlie. I think if I was gonna add another one, I would add Tom Gayner, the CEO of Markel. I just think — that sort of principled stewardship leadership, that servant leadership, a company that is built with an enormous durability and culture of stewardship in mind. We’ve served on boards together. He’s helped me through difficult times. I’ve done my best to help him through difficult times. It’s a great thing to go through life surrounded by people you admire. And of course, I get to work with people I admire. And that’s a big plus.

[01:29:00] Barry Ritholtz: Really, really interesting. Let’s talk about — I know you’re a fellow reader. What are some of your favorite books? What are you reading currently?

[01:29:10] Chris Davis: Well, I have too many favorite books to list, but I’ll give you three. I was, by the —

[01:29:14] Barry Ritholtz: By the way, people always tell me, oh, that’s my favorite question. I’m always looking for something new.

[01:29:18] Chris Davis: Well, I’ll give you the most recent one I read that I think is a good antidote to the AI phenomenon, or the AI hysteria, or the AI obsession — that’s a better word. It’s a book called “Alchemy.” The author is Rory Sutherland. I think that’s a very useful book to read right now.

[01:29:40] Barry Ritholtz: On marketing and advertising.

[01:29:43] Chris Davis: It’s really on the ways in which we maybe fetishize, if I said that right, rationality. When you look at human behavior, it’s very irrational, but it’s often irrational in predictable ways. And the more we say “what’s the rational solution to a problem” and expect people to obey that, the more we’re gonna keep getting crazy outcomes. People react to placebos, but we don’t study placebos. That’s the example he gives that I love: if you wanted to create a really spectacular competitor to Coca-Cola and you hired McKinsey, they would say, well, you should make something that tastes good, sell it a little cheaper, and make it ubiquitous. What you wouldn’t say is, make it more expensive, make it taste bad, and put it in a smaller can. And that’s Red Bull. And so there’s a lot to study in a case like that — how has that worked so well? So I think “Alchemy” is a useful one. Now, I think everybody should read, and then have their kids read, Morgan Housel’s two best books, which should be read as a single book: “The Psychology of Money” and “The Art of Spending.” They go together. I said, one is like the sequel to The Godfather — it’s Godfather Two. It’s not a different movie, it’s just —

[01:31:07] Barry Ritholtz: Continuation.

[01:31:09] Chris Davis: The culmination, in a way. And you —

[01:31:11] Barry Ritholtz: Could skip three.

[01:31:12] Chris Davis: Okay, that’s a —

[01:31:13] Barry Ritholtz: My father — three just doesn’t —

[01:31:15] Chris Davis: I agree. Not as good as the first two. I agree, I agree. And then for a third book — just the one that immediately comes to mind at the moment is “Americana.” It’s a book by — there are two books by the same name, I know, because Charlie had told me —

[01:31:34] Barry Ritholtz: 400 years —

[01:31:35] Chris Davis: Of American capitalism.

[01:31:36] Barry Ritholtz: I love that book. I had him on the podcast years ago.

[01:31:39] Chris Davis: Bhu Srinivasan. Yeah.

[01:31:40] Barry Ritholtz: Yes. Spectacular.

[01:31:41] Chris Davis: Spectacular. And it’s just really —

[01:31:43] Barry Ritholtz: I think people are just so unaware of the history of American capitalism. And that book just does a fantastic job laying out the success.

[01:31:54] Chris Davis: And it will help you as an investor if you think in chapters of that book. If you think about, okay, AI is unfolding — he talks about the interstate highways being built. Well, when the interstate highways were built, who made money? McDonald’s, Wendy’s. The railroads were built — who made money? It wasn’t the railroads. It was the factories, the ability to distribute. And who were the dead men walking? When the car was developed, there were 3,000 car companies. There were 371 publicly traded internet companies. That’s why picking the emerging winners in the early stages is tricky. Always hard. But think of the chapter, think of that whole arc — that’s a terrific book.

[01:32:42] Barry Ritholtz: What are you streaming these days? What’s keeping you entertained — Netflix, podcasts, whatever?

[01:32:48] Chris Davis: Well, anybody who knows me — I watch almost nothing. And I particularly don’t watch sports. I don’t know a lot about sports, with one exception. I love ice hockey. And I love ice hockey in part because we had a lot of family history. My mom’s family helped start the NHL and founded the Boston Bruins.

[01:33:13] Barry Ritholtz: Wait, what? Your mom’s family helped start —

[01:33:15] Chris Davis: The NHL, and founded the Bruins. And we owned the Bruins through my childhood. Can you imagine? My father, who’s probably been to eight hockey games in his life, has his name carved on the Stanley Cup twice, because Shelby Davis was the treasurer of the Boston Bruins. And so they won the cup twice. He got his day with the cup. But one of the things I love about it is that my grandfather, in explaining his love for it to me, said: every sport handicaps the athletes — you can’t use your hands, you can’t use your feet, you have to dribble, whatever it is. He said, hockey accentuates every human ability.

[01:34:01] Barry Ritholtz: Between the skates and the stick —

[01:34:02] Chris Davis: The skates, the stick, the pads, the oval rink, the ice. I mean, it’s just an amazing accelerator of human ability. And I guess the reason I think of it right at this moment — of course, we’re moving into the Stanley Cup playoffs, you were in the last two rounds — but it’s also because I think there’s a way to look at AI as accentuating human ability.

[01:34:26] Barry Ritholtz: It’s an accelerator, for sure.

[01:34:28] Chris Davis: It’s an accelerator. And what that could mean for healthcare — for healthcare inflation going negative. I mean, there are all sorts of —

[01:34:35] Barry Ritholtz: We’re already finding so many new molecules. If anything’s going to find a cure to a lot of cancers, it’s gonna be this.

[01:34:44] Chris Davis: And again, we have to recognize that, of course, like every technology, there are going to be negatives. There are gonna be delays. And as people get disillusioned, we could get a big swing the other way. So, equanimity. But again, going back to “Americana” and tying it to ice hockey — think of those long chapters.

[01:35:03] Barry Ritholtz: All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in investing?

[01:35:12] Chris Davis: Well, I would say learn everything you can about business, and ideally work in business. I met a guy down at Markel — they had their reunion just yesterday, I just flew back from Richmond yesterday. Their reunion is a great event. I recommend everybody go — just buy a share of Markel, go to the reunion. You’ll see something a lot like Berkshire. I love the value system there. But I met a guy who was an engineer at Altria, which is headquartered in Richmond. He owned a lot of Altria, he owned a lot of PMI, but he started investing for himself about 20, 25 years ago. He showed me his portfolio, including his cost basis. He’s built a wonderful record as an investor. And so, I don’t love all these kids going to Goldman Sachs and to private equity. I think private equity — it was a wonderful business to begin with, and I think it has absolutely lost the thread.

[01:36:16] Barry Ritholtz: And the size. It’s just ramped up and —

[01:36:18] Chris Davis: Got so big, and they’re all selling to themselves. And they’re trying to get the widows and orphans in there so that they can unload, have some final sale — just like they did with MLPs and the oil and gas partnerships in the eighties. And I really hate it. There are people within the world of private equity that I admire, that have built stunning records, but most of what’s happening at this scale is just stealing money from pension plans —

[01:36:49] Barry Ritholtz: 401(k)s, endowments —

[01:36:50] Chris Davis: 401(k)s, and it’s going into penthouses and Ferraris. Where are the customers’ yachts? Look at the returns over the last 10 years of the average state pension plan. Then look at the breakdown of assets, and you realize that all of the drag on their returns is alternatives.

[01:37:08] Barry Ritholtz: Amazing. Final question. What do you know about the world of investing today that might have been useful back in the late eighties, early nineties, when you were first getting started?

[01:37:21] Chris Davis: Every investor, if they’re honest, will say that their biggest mistakes were what they sold. And so I would say that I’ve always put all my money in the funds, and I think that’s the right alignment. But I realize now, which I didn’t realize then, that there are some real differences — which is that, in the funds, we have to really think about diversification. If each time I bought a stock in the funds I had bought it in my own name, instead of putting my money in the funds and buying, I probably would’ve just left it alone for the last 30 years, and it would’ve done very well. So — I first bought Amazon in 2002.

[01:38:05] Barry Ritholtz: Good timing.

[01:38:06] Chris Davis: Yeah. But I sold it in 2004.

[01:38:08] Barry Ritholtz: Bad sale.

[01:38:09] Chris Davis: Thank you.

[01:38:10] Barry Ritholtz: I could tell you the same story with —

[01:38:12] Chris Davis: Apple.

[01:38:13] Barry Ritholtz: It was $15, with 13 in cash. Tripled my money. I was a genius. That was like 10,000% ago.

[01:38:21] Chris Davis: I know. We did the same thing in Apple. We viewed it as a real estate play. We said, if you mark the real estate to market and add it to the cash, it was free. It was an 80-cent dollar. And then when it went to $2, we were like, whoa, too rich for our blood. So I do think that I’m trying to really learn and think about how I can improve results over the next 20 years by being more willing to hold. And what does that mean in terms of position size? What does it mean in terms of volatility? What does it mean in terms of client expectation? Would I feel the same if a client has $25,000 with us as I would if it was just my own money? Because I can absorb a bigger loss, and I can absorb more volatility. So that’s something I’m still trying to process. But God, I love the business. And, like my grandfather, if I could die at my desk at a very old age — I do have the best job on earth. I get to study success. I get to work with people I admire. I go and visit companies to focus on that elusive idea of culture. I get to meet the incredible people that have built our society, that have built businesses. And we have a country that loves to tear down the heroes. We admire the guy on the way up, but once they succeed, we somehow decide they’re a villain. I don’t think that’s constructive. I think it’s a strange thing for us to admire athletes and not admire Jeff Bezos for what he created and how it has served all of us every day. We all use Amazon and it serves us. Every day we delight in seeing our kids on Instagram or using Google Maps. And the idea that we continue to vilify our heroes, instead of judging people by their biggest accomplishment, not their weakest moment.

[01:40:15] Barry Ritholtz: Chris, thank you so much for being so generous with your time. This has been absolutely delightful. We have been speaking with Chris Davis. He is the chairman and portfolio manager at Davis Advisors. If you enjoy this conversation, well, check out any of the 641 we’ve done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you get your favorite podcast. I would be remiss if I didn’t thank the crack team that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

~~~

The post Transcript: Chris Davis of Davis Funds appeared first on The Big Picture.

In this guest post, financial advisor (and former Board of Directors member of both the FPA and the CFP Board) Dan Moisand discusses why membership associations are still as important as they ever were, and arguably even more so in the case of financial planning, where our recognized status as a profession is still developing in the eyes of the public, which can require a strong membership association to build credibility.

Notably, in recent years the CFP Board has done much to advance recognition of financial planning as a profession. It requires education on an increasingly comprehensive body of financial planning knowledge, administers a robust comprehensive exam, and has repeatedly lifted its code of ethics and standards of conduct to be increasingly fiduciary in its requirements to serve clients' best interests at all times. While also supporting and better recognizing financial planners who take the time to engage in pro bono financial planning services for those who cannot afford the services.

Yet the reality is that CFP Board's scope is limited, where organizations like the Financial Planning Association can have impact. While CFP Board may be helping to drive the profession, the FPA supports the professional in areas that CFP Board is not well suited, from Continuing Education (through new FPA's Competency Model) to Practice Management (with FPA's professionally-diverse community of advisors) to Advocacy (where FPA can uniquely advocate on behalf of professionals, even sometimes including against the CFP Board).

As Moisand ultimately notes, the FPA does still have work to do, to turn around a nearly 20-year steady decline in membership, and the organization is still in the midst of trying to revamp everything from its MediaSource tools (for consumer media leads) to PlannerSearch (for consumers seeking a financial planner) to its series of four national conferences. Still, while other specialized membership organizations are growing, the unique benefits from advocacy to community amongst a diverse group of business models arguably means those who wish to see the profession advance as a whole should consider belonging to their more specialized membership groups and the FPA.

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My guest on today's podcast is David Mozeika. David is the founder of TOMORO, an RIA based in Red Bank, New Jersey, that oversees $350 million in assets under management for 600 client households.

What's unique about David, though, is how he approaches financial planning from a cash flow perspective, treating income as an asset to be distributed based on a client's goals.

In this episode, we talk in-depth about how David treats cash flow planning not as a budgeting exercise but rather as an opportunity to default clients into saving rather than spending, how David uses what he calls a "cash flow reservoir" to hold client income, with a portion of the reservoir transferred to the client's checking account for spending (frequently leading to greater savings than transferring extra cash from the checking account to savings or investment vehicles), and how David's approach helps clients reduce their "unconscious spending" (such as on subscriptions that they might not use often) and supercharge their savings.

We also talk about David's four-part "financial positioning" process (which includes protection, growth, estate planning, and cash flow) and the milestones he wants to hit when meeting with prospects, how David treats meetings with ongoing clients as a forward-looking "calibration" process based on changes in their financial situation, and how David puts an emphasis on "defense" in the planning process, digging deep into clients' insurance policies to ensure their coverage is commensurate with the growing wealth they achieve over time.

And be certain to listen to the end, where David shares how he created his own software solution to run his "income under management" cash flow planning system (and began to offer it to other advisors), why David made the transition to the RIA model after building a successful career within the insurance channel, and how David has ultimately found success by leaning into his unique talents to solve other people's challenges.

So, whether you're interested in learning about an alternative approach to client cash flow management, the potential benefits of sending client income to a "reservoir" rather than their checking account, or how to leverage ‘defensive' strategies to improve client outcomes, then we hope you enjoy this episode of the Financial Advisor Success podcast, with David Mozeika.

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Markets

• Corporate profit margins rule all. (tker.co)
• AI trades are not a US-only phenomenon. (awealthofcommonsense.com)
• Good luck trying to forecast earnings a decade out. (ritholtz.com)

ETFs

• A change is coming for cannabis stocks and ETFs. (sherwood.news)
• What makes for a successful liquid alts ETF. (hedgeco.net)

AI

• Anthropic is now calling for a slowdown in AI development. (semafor.com)
• OpenAI wants to take the chat out of ChatGPT. (spyglass.org)

Immigration

• Well-funded startups are still able to hire H-1B workers. (pitchbook.com)
• There has not been a surge of denaturalizations under Trump. (npr.org)
• Eliminating birthright citizenship causes its own set of problems. (nytimes.com)

Law

• What happens when the courts can no longer trust DOJ attorneys? (thebulwark.com)
• Why lawyers are fleeing federal government jobs. (nytimes.com)
• How the Trump administration wants to preempt whistleblowers. (theatlantic.com)
• Publicly acknowledged donors to Trump's ballroom keep winning federal contracts. (washingtonpost.com)
• ICE doesn't want to have to disclose deaths of recently released detainees. (washingtonpost.com)

States

• Calling for the end of property taxes is fiscal nihilism. (hamiltonnolan.com)
• No matter where you look religion is getting injected into public schools. (wapo.st)
• More states are looking to launch child-focused savings programs. (thinkadvisor.com)

Economy

• What's behind the boost in payrolls? (wsj.com)
• Real yields are headed higher. (econbrowser.com)
• A look the cap table of the US of A. (thetwocents.substack.com)
• The economic schedule for the comgng week. (economicweekly.substack.com)

Earlier on Abnormal Returns

• Top clicks this week on Abnormal Returns. (abnormalreturns.com)
• What you missed in our Saturday linkfest. (abnormalreturns.com)
• Saying no to algorithmic slop. (abnormalreturns.com)
• Don't miss a thing! Sign up for our daily e-mail newsletter. (abnormalreturns.com)

Mixed media

• Why Putin can't obtain his ultimate goal in Ukraine. (theatlantic.com)
• How Russian oligarchs get around Western sanctions. (wsj.com)
• Russia has been jamming GPS signals in Europe. (news.sky.com)
• Why Putin wants is investing in anti-aging technologies. (wsj.com)

Markets

• Gold is well off its highs. (axios.com)
• Semiconductor stocks have taken a hit from their highs. (semafor.com)
• ASML Holding ($ASML) is Europe's most valuable company, ever. (bloomberg.com)
• When do rising interest rates start to matter? (trendlabs.com)
• Is an AI bubble inevitable? (awealthofcommonsense.com)

ETFs

• Low costs matter, even for Bitcoin ETFs. (wsj.com)
• The Vanguard S&P 500 ETF ($VOO) has crossed $1 trillion in assets. (etf.com)

Private assets

• Blackstone ($BX) is having to gate Bcred. (wsj.com)
• Private credit lenders are now tightening up their lending standards. (wsj.com)

IPOs

• S&P took a stand. (philbak.substack.com)
• S&P stands alone among index providers when it comes to SpaceX. (ft.com)
• The vast majority of American investors will soon be SpaceX shareholders. (thebulwark.com)
• A look at the investors who are going to clean up on SpaceX. (om.co)
• Traders and investor should view SpaceX differently. (aswathdamodaran.blogspot.com)
• You are under no obligation to have an opinion about the SpaceX IPO. (godspeed.today)

Prediction markets

• Signs that prediction markets are taking share from sports books. (barrons.com)
• How Polymarket utilizes paid influencers. (politico.com)
• Not everyone is happy about the approval of perpetual futures. (theblock.co)
• Robinhood ($HOOD) is shifting trades away from Kalshi. (bloomberg.com)
• Prediction market companies have rapidly built up their regulatory efforts. (newrepublic.com)

Economy

• The May NFP showed continued payroll growth and a 4.3% unemployment rate. (bonddad.blogspot.com)
• Jobs growth continues, but its still largely driven by healthcare jobs. (newsletter.platypuseconomics.com)
• How the stock market is driving American wealth. (axios.com)
• Americans just keep spending. (finance.yahoo.com)

Earlier on Abnormal Returns

• Longform links: suspicious markets. (abnormalreturns.com)
• What you missed in our Wednesday linkfest. (abnormalreturns.com)
• Personal finance links: winning at life. (abnormalreturns.com)
• Saying no to algorithmic slop. (abnormalreturns.com)
• Don't miss a thing! Sign up for our daily e-mail newsletter. (abnormalreturns.com)

Mixed media

• Half of all web traffic is now algorithmic, i.e. bots. (tomshardware.com)
• A lot data center projects are getting pushed through despite widespread opposition. (slate.com)
• Some skepticism on space-based data centers. (splittinginfinity.substack.com)

Autos

• How Detroit markets pickup trucks to people who don't really need pickup trucks. (nytimes.com)
• Americans are keeping their cars longer than ever. (wsj.com)
• Why the U.S. fell behind in EV adoption. (econofact.org)
• Why hybrid sales are surging. (wsj.com)
• So are sedans. (sherwood.news)

Transport

• How robotaxi companies deal with 'edge cases.' (wsj.com)
• Some farmers don't want or need high tech tractors. (404media.co)
• Why all commercial aircraft don't yet have Automatic Dependent Surveillance-Broadcast, or ADS-B. (wsj.com)

Energy

• The world should be taking advantage of China's largesse when it comes to solar panels. (ft.com)
• How to think about land use and solar. (theconversation.com)
• India has embraced solar. (grist.org)
• How plug-in solar works. (wsj.com)
• Bury those power lines! (grist.org)

Animals

• People love looking at fireflies. (wsj.com)
• How pigeons find their way home. (smithsonianmag.com)
• Deterring sharks isn't easy. (wsj.com)

Apple

• PC makers are now targeting the Macbook Neo. (wired.com)
• A review of Geoffrey Cain’s latest book, "Steve Jobs in Exile." (arstechnica.com)
• Apple ($AAPL) isn't going to buy Perplexity. (daringfireball.net)

Behavior

• Why middle aged men are more at risk of suicide. (anthonybbradley.substack.com)
• Derek Thompson talks with Laurie Santos about the loneliness crisis. (derekthompson.org)
• On the downsides of remote work. (scientificamerican.com)
• How EMDR therapy works. (wsj.com)
• How catastrophizing comes at us. (yearofmentalhealth.com)
• On the power of overcoming friction. (twopct.com)
• Just invite people over. (theatlantic.com)

Ebola

• How Ebola kills. (npr.org)
• Moderna ($MRNA) gets $50 million to develop mRNA Ebola vaccine against Bundibugyo. (arstechnica.com)

Melanoma

• How mRNA vaccines are being used to treat melanoma. (npr.org)
• How melanoma spreads at different ages. (sciencedaily.com)

Cancer

• Revolution Medicines ($RVMD) has the biggest breakthrough in pancreatic cancer, ever. (yahoo.com)
• Roche used to dominate the cancer market. No more. (giftarticle.ft.com)

Health

• The raft of medical innovations announced recently have been years in the making. (axios.com)
• Researchers are testing a universal coronavirus vaccine. (sciencedaily.com)
• The chair of the President’s Cancer Panel is a co-author on a new paper promoting ivermectin as a cancer treatment. (importantcontext.news)
• The Office of Human Research Protections has largely been defunded. (statnews.com)
• U.S. cigarette smoking has hit an all-time low. (apnews.com)

Drink

• Canned cocktails are gaining share. (theatlantic.com)
• Scotch, an AI startup, wants to remake liquor retailing. (news.crunchbase.com)

Cattle

• The screwworm is back in the U.S. (axios.com)
• Ranchers have problems on top of the screwworm. (nytimes.com)

Food

• Hershey's ($HSY) makes bank marketing s'mores. (fooddive.com)
• Higher scotch bonnet prices mean higher hot sauce prices. (semafor.com)
• Belgium has a surplus of potatoes. (nytimes.com)
• Why 7 Brew seems to be everywhere these days. (cnn.com)
• The foreign food chains that have come to NYC. (listomania.substack.com)
• Americans want farm animals to be treated humanely. (nytimes.com)

Entertainment

• Why should Hollywood learn from the success of 'Backrooms' and 'Obsession'? (slate.com)
• People now watch YouTube more than Netflix in average daily viewing time. (mediaplaynews.com)

Sports

• What a run to the NBA Finals is worth for the Knicks. (huddleup.substack.com)
• Ohio State is setting cases regarding sexual abuse by former OSU sports medicine and team doctor Richard Strauss. (sportico.com)

College

• Finance is the top career choice of university students and recent graduates. (thinkadvisor.com)
• Why colleges are reluctant to crack down on (AI) cheating. (freddiedeboer.substack.com)
• Why every college graduate should read Benjamin Todd’s newly updated book, "80,000 Hours." (marginalrevolution.com)

Children

• How the OBBBA undermines public schools. (slate.com)
• Estonia gave all its 11th and 12th graders a free ChatGPT account. (semafor.com)

Earlier on Abnormal Returns

• What you missed in our Friday linkfest. (abnormalreturns.com)
• Saying no to algorithmic slop. (abnormalreturns.com)
• Don't miss a thing! Sign up for our daily e-mail newsletter. (abnormalreturns.com)

Mixed media

• Brett Steenbarger, "In all areas of life, the greatest returns come from well thought out, meaningful investments and the ability to commit to those." (traderfeed.blogspot.com)
• LinkedIn is now the province of influencers. (nytimes.com)
• Why VCs look for founders with 'heart in the game.' (hunterwalk.com)
• You don't have to yield to the machines. (theconvivialsociety.substack.com)

This week, I sit down with Chris Davis, Chairman and Portfolio Manager at Davis Funds. They discuss his approach to managing risk and the key elements changing the economy. We also discuss Chris’s mentors including Charlie Munger, and how he settled into the family business.

A list of his current reading and favorite books is here; A transcript of our conversation will be available here shortly.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube (video), YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our BONUS Masters in Business Monday with Joe McLean, Managing Partner at MAI Capital Management, where he leads firm’s Sports & Entertainment division, serving 100s of pro athletes/entertainers across NBA, NFL, MLB, PGA + NASCAR. His path to finance runs directly through the locker room as a 4-year NCAA Division 1 player at U of Arizona. Dubbed the athlete’s “Money Whisperer” by the New York Times, he is known for his non-negotiable 60% savings mandate for clients.

Current Reading/Favorite Books

The post MiB: Beating the S&P For Generations with Chris Davis of Davis Funds appeared first on The Big Picture.

Of all the dumb things Wall Street is infamous for, perhaps none is sillier than the all too regular forecasting game. Quarterly earnings, Non-farm payrolls, annual S&P predictions, oil prices, inflation rates, FOMC cuts — it’s a never-ending parade of predictions, forecasts, and guestimates, most of which are wildly, often laughably wrong.

Guessing the revenues and profits of any company is tough enough; it becomes even more difficult for any company with only a few years of history.

Allow me to present to you Exhibit A in whatever subsequent litigation arises, via the WSJ:

“SpaceX’s revenue could reach $3.4 trillion in 2040, according to a Morgan Stanley analysis shared with top investors Thursday, according to people familiar with the matter.

Morgan Stanley told investors the rocket maker’s adjusted earnings before interest, taxes, depreciation and amortization in 2040 could top $2.7 trillion, the people said.”

I find it hilarious that anyone imagines they forecast revenues and/or profits a decade and a half into the future, let alone $3.4 trillion. Hey, you gotta move some shares, and this seems to be one way to accomplish that.

Just recall whatever you were thinking back in 2012 about 2026 (or the early 2010s about the mid 2020s)  — was Artificial Intelligence the top of your list? Intel finally rallying after the US government took a 10% stakle in it? Korea up 4X? GameStop / meme-stock short squeeze? Silicon Valley Bank / digital bank run? 500 basis point rate hikes in 2022? Did you anticipate the pandemic, the rise of EVs, the invasion of Ukraine, or either Trump elections? January 6, or October 7? A treatment/cure for Pancreatic Cancer?

The world is composed of countless co-variables — not only things we cannot predict, but also secondary effects and unforeseen consequences that are even more impossible to forecast — the further out you look, the number of possible outcomes increases exponentially.

So much happens over the course of a year that it makes forecasting challenging; 10-15 years into the future is utterly laughable.

Look, I get it, analysts’ jobs are hard enough as is, and many of them are justifiably terrified about being replaced by Claude.

Still, f*ckery tomfoolery like this does not give one confidence in this IPO process…

Previously:
Is SpaceX IPO Breaking Capitalism? (May 13, 2026)

“Nobody Knows Anything,” Wall Street Strategist Edition (January 2, 2025)

Nobody Knows Anything (May 5, 2016)

The Folly of Forecasting (June 7, 2005)

Nobody Knows Anything (Archive)

See also:
SpaceX won’t make the S&P 500 (FT, June 5, 2026)

Source:
Morgan Stanley Sees SpaceX’s Revenue Reaching $3.4 Trillion in 2040
By Corrie Driebusch
WSJ, June 5, 2026

The post Nobody Knows Anything, SpaceX IPO edition appeared first on The Big Picture.

Also in industry news this week:

• A report finds that while overall financial advisor client satisfaction is high, relatively lower levels of client engagement and willingness to make referrals suggest some firms might have room to grow not only by evaluating their client value propositions, but also by forging closer client relationships
• The compliance deadline for affected smaller RIAs subject to amendments made under Reg S-P hit this week, as some firms appear to face challenges securing assurances from third-party vendors that they are properly protecting client information and will be able to meet the notification deadline when a data breach occurs

From there, we have several articles on retirement planning:

• Four risks to retirement security, including those that can be mitigated through portfolio-based strategies (e.g., longevity and market risk) as well as those (including mortality and decision risk) that require different types of solutions from the advisory toolkit
• Why the relationship between retirement date and lifespan can be particularly hard to disentangle
• Three questions advisors can consider to gauge a client's retirement risk, from the composition of their spending to the percentage of their portfolio that is inflation-adjusted

We also have a number of articles on client communication:

• Why clients sometimes put off implementing the 'perfect' financial plan and the strategies advisors can use to encourage action
• While asking questions early on in the relationship is natural, clients might be more willing to open up if they feel like they aren't being judged based on the response
• A three-part framework that can take clients from being merely satisfied to actively engaged with the planning process

We wrap up with three final articles, all about kindness:

• The difference between being "nice" and "kind" and when each might (or might not) be appropriate
• Experimental research suggests that those engaging in generous or kind acts might underestimate the ultimate impact they're able to make
• How the ability to stand up for one's interests is a valuable complement to kindness in personal and professional interactions

Enjoy the 'light' reading!

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