Investment Discipline – What We Look For in a Company
While there are literally thousands of businesses around the world, not all businesses represent compelling investment opportunities. Over more than four decades of managing money on behalf of individuals and institutions, Davis Advisors has formulated a list of investment criteria that we believe foster long-term value creation for shareholders. These characteristics fall into three primary categories:
- Great businesses are built by first-class management teams.
- Often these are individuals who think like owner-operators, who consider the strategic and operational implications of their decisions, who allocate capital on a day-to-day basis in a financially productive fashion, and who manage risk in a manner that maximizes shareholder value over full market cycles.
- We view management as partners and place great value on those individuals who by their actions exhibit an exceptional degree of intelligence, energy and integrity.
Durable, Financially Strong Business Models
- The best long-term investments are typically durable, well-managed businesses that thrive in good times and have the financial strength to weather more challenging environments.
- We seek to invest in businesses that generate ample free cash flow from products and services that are not prone to obsolescence risk, earn high and/or improving returns on capital and ideally are well positioned to benefit from long-term secular tailwinds.
Sustainable Competitive Advantages
- Capital tends to flow to businesses offering the highest returns. Therefore, even the strongest, most well-managed businesses must constantly build and maintain formidable competitive advantages over competitors in order to preserve their superior economics.
- To maximize our chances of compounding our clients’ capital effectively over full market cycles, we have a strong preference for businesses with wide (and growing) competitive moats. The moats may include globally recognized brands, a dominant or growing share in a growing market, a superior profit model, a lean cost structure, unique distribution advantages, unique intellectual property, and so forth.