Every time I speak with Christopher Davis, chairman of Davis Advisors, I walk away with a clearer understanding of things I thought I already knew. That’s a big deal to me because I’ve interviewed hundreds of successful finance pros in the past 15 years, and—while I’m always impressed by their knowledge—I’ve recently been disturbed to find that many of them have lost sight of the basics.
But not Davis. He’s taught me, for example, to avoid overly complicated approaches to investing because, after all, “complicated” almost always costs you more in the end. By presenting a shorter route to the truth, Davis helps guys like me—and you—make the best decisions.
And he’s not some shaman, sitting isolated on a mutual-fund mountaintop. He’s in the thick of it—close with Jeff Bezos since he read the Amazon founder’s first annual report, and friends with Warren Buffett, whose job he got when Buffett left as lead director of The Washington Post.
Davis is also the rare CEO who finds ways to give some back—seldom found in a business that defines “innovation” as new ways to separate investors from their money. Coming out of the financial crisis in 2009, he actually lowered the fees on his firm’s mutual funds, a selfless gift to battered shareholders that he announced with all the fanfare of…a footnote. A financial columnist who actually read the small print broke the story in Fortune and concluded his column by writing: “So there it is: Wall Street acting good. Next on the agenda: looking West to see the sun rise.”
But in 2015, after years of booming postcrisis returns, the bull market showed its age by turning in the stock market’s worst performance since 2011. So in ’16, Wall Street is working even harder to separate us from our money. That’s why I decided to catch up with Davis and learn from him what I wish I’d learned in my 20s.
Save now and get “sneaky rich”
For a healthy guy in his 20s, it’s very difficult to imagine ever retiring, much less seeing any urgency whatsoever to start squirreling away cash for a rainy day that’s, well, 40 years off. After all, you’re still struggling to fork out for that second Tinder date or re-up your Crunch membership. But thanks to the math of compounding, these early years are by far the most important for your retirement. And in one way, says Davis, taking care of your financial fitness is much easier than your physical fitness.
“If you stop eating well and exercising when you’re 40, you’re going to be miserable and out of shape at 60,” Davis says. “But if you start saving in your 20s, you can stop in your 40s and have a way better outcome than if you start in your 40s and save religiously into your 60s. The math on that is so powerful.”
He’s right; in fact, I did the math when I wrote a book on this: If, from age 20 to 30, you save $3,000 a year, then never save another dime, you’ll retire with a nest egg of around $750,000, assuming 8% annual returns. If you wait until age 35 to start saving and put that same $3,000 away each year for 30 years at the same rate of return, you’ll retire with less than half as much—about $370,000. So get as close to maxing out your 401(k) now as you can. Your compounding savings are like a snowball rolling down a hill: The larger it gets, the more surface area it has for snow to stick to. Huge gains come when it’s been rolling for a long time.
Go cheap, go simple
Follow two rules when it comes to investing: Keep it cheap, and keep it simple. You won’t go wrong with passive index mutual funds or exchange-traded funds, which charge next to nothing and own every stock in the market.
“You’re buying a fractional share of Starbucks or a fractional share of Nike,” says Davis. “So every year as they sell more shoes, they earn more money, and you’ve got a percentage of those earnings.” But most actively managed funds that try to beat the market fail.
And though Davis New York Venture Fund, the company flagship, had some rough years before 2015, it outpaced the S&P 500 and competitors last year, and investors who’ve stuck with the fund for more than 15 years are well ahead of the market. If you forget everything else you read here, remember this: There are no “strategies” or “systems” that will let you trade stocks and come out ahead in the long run.
“There’s an old saying in Vegas,” Davis says. “We send limos for guys with systems.”
Don’t buy that dollar hot dog!
To have money to save, of course, you’ll need to keep your spending in check.
“We live in a consumer economy that teaches us that we’re depriving ourselves if we save instead of spend,” says Davis. “But if I were writing a letter to a younger me, I’d tell myself to realize the enormous pleasure that comes from building financial independence. It’s exactly like fitness—athletes will tell you that the more they work out, the more they take pleasure in it. They feel stronger, more confident; they perform better at work. And the same confidence you get from being physically fit, you also get from taking control of your financial life.”
When, he says, his kids tell him they’d be so much happier in a $50,000 car than a $25,000 car, he tells them to look ahead four years and imagine that either way they’ve got an aging car. But if they bought the cheaper one, they’d have an old car and an extra $25,000.
He tells the story of asking his grandfather for a buck to buy a hot dog. “And my grandfather said, ‘Do you realize that if, instead of spending that dollar, you save and invest it, and you live as long as I’ve lived and earn the returns I’ve earned over a long career, that dollar will be worth $1,000 by the time you’re my age? Is a hot dog worth $1,000?’ There’s so much in that lesson.”
Pretty tough there, Gramps. But I did check the math, and found that $1 compounded at 12.21% over 60 years equals $1,004.37.
Aggressive but not impossible.
Be the one they can trust
Saving, in theory at least, is easier if you’re earning good coin. Davis estimates he’s met with 500-plus CEOs over his career, at companies ranging from boring Midwestern insurance firms to Silicon Valley highfliers. Again, he’s on a first-name basis with Bezos and Buffett. I asked him which qualities distinguished the top performers.
“What makes people fail—and you see this in life outside the C-suite—is the inability to make a decision,” he says. “The inability to be accountable or take responsibility, the constant procrastination, the idea that if I can just put this unpleasantness off a little bit longer, somehow it’ll become somebody else’s problem. So the unsuccessful ones tend to have more in common than the successful ones.
“But what the successful ones do share is they’re people you’d trust to make decisions and to hold themselves accountable.”
Whatever your goal, Davis recommends visualizing then analyzing it. Want to marry a great woman? Think about the qualities she’d look for, then strive to embody them. The same technique works at the office. What qualities does a great boss need?
“The best way to succeed is to be deserving of success,” he says. “Being reliable, working hard, being the first to volunteer, being trustworthy. It’s very rare to see someone rise in an organization if all their peers think they’re a terrible person.”