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Lessons From the Crisis--Chris Davis

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Morningstar founder, chairman, and CEO Joe Mansueto kicked off the 2009 Morningstar Investment Conference by noting the great challenges of the past year for all investors, but then ticked off several Morningstar-specific achievements since the last gathering. The first was the firm’s acquisition of Financial Computer Support Inc. (FCSI), the maker of dbCAMS portfolio management software, which Morningstar has since incorporated into its Principia software suite. Mansueto then mentioned the ongoing development of Morningstar Advisor Workstation 2.0, expected by year’s end, with rollout to customers in 2010, and said the company also plans to launch an “enterprise portfolio management and reporting system to a major broker/dealer.”

Mansueto then introduced keynote speaker Chris C. Davis, scion of the Davis investment family who, with Ken Feinberg, manages the Davis Large Cap Value portfolios. Mansueto noted Davis’s background as an Episcopalian seminarian, then quoted him as saying that studying philosophy and theology was the perfect background for investing: “You need an investing philosophy, then you need to pray like hell!”

Take Responsibility, Avoid Forecasting

Davis began his prepared remarks by noting the “enormous sense of responsibility” that mutual fund managers have toward their clients, then addressed the question everyone asks: Have we made a bottom? While he eschewed forecasting–quoting John Kenneth Galbraith, who said “the only function of economic forecasting is to make astrology look respectable”–Davis showed research indicating that analysts’ forecasts on earnings lag actual earnings, and reminded listeners that “the market will make its bottom and turn before there is evidence that the economy has turned.” Moreover, “sentiment,” he said “will lag the economy.”

While not making forecasts, he did point out that periods of market recovery have tended to follow “disappointing periods” such as the one we’re going through now. As for what to tell clients, he reminded advisors that it’s important to stay in the market, since market recoveries tend to be “explosive and front loaded,” and used returns data from some notable money managers, such as Charley Munger, who underperformed for long periods of time in their careers, to argue that “if clients can’t deal with three years of underperformace from an active manager, then they should be in index funds.”

Recalling his grandfather Shelby Cullom Davis’s admonition that “you make most of your money in a bear market; you just don’t realize it at the time,” Davis said that “in panics, prices lose their informational content–normally, you’d never value your business at what somebody would pay you on any given day, but with stocks, price and value get blurred.” He also suggested that advisors look at longer rolling periods of five or 10 years to get a more accurate idea of a money manager’s performance, and said that “the enormous risk right now is in Treasuries.”

Attendance at the annual Morningstar conference was down sharply, to about 1,000 attendees from last year’s nearly 1,300, according to a Morningstar spokesperson.


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