You are on page 1of 11

An Update from

Christopher C. Davis and Kenneth C. Feinberg


Portfolio Managers
The table below summarizes the results of the report will be a review of the past year, covering
Davis New York Venture Fund compared with the market and economy in general and our
the S&P 500® Index against which my co-man- Portfolio in particular. As always, this review
ager Ken Charles Feinberg, our colleagues and will include an accounting of our biggest mis-
I judge ourselves. Our objective is to outperform takes. The second part will be forward-looking
this Index after fees over the long term as we and explain why an environment characterized
have done in every rolling 10 year period since by fear and uncertainty creates enormous
our inception in 1969.1 While we achieved this opportunity for long-term investors. By outlin-
objective over the last 10 year period, we do not ing this opportunity, our goal is to provide data
consider the Fund’s absolute return of 1.2% per that will help investors stay the course at a time
year much to celebrate despite its advantage when many feel like giving up. This feeling is
over the 1.4% per year decline of the S&P 500® understandable considering that investors have
Index.2 As for results over shorter time periods, suffered through the second worst decade for
we will not mince words. They are poor on both stocks on record–a record that includes the
an absolute and relative basis. Crash of 1929 as well as the Great Depression.
In fact, even if the market produces satisfactory
In the pages that follow, we will provide more returns for 2009 (and it is certainly not off to a
perspective to put these results in context but good start), it is highly likely that the 10 year
we will not try to excuse them.You have a right period ending this coming December will prove
to expect more from us. The first part of the to be the worst decade ever, as it will no longer

Annualized Total Returns 1 5 7 10 15 20 25 30 35 Inception


as of December 31, 2008 Year Years Years Years Years Years Years Years Years (2/17/69)
DNYVF Class A
without a sales charge -40.03% -2.05% -0.17% 1.24% 7.66% 10.41% 11.51% 13.74% 12.93% 11.42%
with a maximum
4.75% sales charge -42.88 -3.00 -0.86 0.75 7.31 10.14 11.29 13.55 12.77 11.28
S&P 500 Index
®
-37.00 -2.19 -1.53 -1.38 6.46 8.43 9.77 11.00 10.02 9.05
The performance presented represents past performance and is not a guarantee of future results.
Total return assumes reinvestment of dividends and capital gain distributions. Investment return and
principal value will vary so that, when redeemed, an investor’s shares may be worth more or less than
their original cost. The total annual operating expense ratio for Class A shares as of the most recent
prospectus was 0.85%. The total annual operating expense ratio may vary in future years. Returns and
expenses for other classes of shares will vary. Current performance may be higher or lower than the per-
formance quoted. For most recent month-end performance, visit davisfunds.com or call 800-279-0279.
1
Class A shares, not including a sales charge. Returns are from 2/17/69–12/31/08. Returns would be lower in some periods if a sales
charge were included. See endnotes for a description of our rolling 10 year performance and a definition of the S&P 500® Index. Past
performance is not a guarantee of future results. 2Class A shares, not including a sales charge. Past performance is not a guar-
antee of future results.
1
include the 21% return of 1999. Given that the The Year 20084
market has lost 3.6% per year for the last nine While capital market downturns are nothing new,
years versus the 1.7% annual loss suffered the dislocation and panic that swept through
between 1928–1938, currently the worst decade the markets in 2008 were unique in scale, sever-
on record, this is not a bold prediction. ity and pace. The vast majority of major financial
institutions collapsed, were taken over, raised
So why should such data give investors confi- dilutive capital, and/or required some sort of
dence? The answer is that low prices may government intervention. The combined market
increase future returns.3 Because investors are capitalization of the top 25 financial institutions
buyers, they should welcome the opportunity in the United States (excluding Berkshire Hath-
to buy the same businesses at lower prices, as away, which we do not consider a pure financial
doing so raises their returns. Consider a busi- institution) fell 75% during the last two years
ness that generates $100,000 of income. In good from $2 trillion to less than $500 billion (as of
times, such a business might be priced at more January 22, 2009). The loss to shareholders has
than $2 million, leaving the buyer with only a been even greater than these numbers indicate
5% return on investment. But if the price falls as most of these companies now have meaning-
by half, the return doubles to 10%. This same fully more shares outstanding, including war-
math applies at the level of the stock market, rants held by the U.S. government.
which is after all simply a collection of busi-
nesses, the majority of which will be earning The amount of direct investments, pledges and
more money 10 years from now than they do guarantees announced by the federal government
today. The data shows that it has always been now approaches $5 trillion. To put this sum in
profitable to invest in the stock market after a perspective, previously the most expensive
decade of poor returns.3 Specifically, there pre- financial debacle in U.S. history, the savings and
viously have been ten rolling 10 year periods loan (S&L) crisis, cost the government about
since 1928 when the S&P 500® Index (and before $185 billion in today’s dollars, about 1/27th
that the Dow Jones Industrial Average) returned as much. The long-term consequences of the
less than 5% per year. In every case, the 10 years government’s ownership interest in private
that followed produced satisfactory returns aver- businesses are unlikely to be positive and the
aging approximately 13% per year and ranging extension of such vast amounts of credit must
from a low of 7% per year to a high of 18% per almost certainly lead to higher inflation.
year.3 While we cannot know for sure what the
next decade holds, it is highly likely to be far Turning to the economy, as is often the case,
better than what we have suffered through in the capital markets have been leading indica-
the last 10 years as we are starting at much more tors. What began as a financial crisis tied to
attractive valuations. We are hopeful that our falling real estate prices is swiftly becoming
shareholders who have endured these hard a broad-based economic crisis. Consumer and
times will be there with us for the rebound. corporate spending are in a free fall. Auto sales,

3
There is no guarantee that low priced securities will appreciate. Equity markets are volatile and an investor may lose money. Past per-
formance is not a guarantee of future results. 4Individual securities are discussed in this piece. While we believe we have a reason-
able basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. The
return of a security to a portfolio will vary based on weighting and timing of purchase. This is not a recommendation to buy or sell any
specific security. Past performance is not a guarantee of future results.
2
for example, fell a staggering 35% in the fourth average. The reason for this expectation is that
quarter alone. Unemployment is increasing value investors tend to focus their investments
sharply as are virtually all other negative indi- in companies whose businesses are not con-
cators. As these metrics deteriorate, however, sidered highly speculative in nature and whose
it is worth remembering that the front side of valuations relative to current earnings and share-
a recession is always the scariest. To understand holders’ equity are comparatively low. As a result,
why, consider this simple example. Suppose a their stock prices tend to hold up better in times
distributor who normally sells 10 widgets per of trouble compared to more speculative compa-
month sells only eight in a given month. When nies whose prospects are less secure. For example,
it is time to reorder, the distributor needs to in the bear market that began in March 2000 and
order only six widgets as there are two left in continued through 2002, when the stock market
inventory from the previous month. Thus, a 20% fell almost 50%, many value investors outper-
decline in sales leads to a 40% decline in orders. formed dramatically as speculative tech and
This inventory effect is a painful magnifier that telecom companies collapsed, while companies
things are slowing but is not permanent and in mundane sectors such as raw materials, utili-
will reverse when sales stabilize. ties, retail, and banking held up relatively well.

Another unsettling aspect of 2008 was that In the last couple of years, though, many of these
many fundamental tenets of sound investing did well-regarded managers, including us, have
not help. For example, it is generally (and rightly) underperformed. Some portion of this under-
believed that diversification among different performance can be attributed to the managers’
asset classes should reduce the volatility of an mistaken appraisals and declines in the value
investor’s returns, as often one type of invest- of the underlying businesses they owned. We
ment goes up while others are going down. had our share of such mistakes, which we will
However, this did not hold true in 2008. As one discuss later in this report. However, another
exasperated institutional investor put it, “All portion of this underperformance is simply
correlations have gone to one.” In other words, attributable to the unpredictability and vagaries
virtually every asset class except government of short-term results. It is the nature of markets
bonds performed badly: domestic stocks, foreign that value and price can diverge for long periods
stocks, commodities, hedge funds, private equity, of time. In euphoric times, such as during the
corporate bonds, real estate, and so on. Only Internet bubble, the stock prices of many com-
6% of the stocks in the S&P 500® Index were up panies exceed their value. In times of panic
last year, the lowest percentage on record.5 and dislocation, the value of many companies
exceeds their prices. In such periods, poor
In addition, many so-called value investors reported results may indicate deferred returns
(a category in which we are generally included) rather than permanent losses. For example, a
have fared poorly at a time when they would company purchased at $10 per share that has
have been expected to do far better than the an intrinsic value of $20 is a good investment

Source: Davis Advisors. Percentage is from 1/1/2008–12/31/08.


5

3
Even the Best Managers Underperform at Times
Percentage of Top Quartile Large Cap Equity Managers Whose Performance Fell
Into the Bottom Half, Quartile or Decile for at Least One Three Year Period
100%
97%
80%
77%
60%

40% 44%

20%

0%
Bottom Half Bottom Quartile Bottom Decile

Source: Davis Advisors. 163 managers from eVestment Alliance’s large cap universe whose 10 year average annualized performance
ranked in the top quartile from January 1, 1999–December 31, 2008. Past performance is no guarantee of future results.

even if its price falls to $5 for some period of the fact that prices and values can irrationally
time. While this seems obvious at the level of diverge for relatively long periods of time.
an individual company, it is also true for whole
portfolios. For example, the vast majority of top- Before turning to the reasons that such diver-
performing managers over a long period of time gences can create real opportunities, we must
will still experience multiyear stretches of poor also recognize the cases in which falling stock
performance. Specifically, as the accompanying prices reflect substantial declines in the value
chart shows, 97% of all of the managers whose of the underlying business. In these cases, we
results over the last 10 years placed them in the were mistaken in our business appraisals.
top performance quartile still underperformed
for at least a three year stretch during that decade Mistakes
of excellent relative results. More important, in By far our largest mistake over the last five years
almost half of these cases (44% to be precise), was our investment in American International
the three year stretches were bad enough to Group (AIG), which cumulatively detracted
place them in the bottom decile relative to roughly 6% from our returns, almost three times
their peers. as much as any other mistake. In essence, this
mistake resulted from our incorrectly assessing
Such periods can be doubly costly for clients. three factors: the financial sophistication of
After all, as portfolio managers, we can focus on management, the leverage of derivatives and
the value of the underlying businesses, but clients the danger of collateral requirements tied to
can only see the prices. As a result, clients often mark-to-market accounting.
lose confidence and get out after they have already
suffered through the period of bad performance Starting with management, the chief executive
but before benefiting from the recovery. In these officer of a complex financial institution also
inevitable periods of underperformance, it is often serves as the de facto chief risk officer. He or
helpful to remember that poor results may not she must understand the nature and extent of
reflect a flawed investment discipline but rather the risks being taken and must have the courage
4
to forgo profits if the risks, however remote, of cash collateral was also tied to AIG’s own
could prove catastrophic. At AIG, the need for credit rating. As is now apparent, all the factors
a highly capable CEO was accentuated by the were in place for a spiral. Because these contracts
diverse business models and risk profiles of its assumed virtually no losses, small increases in
semiautonomous divisions. Unfortunately, the loss estimates led to huge losses. As these losses
abrupt ouster of its longtime CEO and the pro- mounted, rating agencies became concerned
motion of a far less able successor came at the and downgraded the company. Thus, AIG was
worst possible time. Although this successor required to post more collateral for both higher
had deep experience in the field of property estimated losses and its lower credit rating.
and casualty insurance, the company’s financial Adding to these liquidity demands, the company
operations and risks went far beyond this sector engaged in a massive securities lending program
into areas in which new management had vir- in which it lent out many of its investments.
tually no expertise. These loans were themselves collateralized with
cash. Unfortunately, rather than simply hold this
The second factor that we–and this new man- cash in short-term liquid instruments, the com-
agement team–grossly underestimated lay in pany invested much of it in illiquid, often mort-
a relatively small division of AIG called AIG gage-related securities. As nervous customers
Financial Products. This unit contributed about returned borrowed securities and immediately
5% of total profits, only a small portion of demanded their cash back, AIG was forced to
which came from selling a type of highly com- try to sell these illiquid securities at a time when
plex and highly leveraged derivative known as there were no buyers. In just a matter of months,
a credit default swap, or CDS. At its heart, a these liquidity demands exceeded AIG’s available
CDS is a type of financial insurance in which resources. Facing default, AIG asked for govern-
a buyer would pay AIG a tiny premium in ment intervention. In exchange for providing
exchange for coverage against a highly unlikely the necessary liquidity and guaranteeing or
financial event, such as the default of a triple-A assuming responsibility for a number of assets
security. In some cases, the premium could be and liabilities, the government took equity war-
as low as $1 for $1,000 worth of coverage. rants for approximately 80% of the company.
Unfortunately, many of the triple-A securities
that AIG insured were tied to mortgages and All of the above analysis begs the question:
presumed that residential real estate prices “Why did we continue to hold the shares even
would never go down substantially. To make as the situation got worse and worse?” The
matters worse, unlike normal insurance con- answer is twofold. First, we remained focused
tracts, credit default swaps are marked-to- on the fact that the company had close to $100
market, meaning that they are priced not for billion of tangible equity, more than $1 trillion
what the actual losses are today but for what in investments and more than $20 billion of pre-
the market estimates the losses will be in the tax earnings from global insurance, leasing and
future. This mark-to-market accounting brings asset management operations. Furthermore, in
us to the third aspect of our mistake. contrast to a bank, it is difficult to have a run on
an insurance company, as policyholders, unlike
As the estimated losses on the contracts went depositors, generally cannot suddenly take back
up, AIG was required to post cash collateral for their premiums. Thus, we thought the company’s
the buyers of the swaps. Worse still, the amount powerful diversified earnings, tangible equity
5
and assets would more than cover the losses risk to the bank, he could still be bankrupted by
over time. This thinking ignored three important having to mark his house to market and post
facts. First, because of the collateral requirements collateral. It was this type of liquidity risk that,
discussed above, the company did not have the in a matter of months, brought down what had
luxury of time but needed to come up with the been the most profitable and highly valued
cash immediately. Second, because there had insurance company in the world.
been inadequate disclosure about the massive
securities lending operation, the scale and imme- The other mistake that deserves mention reached
diacy of the cash requirements were far greater its conclusion in our fourth quarter sale of virtu-
than anyone had imagined. Finally, although the ally all our Merrill Lynch at a substantial loss.
company’s financial statements showed a huge Although our first purchase was at $48 per share,
amount of liquid assets, most were held in the we added to our investment at lower prices giving
company’s insurance subsidiaries. As regulated us an average cost of $35 for all shares acquired.
entities, these subsidiaries were not permitted to As has been widely reported, on September 15th
release the assets to the parent company in order Bank of America offered $29 per share to acquire
for AIG to meet these collateral calls. As a result, Merrill Lynch. We sold the shares in the weeks
even if these mark-to-market losses proved following the announcement at prices ranging
temporary rather than permanent (as they still from $13–$29 per share. We acknowledge that
could), even if the company’s net worth remained this investment was a mistake, though we remain
substantial, or even if the company could have convinced that Merrill’s powerful network of
earned enough in the next five years to pay the financial advisors combined with decisive man-
losses as they came due, it still faced bankruptcy agement reduced our downside and prevented
as a result of defaulting on the collateral calls. the sort of catastrophic loss we experienced
in AIG and others experienced in firms like
We will end this discussion with an example Lehman Brothers and Bear Stearns.
of the dangers of this sort of collateral posting
requirement. Imagine a homeowner has a As always, the only value of mistakes lies in
$400,000 home with a $300,000 mortgage. Now the lessons learned. Looking back at the crisis
imagine he earns $100,000 per year of which he of 2008, the lessons can be reduced to a single
uses $50,000 for living expenses, leaving $50,000 word: liquidity. In a nutshell, we learned that
to service the mortgage. If we add to this exam- while the answer to the question, How much
ple as a given that this person will never move long-term debt is appropriate for a given company?
and will never lose his job, it would seem that varies by industry and business, the answer to,
the mortgage is virtually risk free. But if we How much short-term debt is appropriate for a
change one feature that on its face seems minor, given company? should almost always be zero.
we completely alter the risk profile. Specifically, In 2008, even companies with plenty of earnings
imagine that the mortgage requires that if the and equity relative to their debt found themselves
estimated price at which the house could be shut out of the credit markets. In the best cases,
sold on any given day falls below $300,000, the they were required to fund themselves at very
homeowner must put the shortfall in an escrow high rates. In the worst, they were forced to sell
account or face eviction. Now, even if the home- valuable assets at pawn shop prices, auction off
owner could service this mortgage forever and the entire company or face bankruptcy. Compa-
even pay it down completely over time with no nies like Countrywide, Lehman, Bear Stearns,
6
and even Fannie Mae and Freddie Mac (none of buy great growth companies at 10 to 12 times
which we owned) all were financed with short- earnings with 3% dividend yields or leading
term funds or required constant access to new financial companies at five times earnings with
capital. In virtually all these cases, managements 5% dividends and so on. Great records devel-
put companies at risk by trying to save a few oped from the depths of these bear markets as
percentage points of interest costs. Such a strat- steady-handed investors purchased stalwart
egy has accurately been likened to picking up companies with decent dividends at low price-
pennies in front of a fast-moving steam roller. earnings multiples and simply held on, letting
compounding and gradually improving confi-
Looking Ahead dence take care of the rest.
This long dissertation on economic turmoil
and uncertainty, as well as the recounting of Imagine, for example, a high-quality company
our biggest mistakes, raises the question: Why that can grow its earnings on average at 10%
are we almost fully invested and confident that per year over a decade. In a bull market, such
today’s prices should be viewed as an enormous a company might sell at 20 times earnings and
long-term opportunity? Before answering, we have a negligible dividend yield. As a result,
should provide one caveat. In making the case buyers of that company would be lucky to have
for equities today, we are not predicting that the returns even in line with the earnings growth
market has reached bottom. Although stocks rate. In fact, should the multiple contract to the
could be substantially higher six months from long-term market average of 15 times earnings
now, they could also be 30% lower. We simply over a decade, the company’s 10% growth rate
do not know–and no one else does either. With would shrink to a 6.9% return for investors.
this caveat out of the way, we will now turn to
the subject of opportunity. However, in a bear market, this math is reversed.
Imagine the same company now trading at 10
When I first started investing, my grandfather times earnings and carrying a 3% dividend yield.
gave me a card on which was written,“You make The buyer of this company now can reasonably
most of your money in a bear market, you just expect to make returns in line with the earnings
don’t realize it at the time.”Although at first growth rate of 10% plus dividends of 3% for a
blush this saying sounds counterintuitive–after total return of 13%. While this in itself is a satis-
all, in a bear market prices are going down– factory return, it can even be enhanced should
it makes sense when you recognize that as confidence return and the multiple rise to the
investors we are buyers and thus should welcome long-term average of 15 times earnings. If
lower prices for the simple reason that lower this happens over a decade, the company’s
prices may increase future returns. In bear mar- 10% growth rate would expand to an 18%
kets, prices are driven down by fear and forced return for investors.
selling. Sellers are not asking what a business is
worth but taking whatever they can get. Such Because a bear market presents the opportunity
irrational selling allows investors with patience to benefit from earnings growth, dividend yield
to buy great businesses at distressed prices. and multiple expansion, I had always been a
These low prices may increase future returns. bit jealous of the opportunities that my father
Over the years, my father and grandfather used and grandfather were given in the terrible
to tell me about the opportunities they had to bear markets of the last 60 years. Now that our
7
generation has finally been given the same they are self-funding and have no need to
opportunity, I recognize the wisdom of the say- regularly replenish capital. This self-sufficiency
ing, “Be careful what you wish for.” In a time of has led some wags to refer to such companies
fear and panic, investments will never seem as as “camels.”
straightforward as the example given above.
More important, even if investors can recognize A second, much smaller category is made up of
such opportunities with their heads, their companies whose business model and manage-
stomachs often have other ideas. As legendary ment mindset put them in a position to take
manager Peter Lynch observed, “The key organ advantage of the chaos in the capital markets.
(for investment success) is your stomach. Every- Such opportunistic companies may use distressed
one has the brainpower, but not everyone has prices to make investments or acquisitions or
the stomach for it.” In today’s bear market, even to buy in their own shares. Although many
investors are racing for the exits. Cash is pour- companies have the balance sheet strength to
ing into “riskless” securities like short-term fall into this category, few have the temperament.
U.S. Treasuries with virtually no yield. Although Instead, most companies that were only too
such a choice feels good, it is, given the near happy to buy in shares and do deals when prices
certainty of inflation, likely to prove very costly. were high have reduced or eliminated such
Meanwhile, investments in high grade common activities in response to the current uncertain
stocks, which feel like a terrible choice, are likely environment, forgetting that the environment is
to prove very profitable and are almost certain never certain. While savvy holding companies
to outperform cash over the next decade.6 such as Loews and disciplined share repurchasers
such as Dun & Bradstreet and Comcast fall into
Before turning to the Portfolio itself, we would this opportunistic category, by far the best
remind you of the old saying that investing example is Berkshire Hathaway, which spent
is the art of the specific and warn that general much of the last decade building up cash and
discussions tend to oversimplify the rationale warning about the dangers of derivatives. It is
behind our investment decisions. Nevertheless, now routine to read about the enormous invest-
in today’s environment, we are looking for oppor- ments that Berkshire is making at a time when
tunities that roughly fall into four categories. others seem paralyzed. Of note, we recently
The first most closely resembles the hypothetical joined with Berkshire to invest in senior securi-
high-quality company discussed above and would ties of two companies whose common stock we
include companies such as Procter & Gamble, already own, Sealed Air and Harley-Davidson.
Johnson & Johnson, Costco, Shering-Plough, These investments were made at yields of 12%
and Philip Morris International. These compa- and 15%, respectively.
nies are characterized by healthy balance sheets,
strong competitive positions and durable busi- The third category comprises investments made
ness models. They are generally (but not always) where the headlines are the worst7–specifically
global leaders with relatively strong pricing power in selected financial companies. While we rec-
and the ability to pass through cost increases. ognize there are many fundamental uncertain-
Because such businesses produce excess cash, ties, we believe that some positives are being

6
Equity markets are volatile and an investor may lose money. 7While we research companies subject to such contingencies, we cannot
be correct every time, and a company’s stock may never recover.
8
overlooked in the midst of the turmoil. First, one of the worst years and worst decades ever
although aspects of the insurance, asset man- for stock investors, he noted, “The financial
agement, and retail, commercial and investment world is a mess, both in the United States and
banking businesses are changing, their under- abroad. Its problems, moreover, have been
lying business models are unlikely to become leaking into the general economy, and the leaks
obsolete. Furthermore, those companies that get are now turning into a gusher. In the near term,
through this storm will face far less competition. unemployment will rise, business activity will
In retail and commercial banking, for example, falter and headlines will be scary. So . . . I’ve
there is an astounding flight to quality. Incre- been buying American stocks.” He continues,
dibly, in the fourth quarter alone, Wells Fargo’s “Over the long term, the stock market news will
deposits, which pay extremely low interest, be good. In the 20th century, the United States
grew at a staggering 31% annualized rate. For endured two world wars and other traumatic
investment banks, although leveraged propri- and expensive military conflicts; the Depression;
etary trading will never be the same (which is a a dozen or so recessions and financial panics;
positive), services like mergers and acquisitions oil shocks; a flu epidemic; and the resignation
advice and equity and debt underwriting will of a disgraced president.Yet the Dow rose
always be in demand. To be clear, we know that from 66 to 11,497.” 8 To view this article, visit
there are still many risks in this sector, including www.davisfunds.com/invedu.html.
the fact that nonperforming assets will continue
to rise. While we are selectively adding, we are Although such a powerful statistic makes it
not “swinging for the fences.” hard to believe that stock investors could have
lost money during a century marked by such
The final category focuses on what we con- an extraordinary gain, Mr. Buffett goes on to
sider to be the inexorable growth of the middle caution that “some investors did. The hapless
class in massive economies such as China’s. ones bought stocks only when they felt comfort
We continue to expect that the Chinese econ- in doing so and then proceeded to sell when the
omy will grow faster than average for decades headlines made them queasy.” While the dire
to come, putting strain on China’s infrastruc- headlines we read day after day make “queasy”
ture and increasing demand for most natural an understatement, they should be welcomed
resources. A number of Portfolio companies by long-term investors for their role in creating
are positioned to benefit from these trends bargain prices. While we cannot predict the
including our direct Asian holdings and our direction of the market over the next month
investments in energy, commodity and agri- or the next year, we do know that it will move
cultural companies. higher long before the economy or the head-
lines are more reassuring.9 If investors wait until
Concluding Thoughts things seem better, they will pay much higher
In mid-October Warren Buffett wrote an prices. In our experience, today’s prices reflect
unusual and important editorial for The New some of the most attractive valuations we have
York Times. Just as we were coming through seen in decades.

8
Buffett, Warren, “Buy American. I Am.” The New York Times, October 17, 2008. 9There is no guarantee that low priced securities will
appreciate. Equity markets are volatile and an investor may lose money.
9
This optimism about the future does not We never forget the trust you have placed in our
minimize the fact that together we have gone firm. We wholeheartedly look forward to the
through one of the worst periods in market years ahead when we should be able to report
history. We are disappointed with our short- that today’s low prices became tomorrow’s
term results and humbled by our mistakes. But high returns.10 Thank you for staying the course
most important, we are grateful for the patience with us. ■
you have shown us during this difficult time.

Davis Investor Education

The Wisdom of Great Investors


Investing for the long term necessarily involves investing through periods of dislocation. Staying
the course in such times can be difficult for investors. For this reason we have collected some
useful lessons and insights from investors who managed successfully through challenging times
in the past in The Wisdom of Great Investors:
■ Avoid Self-Destructive Investor Behavior
■ Understand That Crises Are Inevitable
■ Understand While Painful, Crisis Creates Opportunity
■ Don’t Attempt to Time the Market
■ Don’t Let Emotions Guide Your Investment Decisions
■ Recognize That Short-Term Underperformance Is Inevitable
■ Disregard Short-Term Forecasts and Predictions

For a copy of this brochure please contact your Davis Regional Representative at
800-717-3477 or visit www.davisfunds.com/invedu_grtinv.html
There is no guarantee that low priced securities will appreciate. Equity markets are volatile and an investor may lose money.
10

10
This report is authorized for use by existing shareholders. A current Davis New York Venture Fund prospectus must accompany or precede this
piece if it is distributed to prospective shareholders. You should carefully consider the Fund’s investment objectives, risks, charges, and expenses
before investing. Read the prospectus carefully before you invest or send money.
This report includes candid statements and observations regarding investment strategies, individual securities, economic and market
conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. These comments may
also include the expression of opinions that are speculative in nature and should not be relied on as statements of fact.
Davis New York Venture Fund’s investment objective is long-term growth of capital. There can be no assurance that the Fund will achieve
its objective. Davis New York Venture Fund invests primarily in equity securities issued by large companies with market capitalizations of
at least $10 billion. Some important risks of an investment in the Fund are: market risk: the market value of shares of common stock can
change rapidly and unpredictably; company risk: the market value of a common stock varies with the success or failure of the company
issuing the stock; financial services risk: investing a significant portion of assets in the financial services sector may cause a fund to be
more volatile as securities within the financial services sector are more prone to regulatory action in the financial services industry, more
sensitive to interest rate fluctuations and are the target of increased competition; and foreign country risk: companies operating, incor-
porated or principally traded in foreign countries may have more fluctuation as foreign economies may not be as strong or diversified,
foreign political systems may not be as stable and foreign financial reporting standards may not be as rigorous as they are in the United
States. As of December 31, 2008, Davis New York Venture Fund had approximately 11.7% of assets invested in foreign companies. See the
prospectus for a complete listing of the principal risks.
Davis Advisors is committed to communicating with our investment partners as candidly as possible because we believe our investors
benefit from understanding our investment philosophy and approach. Our views and opinions regarding the investment prospects of
our portfolio holdings include “forward looking statements” which may or may not be accurate over the long term. While we believe we
have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we
anticipate. These opinions are current as of the date of this piece but are subject to change. Market values will vary so that an investor
may experience a gain or a loss. The information provided in this report should not be considered a recommendation to buy, sell or hold
any particular security. As of December 31, 2008, Davis New York Venture Fund had invested the following percentages of its assets in the
companies listed: AIG, 0.18%; Berkshire Hathaway, 4.16%; Comcast, 2.24%; Costco Wholesale, 4.34%; Dun & Bradstreet, 1.37%; Harley-
Davidson, 0.56%; Johnson & Johnson, 0.63%; Loews, 2.24%; Merrill Lynch, 0.17%; Microsoft, 1.81%; Phillip Morris International, 3.47%;
Procter & Gamble, 1.92%; Schering-Plough, 1.24%; Sealed Air, 1.43%; Wells Fargo, 4.30%.
Davis Funds has adopted a Portfolio Holdings Disclosure policy that governs the release of non-public portfolio holding information.
This policy is described in detail in the prospectus. Visit davisfunds.com or call 800-279-0279 for the most current public portfolio hold-
ings information.
Rolling 10 Year Performance. Davis New York Venture Fund’s average annual total returns for Class A shares were compared against
the returns earned by the S&P 500® Index as of December 31 of each year for all 10 year time periods from 1969 through 2008. The
Fund’s returns assume an investment in Class A shares on January 1 of each year with all dividends and capital gain distributions rein-
vested for a 10 year period. The figures are not adjusted for any sales charge that may be imposed. If a sales charge were imposed, the
reported figures would be lower. The figures shown reflect past results; past performance is not a guarantee of future results. There can
be no guarantee that the Fund will continue to deliver consistent investment performance. The performance presented includes periods
of bear markets when performance was negative. Equity markets are volatile and an investor may lose money. Returns for other share
classes will vary.
Broker-dealers and other financial intermediaries may charge Davis Advisors substantial fees for selling its products and providing con-
tinuing support to clients and shareholders. For example, broker-dealers and other financial intermediaries may charge: sales commis-
sions; distribution and service fees and record-keeping fees. In addition, payments or reimbursements may be requested for: marketing
support concerning Davis Advisors’ products; placement on a list of offered products; access to sales meetings, sales representatives and
management representatives; and participation in conferences or seminars, sales or training programs for invited registered representa-
tives and other employees, client and investor events, and other dealer-sponsored events. Financial advisors should not consider Davis
Advisors’ payment(s) to a financial intermediary as a basis for recommending Davis Advisors.
Over the last five years, the high and low turnover ratio for Davis New York Venture Fund was 16% and 3%, respectively.
The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange.
The Index is adjusted for dividends, weighted towards stocks with large market capitalizations and represents approximately two-thirds
of the total market value of all domestic common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively
traded blue chip stocks. The Dow Jones is calculated by adding the closing prices of the component stocks and using a divisor that is
adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The
average is quoted in points, not in dollars. Investments cannot be made directly in an index.
After April 30, 2009, this material must be accompanied by a supplement containing performance data for the most recent quarter end.
Shares of the Davis Funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the
FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.
The information provided in this commentary, unless otherwise indicated, is as of the date that this commentary was written (January 2009).

Item #4772 12/08 Davis Distributors, LLC, 2949 East Elvira Road, Suite 101, Tucson, AZ 85756, 800-279-0279, davisfunds.com