(Bloomberg Opinion) -- Most investors define value too narrowly, looking at price-to-earnings or price-to-book-value ratios. That misses key components of what makes a stock cheap, says this week's guest on Masters in Business, Chris Davis, chairman and chief executive officer of Davis Selected Advisors LP, which oversees more than $25 billion in mutual funds, exchange-traded funds and separately managed accounts.
He offered this example: When insurance company Geico first began using Google advertising for customer acquisition, each new lead cost about $2. The next nearest customer acquisition vehicle for the insurer? Late-night cable television advertising, at a cost of $30 per customer. That enormous differential explained why Google was poised to take so much ad revenue from traditional media outlets. It also suggested that using the P/E ratio to determine how cheap or expensive Google gave a distorted and inaccurate valuation.
Davis discussed the firm’s early days in the late 1960s, when it was running separately managed accounts, and decided to move into mutual funds after being asked to do so by several clients. Four decades later, similar requests from clients led the firm into ETFs. The firm’s four main investment strategies include concentrated versions of U.S., international, global and financials funds.
Davis also sits on the board Coca Cola Co. and is vice chairman of the American Museum of Natural History.
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Next week, we geek out on cars with Hannah Elliot, reviewer of supercars for Bloomberg.
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Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”
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