Essential Wisdom for

Todays Market

Over 40 Years of Reliable Investing

Though frustrating, stretches of disappointing results for the

market are not unprecedented. History shows however, that these
difficult stretches have been followed by periods of recovery.
Why? Because lower prices increase future returns.
Christopher C. Davis
Portfolio Manager, Davis Advisors

Recognize That Historically, Periods of Low Returns for Stocks

Have Been Followed by Periods of Higher Returns1
History shows that disappointing
10 year periods for stocks, though rare,
do occur. While such stretches can
test an investors conviction, long-term
investors should recognize that these
poor periods have always been followed
by periods of recovery.1
This important concept is illustrated
in the chart below. The tan bars
represent the worst 10 year stretches

for the market since 1928. The green

bars represent the 10 year average
annual returns that followed these
difficult periods.

the 10 year period ending in 1984.

Furthermore, these periods of recovery
averaged 10% per year.
While no one knows what the next
10 years will bring, history shows that
investors with long-term goals should
consider maintaining or adding to their
stock holdings after a prolonged period
of poor market returns.

In every case, the 10 year period

following these disappointing stretches
produced satisfactory returns. For
example, the disappointing 1.2% return
for the 10 year period ending in 1974
was followed by a 14.8% return for

Poor Periods for the Market Have Always Been Followed by Stronger Periods
10 Year Market Returns Less Than 5%

Subsequent 10 Year Market Returns

20%

17.6%
14.8%

15%

16.3%

15.3%

14.3%

12.1%
9.3%

10%

8.5%
6.6%

4.8%

5%
0%

0.2%

3.6%

3.3%

2.7%

3.2%

2.9%

1.2%

0.1%

1.7%

201221

200211

197988

196978

197887

196877

197685

196675

197584

196574

194756

193746

194150

193140

194049

193039

193948

192938

193847

192837

5%

Source: Thomson Financial, Lipper and Bloomberg. Chart represents when the annualized market returns were less than 5%. Periods where there is not a subsequent
10 year period are not shown. The market is represented by the Dow Jones Industrial Average for the period from 1928 through 1957 and by the S&P 500 Index for
the period from 1958 through 2012. Investments cannot be made directly in an index. The performance shown is not indicative of any particular Davis investment.
Past performance is not a guarantee of future results.

1. There is no guarantee that in the future the market will be better than it has been in the past. Discussion of stock performance refers to the Dow Jones Industrial
Average for the period from 1928 through 1957 and the S&P 500 Index for the period from 1958 through 2012. Past performance is not a guarantee of future results.

Individuals who cannot master their emotions are

ill-suited to profit from the investment process.
Benjamin Graham
Father of Value Investing

Avoid Self-Destructive Investor Behavior

A study by Dalbar underscores the
importance of controlling emotions
and avoiding self-destructive investor
behavior. From 1993 to 2012, the average
stock fund returned 8.6% annually while
the average stock fund investor earned
only 4.3%. We call the gap between these
results the investor behavior penalty.
Why have investors historically
sacrificed half their potential return?

Driven by emotions like fear and greed,

they succumbed to negative behavior
such as:
Pouring money into the latest
top-performing manager or asset
class, expecting the winning streak
to continue

Avoiding areas of the market that

have performed poorly, assuming
recovery will never occur

Abandoning their investment plan by

attempting to successfully time moves
in and out of the market, a near
impossible feat

Successful investors throughout

history have understood that building
long-term wealth requires the ability
to control emotions and avoid selfdestructive investor behavior.

Average Stock Fund Return vs. Average Stock Fund Investor Return
19932012
10%
8.6%

Average Annual Return

8%
Investor Behavior Penalty
6%
4.3%
4%

2%

0%

Average Stock Fund Return

Average Stock Fund Investor Return

Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2013) and Lipper. Dalbar computed the average stock fund investor return by using industry
cash flow reports from the Investment Company Institute. The average stock fund return figures represent the average return for all funds listed in Lippers U.S.
Diversified Equity fund classification model. Dalbar also measured the behavior of an asset allocation investor that uses a mix of equity and fixed income investments.
The annualized return for this investor type was 2.3% over the time frame measured. All Dalbar returns were computed using the S&P 500 Index. Returns assume
reinvestment of dividends and capital gain distributions. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue
to be successful in the future. The performance shown is not indicative of any particular Davis investment. Past performance is not a guarantee of future results.

There is no guarantee that the average stock fund will continue to outperform the average stock fund investor in the future. Equity markets are volatile and
average stock funds and/or average stock fund investors may lose money.

History shows that even the most successful investors have

encountered periods of poor performance. Such periods are inevitable
and will measure whether an investor has the conviction, courage and
discipline necessary to beat the market over the long term.
Shelby Cullom Davis
Legendary Investor, Davis Investment Discipline Founder

Understand That Short-Term Underperformance is Inevitable

Most investors find periods of shortterm underperformance frustrating.
Yet such periods are inevitable when
building long-term wealth.

The results are eye-opening:

95% of the top-performing managers
from 2003 to 2012 fell into the bottom
half of their peer groups for at least
one three year period

To prove this point, we conducted a

study to determine what percentage of
top-performing investment managers
from 2003 to 2012 experienced a period
of short-term underperformance on
their way to building an attractive
long-term track record.

70% fell into the bottom quarter of

their peer groups for at least one
three year period

Though each of the managers in this

study delivered excellent long-term

returns over the entire 10 year period,

almost all experienced a difficult stretch
along the way.
Investors who recognize and prepare
for the fact that short-term underperformance is inevitableeven from
the best managersmay be less likely to
make unnecessary and often destructive
changes in their investment plans.

Percentage of Top Quartile Large Cap Equity Managers Whose Performance Fell
Into the Bottom Half or Quarter for at Least One Three Year Period
20032012
100%

95%

80%

70%

60%

40%

20%

0%

Bottom Half

Bottom Quarter

Source: Davis Advisors. 150 managers from eVestment Alliances large cap universe whose 10 year gross of fee average annualized performance ranked in the top
quartile from January 1, 2003 to December 31, 2012. Past performance is not a guarantee of future results.

Sixty years of successfully investing in equities has

taught us that long-term investors will inevitably
encounter economic and market uncertainty. History
shows that uncertainty is the rule, not the exception.
Despite these frustrating stretches, the market has
continued to grow over the long term.
To benefit from the wealth-building potential of stocks,
investors must remain unemotional, disciplined and
focused on the long term. With that in mind, we have
collected three essential pieces of investment wisdom
that all investors should remember as they navigate
todays market.

This material may be shared with existing and

potential clients to provide information concerning
market conditions and the investment strategies
and techniques used by Davis Advisors to manage
its client accounts. Please refer to Davis Advisors
Form ADV Part 2 for more information regarding
investment strategies, risks, charges, and expenses.
Clients should also review other relevant material,
including a schedule of investments listing
securities held in their account.
All investments contain risk and may lose value.
There is no guarantee that these investment
strategies will work under all market conditions,
and each investor should evaluate their ability to
invest for the long term, especially during periods
of downturn in the market.
Davis Advisors investment professionals make
candid statements and observations regarding
economic conditions and current and historical
market conditions. However, there is no guarantee
that these statements, opinions or forecasts will
prove to be correct. All investments involve some
degree of risk, and there can be no assurance
that Davis Advisors investment strategies will be
successful. The value of equity investments will
vary so that, when sold, an investment could be
worth more or less than its original cost.
Dalbar, a Boston-based financial research
firm that is independent from Davis Advisors,
researched the result of actively trading mutual
funds in a report entitled Quantitative Analysis

of Investor Behavior (QAIB). The Dalbar report

covered the time periods from 19932012.
The Lipper Equity LANA Universe includes all
U.S. registered equity and mixed-equity mutual
funds with data available through Lipper. The fact
that buy and hold has been a successful strategy
in the past does not guarantee that it will continue
to be successful in the future.
The charts in this report are used to illustrate
specific points. No chart, formula or other
device can, by itself, guide an investor as to what
securities should be bought or sold or when to
buy or sell them. Although the facts in this report
have been obtained from and are based on sources
we believe to be reliable, we do not guarantee
their accuracy, and such information is subject to
change without notice.
Benjamin Graham is not associated in any way
with Davis Selected Advisers, Davis Advisors or
their affiliates.
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 priceweighted 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.
Broker-dealers and other financial intermediaries
may charge Davis Advisors substantial fees for
selling its products and providing continuing
support to clients and shareholders. For example,
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may charge: sales commissions; distribution
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requested for: marketing support concerning
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and participation in conferences or seminars,
sales or training programs for invited registered
representatives and other employees, client and
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events. Financial advisors should not consider
Davis Advisors payment(s) to a financial
intermediary as a basis for recommending
Davis Advisors.
Shares of the Davis Funds are not deposits or
obligations of any bank, are not guaranteed by
any bank, are not insured by FDIC or any other
agency, and involve investment risks, including
possible loss of the principal amount invested.

Davis Advisors
2949 East Elvira Road, Suite101, Tucson, AZ 85756
800-279-0279
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