John Rothchild
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Three generations of the Davis family — Shelby Cullom Davis, his son Shelby, and grandson Chris — bound by the compounding gospel that patient ownership of financial companies through crises builds dynastic wealth.
Three generations of the Davis family — Shelby Cullom Davis, his son Shelby, and grandson Chris — bound by the compounding gospel that patient ownership of financial companies through crises builds dynastic wealth.
“frugality was more than idle virtue. In his view, a dollar spent was a dollar wasted; a dollar unspent could be sent off to compound.”
“"Out of crisis comes opportunity," Shelby remembers him saying. "A down market lets you buy more shares in great companies at favorable prices. If you know what you're doing, you'll make most of your money from these periods. You just won't realize it until much later."”
“Insurance companies enjoyed some terrific advantages, as compared to manufacturers. Insurers offered a product that never went out of style. They profited from investing their customers' money. They didn't require expensive factories or research labs. They didn't pollute. They were recession-resistant. During hard times, consumers delayed expensive purchases (houses, cars, appliances…”
“Davis acquired 1,000 shares of Insurance USA (a fictitious example) for $4,000 when the company earned $1 a share. He held on until the company earned $8 a share and a crowd of camp followers pounced on the opportunity. What he'd bought for four times $1, they bought for 18 times $8. His $4,000 was now worth $144,000 in Mr. Market's estimation. In terms of profit, he made 36 times his initial outlay, plus whatever dividend checks had landed in his mailbox during the waiting period. Davis called this sort of lucrative transformation "Davis Double Play."”
“Out of crisis comes opportunity. A down market lets you buy more shares in great companies at favorable prices. If you know what you're doing, you'll make most of your money from these periods. You just won't realize it until much later.”
Shelby Cullom Davis counseling his son Shelby on how to think about bear markets.
“If you had one silver bullet to shoot a competitor, which competitor would you shoot?”
Davis's favorite question when meeting with company CEOs to identify the strongest rivals.
“Losing $125 million in the market he could tolerate, because a pile of bargains had landed in his lap. Losing $125 out of his wallet would have driven him crazy.”
Davis's assistant Widlitz describing the patriarch's reaction to Black Monday 1987 losses.
“You're getting nothing from me. That way, you won't be robbed of the pleasure of earning it yourself.”
Davis telling grandson Chris the same thing he'd told Shelby and Diana decades earlier about inheritance.
“Money never becomes obsolete.”
Shelby Jr. explaining why financial companies were his preferred investment sector.
Davis recognized that the U.S. Tax Code systematically rewarded unproductive municipal bond investment while punishing equity ownership in productive enterprises, retarding national prosperity.
After bear markets, the most celebrated fallen stocks are often the slowest to recover — lesser-known companies with better value offered superior returns for nearly a decade.
Corporate consolidation can crush innovative smaller competitors and sap economic dynamism, as Davis observed in auto industry extinctions and Depression-era policy failures.
Why linked: Shares Buffett, General Electric, and Litton Industries.
“"You can always learn accounting on the side," he told his son, "but you've got to study history. History gives you a broad perspective and teaches that…”
“Davis's financial life had three phases: learn, earn, and return. The learn phase lasted into his early forties, and the earn phase stretched from his forties into his late seventies. At that point, he tackled the return phase, turning his attention to the lucky would-be recipients of the money he'd hoarded and tended so devotedly.”
“Davis's portfolio had the constancy of a dowager's living room. If a company he owned failed to meet his expectations, he disposed of it. If it merged with or was acquired by a larger company, he'd sometimes take his profit and invest elsewhere. But these were exceptional cases. Mostly, he bought and held. Year after year, he stuck with the same names.”
“Insurance companies enjoyed some terrific advantages, as compared to manufacturers. Insurers offered a product that never went out of style. They profited from investing their customers' money. They didn't require expensive factories or research labs. They didn't pollute. They were recession-resistant. During hard times, consumers delayed expensive purchases (houses, cars, appliances…”
“Foreign investors were the biggest losers in U.S. rail projects. The British, in particular, couldn't resist bankrolling the emerging U.S. market in the mid-1800s, just as Americans couldn't resist bankrolling emerging Asian markets in the late 1900s. Much British capital was lost in what turned out to be a gigantic, albeit unintended, charitable contribution to U.S. track laying and road building. Heed it well, ye global capitalists! Fast growth in the latest emerging phenom doesn't necessarily mean fat profits for foreign enthusiasts. The U.S. railroads proved that.”
“He borrowed roughly half the market value of his portfolio,”
“"unanimity of opinion is a danger sign. When everybody thinks that interest rates are going to remain low or go lower, look out."”
“Not only was a penny saved a penny earned-a penny compounded 25 times was $671,000!”
“A bank didn't manufacture anything, so it didn't need expensive factories, finicky machinery, warehouses, research labs, or high-priced PhDs. It didn'tpollute, so it spent zilch on pollution-control devices. It didn't sell gadgets or ready-to-wear, so it could avoid hiring a sales force. It didn't ship merchandise, so it had no shipping costs. Its sole product was money, borrowed from depositors and lent out to borrowers. Money came in different guises (coins, paper, blips on a screen), but was never obsolete. Banks competed with other banks, but banking itself was always in vogue.”
“as a part owner of every holding in the portfolio.”
“The market value of Davis's assets (the stocks in his portfolio) was 1.5 times greater than his actual capital, reflecting the fact that Davis invested on margin. Merrill Lynch, to compare a pumpkin to a peanut, controlled assets with a market value 20 times greater than its own capital. Large investment houses typically operated much closer to oblivion than Davis did.”
“other notable patriots realized that a new nation, especially a nation of wooden buildings, couldn't long survive without protecting its real estate. Alexander Hamilton took time out from political wrangling to found Mutual Assurance of New York, while John Marshall, original chief justice of the U.S. Supreme Court, launched the Mutual Assurance Society Against Fire on Buildings in Virginia. One of Marshall's best customers was Thomas Jefferson, who bought a policy for his Monticello mansion.”
“The famous Lloyd's of London survived the bubble by not being publicly traded. Lloyd's got its start as a coffeehouse with a liquor license, which explains its popularity with seafarers.”
“falling rates favored paper assets and not brick, mortar, and baubles-Shelby populated Venture with financial stocks that had underachieved in the hard-asset prosperity of the 1970s. Besides being timely, bank shares were very affordable. They were selling at 10 times earnings, and their earnings were growing at a steady 12 to 15 percent. Banks' stodgy reputation caused investors to underrate their future prospects. This was a perfect setup for the latest Davis Double Play.”
“European fire insurance has been traced back to the village of Verambacht in A.D. 1240. According to local law, "the person whose house burned down is to be indemnified without delay by the whole village." In the 1500s, English "slush funds" reimbursed guild workers for losses due to everythingfrom sickness to fraud. English burial societies covered expenses for people who "wished to be interred in a genteel manner." In London, a well-preserved life insurance policy from 1583 was unearthed four centuries later. It belonged to William Gybbons, who, with excellent timing, expired 17 days before his coverage did.”
“While the Dow went south (down 24 percent from 1947 to 1949), Davis's portfolio went north. He was in the right stocks and the right industry, and his rapid moneymaking got a considerable boost from leverage. He borrowed $29,000 the first year and continued to borrow to the maximum throughout his career.”
“According to academic sources, insurance "dawned" as far back as 4000 B.C., which makes it a candidate for the world's second oldest profession. Over the centuries, various cultures have contributed new types of coverage, but the basics of insurance have otherwise stayed the same.”
“Nelson Peltz”
“Once he grasped a company by its numbers, Davis turned his attention to management. He was constantly on the road, meeting with executives, quizzing CEOs on everything from the sales force to the claims office to the company's…”
“Campeau.”
“The more wisely you invest, the faster your bankroll will expand. If you know the rate of return on your investment,the Rule of 72 tells you how long it will take to double your money. The greater the return, the faster the compounding, which is why an extra percent or two makes a huge difference. A 10 percent return over 211/2 years turns $100,000 into $400,000. At 12 percent, the payoff is $595,509.”
“In the savings and loan (S&L) debacle of the late 1980s,he looked for an investment angle. In his "Crisis Creates Opportunity" mode, he found an obvious beneficiary in Fannie Mae, a buyer and processor of home mortgages.In cities and towns across America, the same buccaneer spirit that inspired corporate raiders bankrupted hundreds of local thrifts.”
“The first known policy, the "bottomry contract," covered sea freight. Bottomry was popular with seafaring Babylonians and Phoenicians. In the ancient Code of Hammurabi (circa 1750 B.C.), a terrestrial insurance angle appeared: "If a life [has been lost], the city or district governor shall pay one mina of silver to the deceased's relatives." In addition to pioneering group coverage, Hammurabi was tough on pilferers in the fire department. Any fireman caught stealing property while putting out a fire was thrown into the fire.”
“Meanwhile, Davis's early stock picks were merrily compounding. He'd started his fledgling company with $100,000 in assets ($50,000 cash plus the seat on the NYSE, valued at $50,000). By the end of year one, his net worth was pegged at $234,790.”
“GEICO was a Texas brainstorm from the 1930s. Its creator, Leo Goodwin, added two brilliant features that distinguished this auto insurer from the white bread version. GEICO sold policies by mail, cutting out the expensive sales brigade. It only sold to government geeks. Goodwin once read a study that showed federal, state, and local bureaucrats caused fewer car wrecks than blue-collar or corporate types. A bureaucrat might be boring as a date, but he or she was a dreamy client for an insurance company.Lower expenses and fewer accident claims formed a winning combination for GEICO. Ben Graham figured this out and bought half-ownership in the company in 1947. GEICO soon went public, so anybody could buy the stock by 1951, the year Buffett got interested in it. One Saturday that year, Graham's star pupil hopped a train from New York to Washington to behold GEICO in person. Finding the place locked, Buffett banged the door and roused the janitor. The 23-year-old grad student talked his way around the janitor and into a four-hour interview with the CEO.”
“Inside an investment account, which was where it belonged, money was a joyous and nourishing substance. Outside an investment account, in the hands of spenders, money was worrisome and potentially toxic. It sapped self-reliance and subverted the work urge of its possessors.”
“Besides vicious taxation and Roosevelt's harangues, Davis identified three other Depression enhancers: (1) Congress's slapping stiff tariffs on foreign products to shelter U.S. manufacturers, (2) collapsing currencies abroad, and (3) corporate mergers. (Given the merger mania and the multiple currency crises in the late 1990s, plus the vigorous debate over free trade, all three have contemporary relevance.)”
“John Kenneth Galbraith published The Affluent Society,”
“The Dow rose from 41 to 160, and the S&P 500 did even better. This unexpected bonanza was a good lesson for Davis. It reminded him that stocks don't read the papers or swoon in response to scary headlines. When they're priced for desperation, they can rally in the face of desperation, escaping the dumps while the companies to which they're attached are still wallowing in the dumps.”
“Don't be a bondholder. Bondholders are lenders. Be a shareholder. Shareholders are owners. Owning shares in a successful company is far more rewarding than owning its bonds.”
“After the market closed on that infamous "Black Monday," Widlitz had the unpleasant task of telling the boss he'd lost $125 million. The news didn't shake him. "Losing $125 million in the market he could tolerate," said Widlitz, "because a pile of bargains had landed in his lap. Losing $125 out of his wallet would have driven him crazy."”
“Davis reiterated to Chris what he'd said decades earlier to Shelby and Diana: "You're getting nothing from me. That way, you won't be robbed of the pleasure of earning it yourself."”
“compounding machines from other types of companies, but the regulatory job had taught him this crucial distinction. Where manufacturers expended capital to devise a salable product, then spent more toupgrade their factories and improve the merchandise, insurers took in cash from every new customer and spent belatedly, when claims were filed or policies matured.”
“Intelligent Investor, a sequel to his famous Securities Analysis, Benjamin Graham had written: "[To] enjoy a reasonable chance of continued better-than-average results, the investor must follow policies which are (1) inherently sound and promising, and (2) are not popular on Wall Street."”
“A "prolonged sinking spell" in a specific company was, to him, a sign of possible trouble behind the scenes. Most likely, a swoon occurred when knowledgeable insiders dumped their shares. "It probably means, as they used to say in `01' Man River,"' he told an audience, "…”
“He was attracted to companies "whose earnings and/or price-earnings ratios are likely to show above-average expansion,"”
“Stock prices ride on a company's earnings. Eventually, earnings, or the lack of same, determine whether the shareholder wins or loses.• Earnings ride on the U.S. economy. The reason to be bullish on stocks is that the U.S. economy has a habit of doubling in size every 16 to 18 years, going back more than a century.• If history repeats itself, the economy will expand eightfold during the adult life of an average investor. Thus, at minimum, an investor can expect a portfolio to generate at least an eightfold gain during his stock-picking career. In periods when stock prices rise faster than earnings, he'll possibly do better. Meanwhile, he'll also benefit from dividends.”
“Companies that were nobody's darlings when stock prices rose, he decided, were less likely to disappoint when the market fell. Why risk a pole vault when you could take the stairs?”
“How could mergers depress an economy? Davis explained as follows. Big companies combined to make bigger companies, until a few names (General Electric, DuPont, GeneralMotors, and U.S. Steel) dominated their respective industries. With these giants throwing their weight around, smaller, more innovative enterprises scrambled to survive. In the auto industry alone, a procession of car makers (Stutz, Reo, Auburn, Hupmobile, Willys-Overland, Hudson, Packard, Studebaker, and others) went bankrupt or were consumed by more powerful rivals.”
“"You are neither right nor wrong because the crowd disagrees with you," Graham had taught.”