The Davis Dynasty: Fifty Years of Successful Investing on Wall Street, by John Rothchild
By Stephen Northcutt
The Davis Dynasty: Fifty Years of Successful Investing on Wall Street
by John Rothchild
I was given this book by an investing group I am a part of. Their letter recommended the book so I put it first in the queue to take on my next few flights. I cannot say that I liked the book; I really did not like the Davis family from the way they were portrayed, but there are some investing nuggets, and the final chapters are chock full of actionable investing advice. It is really two books; partly the story especially of the first Shelby Davis who was a tightwad that married well and used his wife's money to build incredible wealth. By living cheaply, he was able to invest extra money in the market. His focus was on insurance companies because it was an industry he knew well. One big tip from the book, because insurance as a group is not flashy, some of these stocks were undervalued in general. He had a general notion of compounding engines, stocks that pay dividends.
This has been true for me for forty-one years, but it may not be true for another one year. Today, the United States is facing what the news calls the fiscal cliff. Depending on what Congress does or does not do, dividends may soon be taxed at 41%. So much for compounding engines. The book does a good job of talking about some of the major trends in bonds and equities over the years and, while it does not use the term "herd mentality", it paints the picture well. Whether by luck or brilliance, the Davis clan did not follow the herd. He was a value investor, looking for insurance stocks that traded at low P/E multiples and low earnings that might bump to 15 or even 20 with high earnings because they caught the eye of other investors. He called this strategy the "Davis Double Play".
Chapter 9 was particularly telling, "Wall Street a Go Go." This is the idea of celebrity stock pickers with hugely inflated mutual funds who had a time of luck, but the luck ran out. I just smiled, my worst investments by far have been in mutual funds. As we face the fiscal cliff, mutual funds may subject us all to even greater tax liability.
In Chapter 10, we turn our focus to Shelby Davis, the son, or the second generation of the Dynasty. He did not work for his father, they were not close, and his father would have only paid him pennies, but he did learn a number of the basics including the power of dividends to create compounding interest and the Davis Double Play. This was in 1969 and, as the book points out, the year Neil Armstrong walked on the moon. He and a friend took the helm of the New York Venture fund. Through 1983, this was one of the more successful mutual funds. The book makes a very strong point of investing on margin. Since he succeeded, it allowed him to magnify his wins, but had he failed, that would have sunk him quickly. An important point, in the stock crash of 1987, he went on a buying spree, this would quickly establish him as a very wealthy man.
Chapter 16, with both father and son Shelby Davis investors very rich, we turn to the third generation of the Dynasty, Andrew and Chris. Alhough they came by different paths, they both became investors in the family business. One of my favorite anecdotes is on page 245. The elder Shelby Davis had been writing an investment journal his whole career. Grandson Chris, wrote a paragraph and later the entire newsletter. One day he asked. "Why do we bother with this, when nobody reads it?" The elder Shelby Davis replied, "It's for us. We write it for ourselves. Putting ideas on paper forces you to think things through." And of everything I learned from the book, that validation, at least for me, is the most important.
Another anecdote in the annals of this dysfunctional, but rich family, is also in Chapter 17. The elder Shelby Davis is declining, his business essentially over, he is still investing, but does not know what to invest in so he starts following his son's picks. When the younger Shelby finds out, according to grandson Chris, "Intel, Fannie Mae and New York Venture were the words of praise my father [the younger Shelby] had waited all his adult life to hear and my grandfather had never uttered."
In Chapter 18, Chris takes over the Venture fund. In 1997 there were now 5,000 different equity mutual funds. "A record 45% of U.S. households had cash riding on this bull in the thin air of valuation." This kicks off a long, well written, discussion of growth versus value and, above all, not paying too much for a stock. "Our best bear protection is buying companies with strong balance sheets, low debt, real earnings, and powerful franchises. These companies can survive bad times and eventually will become more dominant as weaker competitors are forced to cut back or shut down."
The final chapter in the book summarizes the Davis methodology. It is well written and good solid advice, I am not going to try to summarize it all, you will need to read the book.