How past experience impacts your investment approach
Moreover, he achieved these results by mostly focusing on just one sector - insurance, although geographically, he did not just stick to US stocks, investing in Japanese and some other international stocks. If this is not enough, Davis managed to raise a son who launched his own investment management business (Davis Funds), which are now run by his own sons (grandsons of Shelby Davis). The son has also leaned towards the financial sector investing in both insurance as well as banks, money managers and other financial companies.
An incredible life story indeed. I am not going to review all the details here. Below I am sharing my notes on investing style and technique of the Davis family. One last reason to read this book is that both Davis father and son invested through the 1970s (a period of high inflation and low economic crisis), which I think could be useful in today's environment.
I will refer to the founder (father) as Davis and his son - as Shelby - to avoid confusion.
An interesting thought on how past experience impacts your investment approach. The book talks about two concepts - one promoted by Edgar Lawrence Smith and the other one - by Gerald Loeb. Smith published a best-selling book - 'Common Stocks As Long-Term Investments' in 1924. This book was even mentioned by Buffett in his 2020 annual letter. Smith argued that companies could grow earnings through reinvesting them into the business, and this should allow them to increase dividends over time. Compared to bonds, stocks were more attractive as the former paid fixed dividends, which would not rise if business performance continued to improve.
Taken to the extreme, Smith's idea made stocks an absolute favourite investment vehicle which became regarded as safe and reliable.
Loeb, on the other hand, ditched his stocks before the 1929 crash. This timely exit from the market convinced him that stocks should be traded tactically, not held for the long term. Loeb wrote a book in 1935 - 'The Battle for Investment Survival' in which he compared investing to warfare. To win the war, you had to keep fresh assets (cash). His strategy involved selling on 10% drops and buying on the rise - always ready to move out at the first sign of a turn. In fact, I read Loeb's book in 2009 - it sounded very natural after the 2008 crash (I might have bought it on recommendation by some media), but regrettably, its conclusions were useless for the bull market that ensued.
Davis was generally an optimistic person, which helped him remain upbeat and have the courage to buy during crises (or at least not sell during corrections). A similar quality coupled with a strong belief in American capitalism also sets Warren Buffett apart:
"Davis was congenitally optimistic, an indispensable trait for any shareholder. As brokerage houses would later say during prosperous times, "Past performance is no guarantee of future success," but at the end of the worst decade in modern history, Davis realized that past performance was no guarantee of a future failure. He was a student of history and a believer in cycles. He never lost faith in Edgar Lawrence Smith's credo that stocks pay off in the long run. He looked beyond the breadlines, the gloomy headlines, the ravages of deflation, and the national disgust with Wall Street brokers and bankers. He focused on America's lucrative knack for innovation".
An important point on market cycles and the importance of not extrapolating recent performance (wrote by the author though, not Davis):
"Is it a cruel joke that the most popular asset of each era will impoverish its owners? Every 20 years or so in the twentieth century, the most rewarding investment of the day reached the top of its rise and started a long decline, and the least rewarding investment hit bottom and began a long ascent. These turning points enriched a small group of nonconformists who caught the turn, but the majority continued to put their money on yesterday's proven winner. The majority's loyalty cost them plenty".