📚 Family of Value: The Davis Dynasty
"The Davises provide a 50-year case study not only in how to tend a portfolio but how to raise children who break the mold, work hard, and compound the family fortune."
In 1947, Shelby Cullom Davis left his position as deputy superintendent of insurance in New York to pick stocks. He did this “at age 38, with no MBA or economics training,” as John Rothchild wrote about Davis and his family in The Davis Dynasty.
It turned out to be one of history’s most profitable midlife crises. Over the course of his life, Davis compounded an initial stake of $50,000 into some $900 million.
Until then, there had been no sign that Davis was destined to make a fortune. Unlike the characters I wrote about in The Last Superpower, Davis had not yet found his life’s work. Keenly interested in history and politics, he majored in Russian, spent time as a radio correspondent in Europe, and earned a PHD in political science. He worked as a research analyst, magazine editor, and on the staff of New York’s governor. In 1944, the governor appointed him to the state’s insurance department. “Davis could just as easily have been named deputy superintendent in the traffic department,” Rothchild noted.
Instead, Davis began to realize that the industry he was overseeing was misunderstood, unloved, and its companies dramatically undervalued. Charlie Munger famously said to ‘take a simple idea and take it seriously.’ Davis did this to the extreme. He capitalized on a small number of insights for the rest of his life.
Quotes in this piece will be from the book The Davis Dynasty:
Basically, he stuck with insurance stocks through booms, busts, bebop, beatniks, and the Beatles. When U.S. insurers got too pricey, he bought Japanese insurance stocks. In the 1960s, his Japanese holdings took off like pigeons near a firecracker. By the time he died, in 1994, he’d multiplied his original stake 18,000 times.
Even though he had no Munger by his side, Davis still shared many parallels with Buffett. Both were value investors and devoted to Ben Graham. Both focused on the insurance sector and compounded their own capital all their lives. Both were notoriously frugal, cared deeply about sharing their values, and worried about how inherited wealth would affect their children.
But Davis’s story has a fascinating wrinkle. Both his son (confusingly also named Shelby Davis) and grandson followed him into the business. Today, the family still runs the Davis Funds. Let’s look at the Davis clan in the wealth chart framework:
For Davis Sr., value was created when he correctly identified a massive market mispricing, bet on it, and held on to the winners which were reinvesting their capital at attractive returns. He was always in business for himself and, in contrast to Buffett, used margin leverage. While the following generations were also investors, they created wealth primarily by building an asset management business.
Interestingly, Davis Sr. was not successful as an entrepreneur. When he started, the asset management industry was still in its infancy. And his introverted temperament was not a fit when he tried to build a brokerage house to further capitalize on his research insights.
The book’s first enduring lesson is that his ideas did not gain much publicity. He had found a gold mine, and nobody cared.
For decades, Davis Sr. wrote a newsletter and shared his research. One day, his grandson helped him edit and noticed the lack of readers. “Why do we bother with this?” he asked, “when nobody reads it?”
“It's not for the readers,” his grandfather answered. “It's for us. We write it for ourselves. Putting ideas on paper forces you to think things through.”
That is such an important idea and one I tried to emphasize in my piece on writing. Davis Sr. earned his fortune by making good decisions and risking capital based on his judgment. If writing helped him clarify his thinking, it must have paid dividends on par with his best-performing stocks.
The second lesson is that the most important bet in your life will be the one you make on yourself.
To be fair, Davis Sr. needed a little bit of help. He needed capital.
In a pattern familiar from Predators to Icons, Davis Sr. married into wealth. His wife's nest egg served as the initial capital stack with which he scoured the market for bargains. Rothchild quipped it was not a rags-to-riches story but ‘Saks-to-riches’.
On the one hand, Davis Sr.’s thrift and focus let him accumulate a fortune. He consumed little, passed on a distinct set of values, and ultimately gave away most of his money to a variety of causes and organizations. The generations that followed him did very well financially. On the other hand, his rigidity could become a cause of conflict and distance in the family.
To his son, Davis passed along his infectious passion for owning shares in carefully chosen companies (he called them “compounding machines”), his conviction that owning the best compounding machines would lead to unimagined rewards, his distrust of unnecessary spending (why waste money that could be invested?), and his workaholic tendencies.
When his son graduated, he declined to join his father in the family business because “he was too cheap to pay me anything.” Instead, he launched his own fund (in which Davis Sr. did not invest). Perhaps it was for the better.
Like Buffett, Davis Sr. reasoned that a large inheritance would spoil his children and stunt their ambitions. This led to some friction, including an ugly public fight with his daughter over millions he had previously put in trust for her (he decided to donate the money to Princeton instead).
“Money,” his son once said, “was my father’s way of keeping score, and he hated to give up any points.”
The book is filled with lessons about money, markets, and family. It is, however, not a how-to book. It offers no formulas or practical advice to replicate the Davis clan’s success (nor do we find ourselves in similar circumstances as he did). Its value lies in a collection of enduring lessons and ideas. My favorites are:
Stay curious: you never know where a fortune waits
The value and lessons of history
How Davis got rich: the ‘Triple Play’
Money doesn’t become obsolete: winning with financial companies
The right mindset for bear markets
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