How to Build a Multi-Generational Portfolio | The Davis Dynasty w/ Kyle Grieve (TIP799)

Summary

• Core Theme: The episode highlights the Davis dynasty’s long-term success focusing on insurance stocks, with detailed advantages like float, pricing power, low CapEx, and recession resilience.
• Reinsurance: A pivotal expansion into reinsurance (including Europe) broadened opportunity sets and reinforced a deep circle of competence within Financials.
• Banks: A later strategic pivot emphasized banks for their simplicity, durable demand, favorable rate cycles, and capital-light profiles.
• Small Caps: The discussion underscores small caps as fertile ground when large caps dominate attention, citing decade-long outperformance from this contrarian tilt.
• Blue Chips: A shift to blue chips with predictable earnings (buying on bad quarters) improved downside protection and reduced portfolio turnover.
• Companies Mentioned: References include Amazon (AMZN), Intel (INTC), Berkshire Hathaway (BRK.B), Johnson & Johnson (JNJ), Costco (COST), AIG (AIG), Chubb (CB), Progressive (PGR), and Fannie Mae (FNMA).
• Market Lessons: Cautions against stocks priced to perfection (e.g., Nifty Fifty era) and emphasizes patience, valuation discipline, and cash buffers in obvious bubbles.
• Overall View: Endorses a contrarian value approach within Financials, concentrating on superior management and holding compounders for decades.

Transcript

00:00:00:01 - 00:00:20:08 Unknown  Well, there are all sorts of great businesses  that go through price fluctuations. I think you   have to treat different companies differently.  If a business sees its profits rise initially,   then drop like a roller coaster, then chances  are you're going to lose a lot of money.   Quality businesses might see a massive rise  in their profits, and the rewards of waiting   for that to be reflected in the stock price  are actually only available to the patient. 00:00:20:08 - 00:00:27:21 Unknown  People who can cure some short term pain. 00:00:27:23 - 00:00:48:17 Unknown  Hey, real quick, before we jump into today's  episode, if you've been enjoying the show,   please hit that subscribe button. It's  totally free. Helps out the channel a   ton and ensures that you won't miss any  future episodes. Thanks a bunch! I'm going   to discuss one of the greatest investing  dynasties ever, and this is a family that   most investors other than, you know, the  die hards have probably never heard of. 00:00:48:23 - 00:01:13:12 Unknown  And this is the Davis dynasty. I'll be talking  about the great book about them titled The Davis   Dynasty by John Rothchild. But let's start  here with the founder of the Davis Dynasty,   Shelby Davis. Since the second generation of  the Davis dynasty was also named Shelby Davis,   but not JR. I'll refer to the eldest  Shelby Davis in this episode simply   as Davis and the second generation  of Shelby Davis as Shelby Davis. 00:01:13:14 - 00:01:34:11 Unknown  So Davis had a very interesting route  to the success that he eventually had.   He didn't actually start investing like  a child prodigy such as a Warren Buffett,   and he wasn't actually even a prodigy in  investing in his formal education years,   either. He had quite the road to take just  to get him into investing in the first   place. He started work as a journalist,  working as a radio reporter for CBS. 00:01:34:13 - 00:01:55:06 Unknown  He eventually earned a PhD in political science  and continued his work as a journalist. His big   intro into investing came actually from his wife,  Katherine Wasserman. So Katherine came from money,   and much of the money was invested for future  generations to take advantage of. Now, keep in   mind this was in the 1920s and finances were about  to be majorly disrupted by the Great Depression. 00:01:55:08 - 00:02:17:07 Unknown  Luckily, much of her family fortune was  just invested in bonds at this time,   and that meant that they didn't end up losing  that much money during the Great Depression,   as they were minimally exposed to the stock  market, which unfortunately evaporated many,   many people's fortunes. Now, Davis was very, very  frugal. He reportedly wore very worn out clothes,   and he figured that getting married to Katherine  was a great idea, as they could just split rent. 00:02:17:08 - 00:02:42:13 Unknown  So Davis understood that being frugal  was an advantage pretty early on,   and I think that helped him get into investing in  what would be considered cheap stocks in pretty   cheap industries, and the industry of his choice  would be in insurance. Now, the Great Depression   also shaped Davis's worldview. So in the 1920s,  Davis and Katharine were in Europe for much of   that time and learned a lot about Hitler and  how economics and geopolitics would collide. 00:02:42:15 - 00:03:03:01 Unknown  Now reporting on the rise of Hitler, Davis  had a very eye view. He actually believed   that Germany and Russia would just end up  squaring off with each other and wiping   each other out. And therefore, he felt that  Americans should just be more isolationists   and just stay out of things. During World War  Two, he actually opposed U.S. interference. It   was after the Great Depression that  Davis finally got into investing. 00:03:03:03 - 00:03:20:18 Unknown  He was supposed to get a job and move with his  wife to Japan, but there was a massive earthquake   in Japan, and that put that plan completely  on hold. So he'd also been offered a job by   his brother in law to work as a statistician,  which is what we now call a stock analyst. Now,   this reminds me that all investors come from  investing at completely different angles. 00:03:20:18 - 00:03:38:15 Unknown  And whether you start at 11, like Warren  Buffett, or don't even start buying your first   stock well into your 30s, like myself, I think  anyone can benefit from just getting started.   The compounding engine is available to  all of us, as long as we decide to start   at some point and don't continue to defer  using our capital until it's just too late. 00:03:38:17 - 00:04:03:11 Unknown  Now, Davis's job as an analyst took him in a  variety of different directions. He was on the   road a lot, learning about industries that he  was tasked with, such as, you know, airlines,   autos, railroads, steel and even rubber. These  are industries that he would eventually avoid   because he developed a skill in another sector,  which we'll discuss later. Davis began shunning   family events that he and his wife used to  always attend, and the family was noticing. 00:04:03:13 - 00:04:22:00 Unknown  Now, as I mentioned earlier, Davis had a strong  belief that the U.S. should stay out of World War   Two, which was not shared by his wife's family.  And even though Davis had a high position under   his brother's firm, he was actually passed over  for a promotion. So the early part of Davis's   life wasn't really what you'd expect from an  investor who had eventually become a billionaire. 00:04:22:01 - 00:04:37:06 Unknown  But there are many clues here to learn from.  First is a power of frugality. I know that this   can be a problem in some households, because  if one person is frugal and the other isn't,   it can easily create tension. Now,  Davis was able to bypass that,   but that might have been more of a  product of the time that he was living in. 00:04:37:06 - 00:04:57:06 Unknown  When, you know, a lot of financial decisions  were largely made by males in the family. Today,   it might not have worked, but his frugality seemed  to work fine for his family back in the 1930s. Now   frugality is is great in business. If you have  management that tends to be frugal. I think it's   a huge bonus because if you're frugal in life,  chances are you're going to be frugal in business. 00:04:57:07 - 00:05:17:21 Unknown  A CEO who drives a souped up car to work is  probably willing to spend a lot on the office as   well. And this means that he or she probably isn't  going to be the best person to rely on. If you   think that the business should cut costs. That's  why I admire CEOs like Jeff Bezos, who drove a   Honda Accord even when Amazon was blowing up as  a successful and more and more valuable company. 00:05:17:23 - 00:05:40:10 Unknown  This frugality helped also explain why  Bezos instilled rules such as removing   the lights from Amazon vending machines  just to save $20,000 on energy bills. If   you can clearly see that the CEO is frugal, I  think it's a really good sign that you might   have someone who highly prioritizes cost  control. And the thing about frugal CEOs   is that they create work cultures where that  frugality becomes a part of the businesses DNA. 00:05:40:11 - 00:05:59:01 Unknown  This can help businesses that are very  cost conscious into the future as well.   Now, Davis learned a lot about America in the  1930s, working for his brother in law. Part of   that research led him to study the big picture in  a little more detail, and he concluded that it was   government policy and not necessarily corporate  policy that he felt caused the Great Depression. 00:05:59:03 - 00:06:27:08 Unknown  He felt that Washington was more responsible  than Wall Street for factories being strangely   inactive, while consumers lacked things  like shoes, clothing, and other necessities.   There is no denying that a fantastic and  unstoppable stock prices led to great oops,   and that by raising interest rates in the  1929, the fed had knocked the bull off the   stride. But greedy capitalists caused the  Great Depression, as Wall Street's critics   had never tired of contending what accounted  for the different economic outcome in England. 00:06:27:10 - 00:06:46:13 Unknown  So Davis observed stock collapse in both the US  and in England. But as the US economy sputtered,   England actually advanced. He felt that  pro-business government had helped England   during this time. And that helped explain why  England saw a much quicker rebound than in the   US. So one example of government policy that  Davis disagreed with was just the US tax code. 00:06:46:18 - 00:07:10:21 Unknown  So at this time it was rewarding bond holders  with zero tax. So investors just poured money   into government bonds rather than into  equities. This helped the government in   funding their projects but didn't really do  anything to further corporate enterprise. And   this is where Davis realized that he was a true  capitalist. And as a true capitalist, Davis saw   opportunities where the recent events of the Great  Depression might have blinded many other people. 00:07:10:23 - 00:07:34:13 Unknown  So even though he lived through the media  reporting these long headlines about red   lines going on and gloomy headings, he focused  on American innovation. He looked at the new   things that were happening in the US, such  as the batteries that General Motors were   installing into every single vehicle that it  was produced. And he was looking at how GM   had also just created this new hand-crank, which  would bring females into the automotive market. 00:07:34:14 - 00:08:01:17 Unknown  He saw electricity consumption double  in the 1930s, causing a number of new   innovations. The US Patent Office had  this massive influx of new applications,   which further strengthened his conviction.  Now, Davis would have agreed here with a   young Buffett at this time over the  grumpy version of Benjamin Graham.   So the Great Depression had harmed Graham,  and like many other investors in the 1930s,   they believed that another depression was just  around the corner waiting to hurt investors. 00:08:01:23 - 00:08:22:23 Unknown  But as I mentioned earlier, Davis, with all the  data that he'd gathered, refused to accept this   gloomy outlook. Davis also made some pretty  big predictions at this time. And you know,   while I don't like big macro predictions because  I think most people will be wrong as much, if not   more than they're right. He was actually spot  on in his prediction going into World War two. 00:08:23:00 - 00:08:46:00 Unknown  So he thought that there was going to be a lot  of pent up demand from the great Depression. And   he felt that America embraced this kind of semi  managed economy. So things like social security,   unemployment and government jobs would provide  steady cash into Americans bank accounts. And   this kept more cash in circulation, which  would prevent future depressions as Americans   had more money to spend, which obviously  would be a lot better for corporations. 00:08:46:01 - 00:09:05:17 Unknown  Now, a significant corollary of this happened  after Covid. Covid created pent up demand,   and consumers who couldn't buy and  get services that they usually would   due to the government shutdowns. Now,  you add the fact that the government   was offering free money to stimulate  the economy. And you have exactly what   you need to get corporations going.  And this is precisely what happened. 00:09:05:18 - 00:09:23:11 Unknown  But there are all sorts of side effects that  we're now experiencing that are part of normal   economic cycles. Covid, I think, just expedited  the cycle in both directions. So in 1941,   Davis saw a great deal directly on Wall  Street, and he pulled the trigger. Now,   this wasn't actually a stock. It was  a seat on the New York Stock Exchange. 00:09:23:13 - 00:09:46:06 Unknown  He just couldn't help himself. The deal was just  too good. He bought a seat for only $33,000, while   that same seat in 1929 sold for $625,000. Now,  around the same time, Davis was helping to support   Governor Dewey's presidential nomination for the  GOP, but he ended up losing. Now, to repay Davis   for his help, Dewey named Davis the superintendent  of the state's insurance department. 00:09:46:08 - 00:10:04:03 Unknown  This was how Davis got his foot into insurance,  an industry that ended up being incredibly good   for him for many, many decades to come. Now,  this short anecdote about making the right   friends in the right places is something  that I'd like to discuss. So when you   make friends and offer value, opportunities  just tend to arise seemingly out of nowhere. 00:10:04:05 - 00:10:19:13 Unknown  I genuinely believe this because I am  a great example. For me, it started in   2020 when I began writing down my thoughts on  investing because I thought it would help me,   and there was a very good chance that it would  probably help someone else. And as I learned more,   I grew my audience and I reached even more people. 00:10:19:15 - 00:10:40:14 Unknown  I reached them through mediums like  Twitter and Substack at that time.   Now, had I just hoarded all the learnings that  I was accumulating, there's a near zero chance   that you would be listening to me talk about  investing today. Now, during World War Two,   bonds were clear winners over stocks. As I  mentioned earlier, the pain from the Great   Depression was still very present and investors  wanted to keep their capital as safe as possible. 00:10:40:15 - 00:11:02:02 Unknown  War bonds gave investors a place to invest as  well as show support for Americans in the war.   And Davis hypothesized that all this government  spending would actually devalue the dollar.   And in that case, bonds would become much  less attractive. Stocks, on the other hand,   had unlimited upside, which was  why he thought that they made much,   much better investments since he  was in the insurance industry. 00:11:02:06 - 00:11:24:10 Unknown  He saw firsthand how insurance companies  were overweight in bonds. He felt that   they should diversify to other asset classes,  such as, you guessed it, stocks. So here's an   excellent excerpt from the book. The 2 to  3% bond yields in the late 1940s expanded   to 15% in the early 1980s. And as yields rose,  bond prices fell and bond investors lost money. 00:11:24:15 - 00:11:46:02 Unknown  The same government bonds that sold  for a dollar in 1946 were worth only   $0.17 in 1981. After three decades, loyal bond  holders who had held their bonds lost $0.83 on   every dollar that they'd invested. Now, with  America's love affair for bonds at this time,   you can really see how it would have been  fertile hunting grounds for stock pickers. 00:11:46:04 - 00:12:10:04 Unknown  In modern times, the last time  stocks were very disliked,   I think was in kind of April of 2025. And  if you just look at how much the S&P 500   has returned since April 2nd of 2025  until December of 2025, it's 21% not   including dividends. So buying unloved assets is  clearly a very, very lucrative opportunity. Now,   in 1947, Davis left the insurance world  and reentered the world of stock picking. 00:12:10:06 - 00:12:31:14 Unknown  Since Davis had spent years in the insurance  world lobbying for reform so that insurance   flows could more easily buy stocks rather than  just buying bonds. He figured that he'd stick   with what he knew best. He knew that the  public didn't quite understand the power   that insurance companies had when they were free  to invest their float into compounding machines,   rather than just bonds that were  getting defeated by inflation. 00:12:31:16 - 00:12:51:08 Unknown  Davis had a very straightforward realization about  the stock market. The Dow was only trading at 9.6   times earnings and only slightly above book  value. And it paid a 5% dividend yield, which   was actually double that of government bonds.  So not only were the yields better on stocks,   but you had the upside of capital appreciation  that bonds just simply couldn't offer. 00:12:51:10 - 00:13:08:22 Unknown  And since stocks were so cheap, it made a lot  of sense to invest in them at that time. But,   you know, times were a lot different  back then. The Federal Reserve Board   conducted a survey and found that 90% of  respondents were opposed to buying stocks.   Only 300,000 Americans owned shares in mutual  funds, which was about 2% of the population. 00:13:09:00 - 00:13:30:13 Unknown  In 2022, the SEC reported that  58% of Americans own stocks   directly or indirectly. Now I get it. The  comparison here is an apples to apples,   but it gives you a picture of just how many  Americans were shunning stock ownership in the   late 1940s compared to today. One realization  that Davis had about insurance stocks at this   time was that they had latent pricing  power that hadn't yet been tested out. 00:13:30:15 - 00:13:51:14 Unknown  Davis said, my shirt costs more, my coal costs  more, my bread costs more. My pork chops cost   more. Practically everything I know costs  nearly twice as much as it did before the war,   except for insurance. And to make things worse,  the investments of insurance companies floats   were all invested into bonds, which, as I  mentioned earlier, were losing to inflation. 00:13:51:16 - 00:14:09:14 Unknown  This meant that these companies were just  completely unable to turn a profit. But the   insurance industry was actually at an inflection  point. GIS had come home from World War two.   They were starting to make families. They were  starting to make more money, and they needed   insurance for themselves for both life home and  auto insurance. Now, Davis love talking his book. 00:14:09:16 - 00:14:32:04 Unknown  He would speak to other investors about the  benefits of insurance stocks, telling listeners   that they were selling for half book value and  offered a great stream of cash as well as capital   appreciation potential. But he didn't end up  swaying many people, as the insurance company's   prices didn't seem to move that much. Now, at the  same time, Benjamin Graham wrote The Intelligent   Investor, he wrote to enjoy a reasonable chance  of continued better than average results. 00:14:32:06 - 00:14:55:06 Unknown  The investor must follow policies which  are one inherently sound and promising,   and two not popular on Wall Street. And  Davis decided to devote his career on   these two maxims. Now, Davis did one thing  a little differently for most investors   who camp out of money for decades, and  that is he used leverage. So since he   designed his investing professionally,  he was able to get about 50% margin. 00:14:55:08 - 00:15:15:21 Unknown  And this allowed Davis to buy 50% more stocks.  But the downside was that you could also lose   money quickly when you were wrong. So  Davis, his son Shelby said that part of   the reason that Davis liked leverage was  that he could actually claim the interest   payments on these loans against his income  to lower his tax bill. So one similarity   that Davis had with many fundamentals  based investors was in his due diligence. 00:15:16:02 - 00:15:37:05 Unknown  He was not a quant like Ben Graham,  relying merely 100% on a company's   financial statements to find value. He  traveled a lot and met people that he   could learn from. He talked to CEOs about the  futures of their insurance businesses. He had   tons of face to face meetings, help them  identify companies with the most talent.   And he actively looked for CEOs who are not  only talking the talk, but walking the walk. 00:15:37:06 - 00:15:58:23 Unknown  Davis despised businesses that  just had this great story,   but didn't have any real substance behind  what they were trying to tell investors.   One of Davis's favorite questions is likely to  be familiar to many fundamentals based investors,   and that was if you had a silver bullet  to shoot a competitor, who would it be?   But even though Davis had some differences to  Graham, much of what he did was very similar. 00:15:59:01 - 00:16:22:12 Unknown  So when he got to meet Graham, he jumped  at the chance to help further the status   of analysts. His newly found profession.  Davis joined the New York Society of Security   Analysis to help out on that front.  Now, Davis actually saw quite a lot   of success right away when he started  investing his own money. So his small   investment firm started with only $100,000,  which I mentioned 50% of was in leverage. 00:16:22:14 - 00:16:43:05 Unknown  Now, by the end of the year, his net worth with  234,000. And he did it the boring way by holding   insurance companies trading on the OTC markets,  where they were increasing sales and profits at a   decent pace. Now, I love this strategy because  I share in his love of boring compounders.   While some compounders are boring businesses,  they aren't necessarily always boring stocks. 00:16:43:06 - 00:17:10:01 Unknown  The market knows about many of these, so they tend  to be bid up in price. One company that I own,   Travis Industries, sells pretty boring  Hvac products and containment vessels   and provides products and services  for the oil and gas industry. Still,   it's also an incredibly well-run business and  has incredibly high returns on invested capital.   And over the last five years, as boring business  with zero I exposure has killed many companies,   including every single company on The  Magnificent Seven other than Nvidia. 00:17:10:03 - 00:17:32:14 Unknown  So the 1950s was a bull market that  nobody seemed to really want. The Dow   nearly tripled and the S&P soared. And yet  Americans just refused to own stocks. Only   4% of Americans own stocks at this time.  But Davis didn't care. He knew that the   contrarian mindset that he had was working  incredibly well for him. And as a result,   he became very wealthy after only  seven years of investing in stocks. 00:17:32:17 - 00:17:50:03 Unknown  His big observation in stocks was that  he could take advantage of something   that he called the Davis double play,  which was very simple. Essentially,   it was just owning a business where  the stock's earnings would increase,   and accompanying that increase in earnings  would be an increase in the earnings multiple.   So just to make sure you understand  that let's go over a quick example. 00:17:50:03 - 00:18:16:17 Unknown  Let's say that Davis found a fictitious  insurance company named insurance USA   which earned about a dollar per  share. So when he saw this business,   nobody wanted it. So it was trading at APA4  times. The shares would then be priced at   $4. Davis would then hold the business while  its earnings compounded, let's say up to $8   a share. At that point, other investors were  very hip to the fact that insurance companies   were decent and would bid up the price up  to something like, let's say, 18 times. 00:18:16:22 - 00:18:38:13 Unknown  Now the share price was $144, and Davis  would have a 36 bagger on his hands. And   this doesn't even factor in the dividends that  the insurance companies would pay shareholders.   A few other advantages that Davis thought  insurance companies had over manufacturers   included things like they had additional  profits from investing their customers   money into the float. They had much lower CapEx  needs as they didn't require factories or labs. 00:18:38:16 - 00:19:01:06 Unknown  They didn't pollute the environment.  They were recession resistant as people   needed insurance even when times were  tougher. And during these lean times,   people would drive fewer miles, meaning  fewer accidents and fewer clamps.   And additionally, during these lean  times, interest rates tended to fall,   increasing the value of bond portfolios that were  held by insurance companies. But the problem with   insurance companies is that some of them  are good, and some of them simply aren't. 00:19:01:08 - 00:19:21:16 Unknown  And Davis understood this well from his  days working inside of the industry. He   came up with his own framework to separate  the good from the bad. The first step was   pretty easy. He would look at the numbers  and see which business is making money,   and add any adjustments that were needed.  When he found businesses that were profitable,   he then look where the company  was investing its insurance float. 00:19:21:18 - 00:19:40:12 Unknown  Were they investing in high quality assets  such as, you know, high grade bonds, stocks   or mortgages, or less desirable assets such as  junk bonds? Next, he looked at a company's private   market value. If the company's private market  value was less than its public market value,   he knew that he was probably on to something  good that offered a very wide margin of safety. 00:19:40:14 - 00:20:02:02 Unknown  And as you'll see throughout his  investing career, many of these   small insurance companies were bought out for  significant premiums to their public price,   which he benefited greatly from. Now, because  Davis placed a significant emphasis on value,   he also developed an incredibly thick  skin. So when the market's mood changed,   he was actually ineffective in changing Davis's  conviction, which was why he had so much success. 00:20:02:04 - 00:20:27:03 Unknown  Instead of getting, you know, depressed  about the market's opinions of his stocks,   he'd hold firm and buy more. A  classic value investor move. Now,   after he understood that the company was truly  profitable and was trading at a discount,   he turned his attention to management. This  was a true advantage for Davis since he was   on the road so much, he got to speak with  insurance executives and insiders to better   understand these insurance companies, their sales  strategies, and their competitive advantages. 00:20:27:05 - 00:20:46:12 Unknown  One detail that I liked in this book was how Davis  handled his relationship with Wall Street. So the   downfall of many great investors is simply  succumbing to Wall Street. Well, that might   mean things like changing your compensation  system to industry standard to 20 or over,   diversifying your portfolio to match an index.  But Davis just didn't take part in any of this. 00:20:46:14 - 00:21:06:13 Unknown  While he knew many analysts and would learn more  about their opinions, he rarely actually acted   on those opinions. He was more of a lone wolf,  which is a bonus investing because it helps you   sidestep groupthink. So Davis reputation in the  industry was growing, too. He was referred to as   the dean of American Insurance, even though he  never worked directly for an insurance company. 00:21:06:15 - 00:21:31:05 Unknown  But with all the contacts he had, he  was able to build up his reputation,   which further improved his edge in gaining  knowledge from the insurance industry. Davis's   firm also competed in underwriting IPOs of  insurance companies. But his firm was small,   so it was very difficult for them to  really have any funding necessary for   larger IPOs. But through all of this,  what really moved the needle for Davis   at this point was simply owning great  insurance businesses in the mid 1950s. 00:21:31:06 - 00:21:51:23 Unknown  His net worth soared to 1.6 million, a 32 times  return on his original $50,000 investment. And   at this time, there was a considerable amount of  turnover in his portfolio. So all 32 insurance   companies that he owned over these years were no  longer in his portfolio. They were replaced with   businesses that he felt a little more comfortable  owning with for more extended periods of time. 00:21:52:01 - 00:22:14:17 Unknown  From this time, he would focus even more on  businesses that he thought could continue to   increase their value for decades. And by  1959, his net worth was somewhere in the   8 to $10 million range. The late 1950s were  an excellent time for Davis because he met   a fellow named Dick Murray, who introduced him  to the reinsurance industry. Now, for those who   are unfamiliar with reinsurance, it's a business  that insures insurance companies against the risk. 00:22:14:19 - 00:22:34:00 Unknown  Murray got Davis into some interesting reinsurers,  both in the US and even more importantly, abroad   in Europe. And this opened Davis's eyes to the  powers of investing internationally. Now, I'd like   to pause here to just discuss Davis's mindset in  a little more detail. He'd already been incredibly   successful, investing nearly exclusively  in insurance businesses and only in the US. 00:22:34:01 - 00:23:00:02 Unknown  And now he was willing to listen to this gentleman  about reinsurers that weren't even in the US. I   think this really shows that Davis was willing  to continue to learn and seek new opportunities   elsewhere. Now, the reinsurance business was an  opportunity that clearly was in his wheelhouse.   It was an adjacent industry where Davis  could easily have learned more and gain   insights into which insurance companies  would probably benefit from reinsurance,   or which reinsurers would be the preferred  suppliers for the US insurance industry. 00:23:00:04 - 00:23:24:11 Unknown  Now, this evolution is very key because nearly  every investor with a multi-decade track record   must evolve to continue to succeed. Buffett  did it when he moved away from cigar butts   and towards higher quality businesses. In Davis's  case, it was somewhat similar. He moved away from   finding these super cheap insurance companies,  trading far below book value to replacing them   with high quality businesses that he felt  he could hold for extended periods of time. 00:23:24:13 - 00:23:45:17 Unknown  Now, the book doesn't exactly outline what  precipitated that shift, but only that it   happened. Now, I can only speculate here,  but perhaps even in those 32 companies,   there were maybe a few large winners where Shelby  felt he could find more of them. If you look for   similar attributes, and perhaps one of those  attributes was to find businesses that had   these long term advantages that protected them  from the cyclicality of the insurance industry. 00:23:45:19 - 00:24:04:08 Unknown  Now, I'd like to transition here to talk about a  couple of key lessons that both Davis and his son,   Shelby Davis, learned between 1950  and 1970, which was a great time of   volatility in the markets. There are a  ton of great lessons from both of them   that I think all investors should take  into account. So Shelby Davis Davis,   his son, approached investing a  little differently from his father. 00:24:04:10 - 00:24:25:02 Unknown  He had been spared the pain and heartache of  living through the Great Depression, so he wasn't   nearly as focused on the downside protection  that his father was at first. Are you looking   to connect with high quality people in the value  investing world? Beyond hosting this podcast,   I also help run our Tip Mastermind Community,  a private group designed for serious investors. 00:24:25:04 - 00:24:47:16 Unknown  Inside, you'll meet vetted members who  are entrepreneurs, private investors,   and asset managers people who understand  your journey and can help you grow.   Each week, we host live calls where  members share insights, strategies,   and experiences. Our members are often  surprised to learn that our community is   not just about finding the next stock pick, but  also sharing lessons on how to live a good life. 00:24:47:18 - 00:25:14:06 Unknown  We certainly do not have all the answers,  but many members have likely faced similar   challenges to yours. And our community does not  just live online. Each year we gather in Omaha   and New York City, giving you the chance to build  deeper, more meaningful relationships in person.   One member told me that being a part of this  group has helped him, not just as an investor,   but as a person looking for a thoughtful  approach to balancing wealth and happiness. 00:25:14:09 - 00:25:49:18 Unknown  We're capping the group at 150 members,  and we're looking to fill just five spots   this month. So if this sounds interesting to  you, you can learn more and sign up for the   waitlist at the Investors podcast.com/mastermind.  That's the investor's podcast.com/mastermind. Or   feel free to email me directly at Clay  at the Investors podcast.com. If you   enjoy excellent breakdowns on individual stocks,   then you need to check out the Intrinsic Value  podcast hosted by Sean O'Malley and Daniel Manca. 00:25:49:20 - 00:26:15:08 Unknown  Each week, Sean and Daniel do in-depth  analysis on a company's business model   and competitive advantages, and in real  time, they build out the intrinsic value   portfolio for you to follow along as they  search for value in the market. So far,   they've done analysis on great businesses like  John Deere, Ulta Beauty, AutoZone, and Airbnb.   And I recommend starting with the episode on  Nintendo, the global powerhouse in gaming. 00:26:15:10 - 00:26:42:14 Unknown  It's rare to find a show that consistently  publishes high quality, comprehensive,   deep dives that cover all of the aspects of  a business from an investment perspective.   Go follow the intrinsic Value podcast on your  favorite podcasting app and discover the next   stock to add to your portfolio or watch list.  So let's go back here to the 1960s. Shelby   and to partners set up the New York Venture  Fund with just $2 million of initial capital. 00:26:42:19 - 00:27:01:01 Unknown  Now, keep in mind this was during the Go-Go years   where many investors were starting to get  media attention, such as Gerry Tsai. Now,   the reason fund managers were getting attention  was due to their investing in some of these kind   of high flying names that had incredibly  impressive returns as a result of these   times. These businesses in the Nifty 50  had some incredibly high expectations. 00:27:01:04 - 00:27:24:21 Unknown  So Shelby was investing in businesses like  Memorex Digital Equipment, American Microsystems,   and Mohawk Data. If I told you these were names  of tech businesses today, you probably wouldn't   even be surprised, given the company names.  Shelby thought that the earnings of these new   era companies were very, very visible into the  future. Now, the book suggests that perhaps Shelby   adopted this strategy simply to prove himself as  he was at the beginning of his investing career. 00:27:24:23 - 00:27:46:08 Unknown  Now, at first, this strategy worked. The venture  fund was up 25% in its first year. Shelby,   reflecting on that time, said, we all thought  we were geniuses. The problem here is that   when the entire market also shares in  your high expectations of a business,   there's something behind the scenes that's  happening which is increasing your risk.   And that's the risk that expectations  will not meet Wall Street's estimates. 00:27:46:10 - 00:28:08:12 Unknown  So the problem for businesses with high  expectations that are already priced in   is simply imagining scenarios in which  the market is no longer in a loving mood   towards these businesses, which specialize  in computer hardware and memory storage. So   this business had a bad quarter and the stock  dropped 20% in one day. But that unfortunately   was just the beginning, as Memorex was  once $168 and promptly fell just to $3. 00:28:08:14 - 00:28:26:19 Unknown  This is the fundamental problem with high price  businesses. They simply do not have that margin   of safety. If they go through rough patches,  then investors who expected high growth will   sell and look for other growth names that they  can build conviction in. And when they leave,   they often do so indiscriminately, causing massive  drops in multiples. So this teaches us two things. 00:28:27:00 - 00:28:47:17 Unknown  One, price drives return more than  quality in the short term. And two,   avoid stocks that are priced to perfection.  Well, there are all sorts of great businesses   that go through price fluctuations.  I think you have to treat different   companies differently. If a business sees its  profits rise initially, then drop like a roller   coaster coming from its apex. Then chances  are you're going to lose a lot of money. 00:28:47:19 - 00:29:06:06 Unknown  But quality businesses might see a massive rise  in their profits, and the rewards of waiting   for that to be reflected in the stock price are  actually only available to the patient people who   can endure some short term pain. The second lesson  on avoiding stock's price to perfection is a great   one, but I think it requires investors to consider  just how much perfection is already priced in. 00:29:06:08 - 00:29:27:08 Unknown  Is it one year perfection? Five years? Ten  years? I personally can live with a year.   Perfection priced in. If it's a business that  I already own that's gone up to that price   point. And I think can continue to do well  for another 5 to 10 years. But, you know,   if it's a business where I think it only has maybe  1 or 2 years of growth in it, there's zero chance   that I'm going to pay for perfection,  because then I get no margin of safety. 00:29:27:09 - 00:29:47:11 Unknown  Once the fundamentals of that business begin  deteriorating. So I mentioned earlier that   the New York Venture Fund had done so well in  its first year that Shelby and his partners   were just swelled with overconfidence.  Shelby had been working a ton of that time,   up to 16 hours per day, and believe that all that   hard work was directly tied to the reason  that the fund had been performing so well. 00:29:47:13 - 00:30:07:03 Unknown  But the second year just wasn't so good. The  New York Venture Fund went from being one   of the top performing funds in America one  year, to being in the lowest decile in the   next. Investing. It's tough. Now, from  1969 to 1971, the fund's shares went from   $10.22 to just $10.88. So there just wasn't  much value being created at this time. 00:30:07:04 - 00:30:28:15 Unknown  And much of that was due to the  overconfidence that Shelby Davis   had in his decisions from the first year.  Now, overconfidence is very expensive,   and I think this is a fascinating notion. So Ian  Cassell, who has been a guest of tip multiple   times, believes that early success was very  instrumental to his own investing career. But   when it came to Shelby Davis, I'm not sure  that early success was such a good thing. 00:30:28:17 - 00:30:51:14 Unknown  The problem with early success is that it's  usually a product of the market's whim. If you   have early success, it usually coincides with  the market also going up significantly during   your early years when you're establishing your  track record. But if you're taking excessive risk   in a bull market, that also means that you're  going to be severely punished. In bear markets,   where most expensive names are often the ones  they can just get hammered down the most in price. 00:30:51:16 - 00:31:08:14 Unknown  So it's vital to understand that the outcome in  the short term is less predicated on your process,   and more predicated on short term noise.  It's only after a multi-year period that   you'll know whether your process is good.  Buffett said that you need at least 3 to 5   years to understand whether your strategy works,  and I think that's a pretty good amount of time. 00:31:08:16 - 00:31:30:00 Unknown  In five years, you're probably going to have  gone through a bear market. And if you still   have success going through an up and down  cycle, you can have some confidence that   your process is actually working. Now, when  I first bought crypto, I thought I had a good   process because I quadrupled my portfolio in  only a few months. But then I lost 97% of it,   and it became incredibly evident that  my process was completely broken. 00:31:30:02 - 00:31:48:18 Unknown  And this is over a very short period  of time, much less than three years.   But that humbling process was very potent and  shaping me into the investor that I am today.   Now, the 1973 1974 period was very difficult  for investing. Buffett had already closed his   investment partnership many years prior simply  because he couldn't find any more decent ideas. 00:31:48:20 - 00:32:06:00 Unknown  The improving market sentiment at that time  was a major reason that Warren couldn't find   any ideas. There was just too much money coming  into the market and not enough ideas. And a big   reason for that was the nifty 50 stocks that  I briefly mentioned here. So these were stocks   that analysts called one decision stocks. You  bought them. And then you didn't touch them. 00:32:06:02 - 00:32:23:04 Unknown  The thesis was that the businesses were  just so good that you just didn't need to   meddle with the stock, and the share price  would just take care of itself. Sounds like   hogwash. But people believed this at the  time. Now, the decline in 1973 1974 was   the market's worst since the Great Depression.  And there are several reasons for the crash. 00:32:23:06 - 00:32:42:07 Unknown  There was an unpopular war in Vietnam which  drained sentiment. There was Nixon's Watergate   scandal. There was geopolitical risk in the  Middle East. There were oil embargoes that   were pushing up oil prices. Then there  were also currency issues and inflation   problems. And as I mentioned previously,  stocks were priced to perfection and the   market was not prepared for this  change in the economic cycle. 00:32:42:09 - 00:33:01:10 Unknown  Shelby Davis, who learned a few lessons from his  first few years with the New York venture Fund,   and he figured that the fund should probably  have some cash on hand, because if there was   another massive drawdown similar to the one  that they experienced in their second year,   the fund just simply might not survive. So  they moved about 30% of their assets into cash,   which ultimately saved them from  much of the carnage to come. 00:33:01:12 - 00:33:35:04 Unknown  So during that bear market, the nifty  50 average dropped from 43 times to 17   times. The S&P 400. SPX dropped from 30  times to 7.5 times. Blue chips that were   in the nifty 50 were definitely not spared.  Polaroid dropped 85%, Disney 81%, Xerox 65%,   Coca-Cola 64% and heck, even McDonald's dropped  61%. Now the story of nifty 50 epic Free Fall,   I think, leaves several excellent lessons  for us, and I think the biggest one is   simply that this event showed that even wonderful  companies can actually make horrible investments. 00:33:35:06 - 00:34:03:10 Unknown  Nifty 50 businesses included so many names that  we still use today, but if you'd invested in them   at their peak times in the early 1970s, you  would have had to hold them for an extended   period just to recoup your losses. And this  shows that quality doesn't offer a margin of   safety if you're paying bubble like prices.  Businesses like Eli Lilly, Philip Morris,   Texas Instruments, Merck and Johnson and Johnson  are all businesses that still exist today,   but they're great examples that even a  fantastic company could be a bad investment. 00:34:03:10 - 00:34:24:17 Unknown  When you pay too high of a multiple.  Johnson and Johnson, at its peak,   traded for 60 times earnings. Now, I was  curious here to know about just what it's   traded out recently. And over the past  ten years it's averaged around 18 times.   Now, I assume if we went back in time it  might have been growing a little faster and   therefore deserved maybe a little bit of a higher  average premium, but nothing close to 60 times. 00:34:24:19 - 00:34:40:20 Unknown  So it also shows that quality businesses  aren't shielded from becoming part of their   own bubbles. Today, when we think of bubbles,  we might think of companies in the world of   AI. But what about a business like Costco?  This is a simple blue chip company that   trades for 50 times trailing earnings.  Could Costco be in its own mini bubble? 00:34:40:22 - 00:35:01:21 Unknown  Only time will tell. Now, based on my experience,  I'm actually okay with quality businesses being   a little expensive. The key for me is to have  conviction in the business's growth. Now, if that   conviction starts wavering, there's a very, very  good chance that the base rate multiple could be   cut and never rebound to historical averages. So  a business like Topix is a good example of that. 00:35:01:23 - 00:35:18:01 Unknown  I think it's been pretty expensive in the  past. But when you look at the valuation   multiples a few years out, it offers very  compelling returns despite the optically   high multiples that it pretty much always  trades at. Now the final, this one I took   from this is that the market can be used as  a tool to help you determine cash positions. 00:35:18:03 - 00:35:38:12 Unknown  If the entire market is having one of its bouts  of irrational exuberance, such as the tech bubble,   where I think it becomes really obvious  that nearly the whole market is in a bubble,   then it's probably a great time to  establish some sort of cash position.   Now, these are pretty rare occurrences,  and I wouldn't bother trying to do this   other than when it's incredibly, incredibly  obvious that the entire market is overpriced. 00:35:38:14 - 00:36:03:04 Unknown  But if all the signals are there, perhaps you  should clone Shelby Davis's example here and   have some cash ready to take advantage  of the inevitable fall in the market.   Now we're going to look at one of Davis's  biggest mistakes in investing career here,   and that was Geico. So Davis actually  found Geico quite early in the 1960s.   He thought it was a great insurer simply  because the business model allowed it to   pay out its claims from its customers premiums  while leaving its investment portfolio intact. 00:36:03:06 - 00:36:27:17 Unknown  The 1960s were great for Geico's performance,  both fundamentally and via total shareholder   returns. Davis's position was so significant that  he was actually offered a position on their board,   which he happily accepted. But the 1970s saw  a reversal in Geico's fundamentals. The US   population became much younger, leading to more  insurance claims from reckless drivers. Geico   CEO Ralph Peck was also undertaking a strategic  shift by selling policies to non bureaucrats. 00:36:27:22 - 00:36:51:07 Unknown  So Geico's original strategy was to only  sell insurance to government workers,   as they inherently had fewer claims than  the average American. And unfortunately,   this new customer ran up claims and reduced its  reserves. And Peck actually lied to shareholders   and the board about the problems that the  business was having. Geico, which had been   something of a market darling, plunged in value as  it announced a massive $126 million loss for 1975. 00:36:51:09 - 00:37:15:15 Unknown  This took the stock all the way from $42 to $5,   a 90% decline as one of Geico's largest  shareholders. Davis helped appoint Jack   Byrne as a new CEO. Byrne cut costs by closing  100 Geico offices, but the stock continued to   crater down at $2. Byrne was then introducing  Warren Buffett, who had formerly owned Geico,   and was attracted by the rock bottom  prices that the shares were now trading at. 00:37:15:17 - 00:37:36:16 Unknown  Buffett bought a bunch of shares, and he suggested  that Byrne sell the stock to raise capital.   Now, I found this case study very  interesting. And the reason being   that Buffett was willing to buy your stock.  That's probably the best possible time to be   doing buybacks. And while Geico was clearly  not in a financial position to do buybacks,   why would Buffett have suggested that they  issue shares at very depressed prices? 00:37:36:18 - 00:37:52:02 Unknown  And the answer to that question is that  Geico was in a very unique situation. If   Geico didn't receive the cash infusion that  it needed, there was a chance that it would   become insolvent. Geico needed to have  the right amount of reserves to satisfy   regulators. And if they didn't have those healthy  reserves, they could simply just be shut down. 00:37:52:04 - 00:38:11:00 Unknown  Now, banks would have been iffy at this time to  lend money to Geico, given the fact that it just   had this incredibly bad quarter with negative  profits, and that meant the only way to raise   capital was to issue equity in Geico and find  some people willing to put up the capital. Davis   did not like the idea of dilution and was  completely opposed to any equity issuance. 00:38:11:02 - 00:38:28:10 Unknown  Buffett, he figured that dilution at $2 a  share was probably much better than owning   shares that were worth $0. Geico ended up going  through the share issuance, and as a result,   Davis stormed out of the Geico meeting when he  heard about it and went straight to his office   and sold all of his Geico shares, a decision  that he regretted for the remainder of his life. 00:38:28:12 - 00:38:47:17 Unknown  Now, the stock went from $2 to $8 in very short  order, and a few months after the bailout,   Byrne announced that Geico would actually do  a share buyback, signaling to Davis that the   company was in much better financial position.  Now, Davis would get one more upper hand on Geico,   which still paled into comparison to the  opportunity cost of his decision to sell Geico. 00:38:47:19 - 00:39:13:02 Unknown  So he owned a significant stake in a Geico  subsidiary called Government Employees Life   Insurance Companies, or Jellicoe. Byrne  tried buying all the shares of Jellico,   but Davis is asking. Price was $21 and Byrne would  only pay $13. So the deal never happened. And   shortly after, a British insurance company bought  out Jellico for $32 a share. Now, this story shows   that the right CEO and the right advice can truly  save a company that looks destined for the dumps. 00:39:13:04 - 00:39:28:16 Unknown  It's an interesting lesson for deep value  investors who look for opportunities like   this. I think I would need many more IQ points  to ever invest in a situation like this,   so it's not something that I would pursue, but  I can really see Buffett's viewpoint on this,   since he was intimately familiar with the  business by owning it several years earlier. 00:39:28:18 - 00:39:48:19 Unknown  Now, Shelby have learned from his first years  in the fund business that a strategy based on   chasing momentum only worked for short  periods of time before you put yourself   and your investors at just too much financial  risk. So he shifted the strategy from looking   for businesses with massive upside  potential to focusing more on high   quality blue chips that could perform well  in a variety of different market conditions. 00:39:48:21 - 00:40:06:08 Unknown  So he bought companies like Philip Morris and  Cap City simply because he believed that people   wouldn't start smoking cigarets or watching  television. He was now looking at businesses   that had very predictable earnings, and one  strategy he did was to look for blue chips that   had a bad quarter where the market was punishing  its share price. I think this is a great strategy. 00:40:06:10 - 00:40:27:21 Unknown  Shelby was cautious to avoid the value  traps that keep cheap companies cheap.   He relied more and more on management talent  and a company's balance sheet to keep these   businesses running well during tough times.  He also stopped buying and selling so much.   The fund's turnover was only 15%, and he  also decreased the hurdle rate on earnings   expectations, which had been a considerable  risk for him early on his investing career. 00:40:27:23 - 00:40:48:12 Unknown  Another strategy he took part in alongside  a Peter Lynch, was to place a larger focus   on small caps. When mid and large cap  businesses are getting a lot of attention,   small caps just tend to underperform.  And this still happens to this day,   given the outperformance that large  caps had. Shelby was seeing a lot of   great opportunities in the small cap arena,  which he milks for the next decade or so. 00:40:48:17 - 00:41:11:17 Unknown  And this strategic shift worked well  for Shelby Davis, just as Davis shift   had worked well for him from 1969 to 1978.  The New York Venture Fund returned 43%. Now,   I know what you're thinking. Those are pretty  pitiful returns. But you have to remember,   the market conditions during this time were  not good. Over that same stretch of time,   the S&P 500 was actually down 1.7%, which  makes that achievement quite impressive. 00:41:11:19 - 00:41:28:12 Unknown  But this shows that good stock  pickers can still win in down   markets. Davis continued to evolve his own  investing strategy as well. But as he age,   I think he started to do a few things that  just gave him an activity to do rather than   rely on his winning strategy, which had just  been to do as little as humanly possible. 00:41:28:14 - 00:41:51:01 Unknown  For instance, Davis actually started investing  outside of his circle of competence, which was   insurance. He began buying businesses across  all sorts of industries that he hadn't had any   previous success in. This coincided with him  being named to the Value Line board, where he   received many of their reports and tended to act  on them. Since Davis has contacts in businesses   such as CEO had nearly all retired, Davis started  feeling a little out of touch with the market. 00:41:51:03 - 00:42:09:07 Unknown  So he began dabbling into over diversification  as well. So he reportedly only had about 30 to 50   names for most of his early career. But later  on, that number ballooned into the hundreds   to give himself even more to do, which  coincidentally gave his brokerage house more   business. He began day trading. He never committed  more than 3% of his capital to the strategy. 00:42:09:07 - 00:42:29:12 Unknown  But it was your typical, you know, kind of get in,   get out strategy that loses many investors a lot  of money. Luckily for Davis, he had a very firm   understanding here of risk control. But when  you have a powerful strategy that just works,   it can overcome any adjustments that you make,  even if they are suboptimal. So in this period,   the 1980s, Davis, his insurance portfolio  had over $500 million to his net worth. 00:42:29:14 - 00:42:49:04 Unknown  And all this added capital was from just simply  sitting on his hand and doing nothing. No   tinkering, day trading or leaning on value line  was needed to get any of these results. This   story is very reminiscent of an unknown Indian  investor who recently passed away named Recast   General and voila! He passed away at the young  age of 62 and had a net worth of $4 billion. 00:42:49:06 - 00:43:09:02 Unknown  He never managed any outside money similar to  Davis. Rakesh had multiple investing strategies.   Davis in his twilight years, he'd invest long  term. And he would also day trade. But Rakesh   owned a business in India called Titan Industries,  which was a major manufacturer of jewelry,   watches and eyewear. And he'd bought that 20  to 25 years ago when he started buying Titan. 00:43:09:02 - 00:43:28:00 Unknown  It made up only about 3% of his overall  portfolio. And he never sold a share of   the business. Of the 4 billion that he had.  2 billion was generated from Titan. That one   stock compounded at about 30% per year for the  entirety of his holding period. His strategy,   just like Davis's early insurance bets,  was to just buy hold and not tinker. 00:43:28:01 - 00:43:46:00 Unknown  But what about the other 50% of rookies  portfolio? The majority of that was also   in one named called lupine, a pharmaceutical  business. So while request was actively trading,   two stocks that he barely touched made up  over 75% of his net worth. If that's not a   signal to take a similar strategy and avoid  the noise, I don't really know what else is. 00:43:46:01 - 00:44:02:04 Unknown  The lesson here from Davis is that drifting  from your edge can feel exciting at the time,   but it's usually just a signal that you're losing  discipline. If you do this early in investing   career, chances are that you're going to have a  very tough time compounding simply because you're   going to fiddle too much with the winners that  can really carry you over the next few decades. 00:44:02:06 - 00:44:21:14 Unknown  But Davis had already done the work for  decades prior to establish an incredible   portfolio of great businesses. Therefore,  the additional fiddling that he did really   just didn't hurt him as much as it would  have if he dedicated a lot of capital to   fiddling much earlier in his career. We've also  discussed some of Shelby's transformations,   but there's another great one that  he learned in the 1980s as well. 00:44:21:15 - 00:44:37:21 Unknown  So I mentioned that Shelby had a nice cash  position that he built up before the 1970s   bear market. And once that bear market came,  Shelby got to work buying bank shares on the   cheap. Shelby knew interest rates had  bottomed, which would be a big time   tailwind for banks. So he backed up the truck on  banks, taking advantage of the Davis double play. 00:44:38:03 - 00:44:58:05 Unknown  Banks were a logical step for Shelby, as he'd had  a stint working at the bank in New York. Shelby,   like banks because they didn't manufacture  anything, require expensive CapEx,   didn't require machinery, research  labs or highly skilled labor.   He also liked the simplicity of banks. You just  borrow from depositors and loan to borrowers and   pocket the profits from the different  interest rates for both those parties. 00:44:58:06 - 00:45:19:13 Unknown  He also figured banks weren't going  anywhere. People would always need   somewhere to put their money. It was a  business that was very hard to disrupt   due to its lack of technological dependance.  But he didn't exclusively invest in banks.   He added insurance companies like Chubb  and Lincoln International Tech players   that focus on hardware such as IBM, Motorola  and Intel, and pharmaceuticals like Merck. 00:45:19:15 - 00:45:39:09 Unknown  Intel was actually a pick that Shelby got behind  after meeting Intel CEO Andy Grove and being   incredibly impressed with him and his great one  liners. One of them was there are two kinds of   companies the quick and the dead. He bought Intel  at single digit PE multiples and held it for well   over a decade. Now the bear market, caused by  Black Monday in 1987 further tested Shelby. 00:45:39:11 - 00:45:58:22 Unknown  But as a fund had done in previous markets,  it was very well protected from the downside   risk. The year after the crash had happened,  Shelby's venture fund was down 6% versus -15%   for the S&P 500. One of the best picks that  Shelby had made during the bear market was in   Fannie Mae. Like all investors, I've had to hold  to a lot of volatility caused by bear markets. 00:45:59:03 - 00:46:19:13 Unknown  Topics. The European Vrms Serial Choir has been  a volatile name. While I've been a shareholder,   I've held two drawdowns of 55% and  36%. And when I have a business in   my portfolio that continues to meet my  lofty expectations, I actually view large   drawdowns as opportunities to add to my  position, rather than as justification   to sell something that is just showing a  little bit of weakness in its share price. 00:46:19:15 - 00:46:38:04 Unknown  I want to briefly discuss something here for  listeners who might have experience with trusts,   so I personally don't, but I know many  listeners do, and there are some very   outstanding lessons in here about the  advantages and disadvantages of trusts,   especially in regard to the constraints that  they can put on things. So I discussed very,   very briefly in this episode, but Davis,  his wife, came from a very wealthy family. 00:46:38:08 - 00:46:59:10 Unknown  And so they manage their own trust.  But by the end of Davis's career,   his wife's trust would have been  in much better hands if it had   just been fully managed by Davis. Davis  absolutely creamed it performance wise,   despite the suggestions of great stocks from both  Davis and his son Shelby. The problem with trusts   is that they're often built on the distrust of  heirs to abuse the distributions from the trust. 00:46:59:14 - 00:47:23:19 Unknown  So here's what's written about that in  the book. The Benefactors lawyer fix it   so that the heirs can't get their hands on the  principal. But the trust is set up to provide   ample income to satisfy the healthy appetite for  spending. With that goal in mind. Trusts tend to   be heavily invested in bonds and dividend paying  stocks. The Wasserman's abandoned their all bond   strategy in 1950, but the portfolio was still  income oriented as opposed to growth oriented. 00:47:23:21 - 00:47:46:00 Unknown  In most cases, an income portfolio can't  reward its owners like a stock portfolio,   especially when the income is siphoned off  to beneficiaries who use it to pay bills   and don't reinvest it for further compounding.  Between the siphoning and the taxes levied on   withdrawals. An income oriented trust is destined  to become a dwindling asset. What pluck. Luck,   genius, talent, enterprise and  in some cases, con artistry. 00:47:46:00 - 00:48:05:18 Unknown  Create a one generation dependency cash  drain and Uncle Sam destroy in the next two.   So the lesson here is that the wrong structure  simply handicaps compounding. So if your goal   is to compound at a rate of, let's say, 10%,  then ask yourself why you own things such as   government bonds or other income producing assets  that are unlikely to meet your hurdle rate. 00:48:05:20 - 00:48:26:08 Unknown  The fact is that if you want to maximize returns,  stocks over the long term are the best vehicle   to do it. And it's not even close. So we've  spoken today about Davis and Shelby Davis,   but this episode is about the Davis  dynasty. And that means there's   actually one more generation to discuss.  And that's Davis's grandson, Chris Davis,   who just like his grandfather and father,  was an excellent investor and still is. 00:48:26:10 - 00:48:44:19 Unknown  Now, Chris's brother Andrew was also  an investor, but he tended to stay out   of the limelight. So I'm just going  to focus mostly on Chris here. Now,   Chris was the Davis who most closely  resembled Warren Buffett at age ten,   a year younger than Buffett's first investment,  Chris bought an insurer named Associated Madison,   and he reportedly never sold it, but  also lost track of where it went. 00:48:44:21 - 00:49:00:21 Unknown  While contemplating what Shelby taught  his kids regarding investing, he said,   the most important thing that I taught them  about the investment business is just how   much I love being in it. Even in the lean  years of the 1970s, I was convinced picking   stocks was something any kid could do, and  I tried to make it fun and keep it simple. 00:49:00:23 - 00:49:19:07 Unknown  The math part, you know, accounting and  spreadsheets. I figured they could learn   later. I got them involved in the detective work,  sniffing out clues about a company's prospects.   Sometimes I took them along on company visits,  just like my father had taken me. Shelby would   incentivize them to analyze companies by dangling  100 bucks in front of them for an analysis report. 00:49:19:09 - 00:49:38:22 Unknown  Now, one day, Chris asked his grandfather, Davis,  for a dollar to buy a hot dog, and Davis went into   a lengthy story about the power of compounding.  Told young Chris that if the dollar were invested   wisely, it would double every five years.  And when Chris was Davis his age in 50 years,   that $1 would be worth $1,024. After hearing  that story, Chris decided that he was not hungry. 00:49:39:00 - 00:49:57:03 Unknown  Now, Chris was much closer to Davis than his  father was. As a teenager, he spent a lot of   time with his grandfather and helped chauffeur  him around as he learned to drive. During school,   he worked at Davis's office doing back end things  like stuff envelopes and sending messages on the   telex system. They took walks together and they  discussed things like politics and Wall Street. 00:49:57:05 - 00:50:18:05 Unknown  Oddly enough, Chris at one point  was studying to become a priest,   and he was a communist to boot. Despite all this,  his grandfather still saw something in him saying,   philosophy and theology give you a perfect  background for investing. To succeed in investing,   you need a philosophy that you've got to pray  like hell. So when Davis went to Scotland,   where Chris was in school, he would take  Chris with him to see insurance companies. 00:50:18:07 - 00:50:34:01 Unknown  This helped Chris better understand the insurance  business and make key contracts in that industry   that would help support in investing. Career.  After a short stint on Wall Street, Chris was   actually offered a job with his grandfather and  he jumped at that chance right away. There are   many lessons that I've learned from my own  family growing up that have stuck with me. 00:50:34:05 - 00:50:49:23 Unknown  Frugality is one of them. While I'm probably  less frugal than both my mom and dad,   I also know that I'm much more frugal  than many of the other people close to   me that I've observed. My dad, who grew up  in Myanmar, was relatively poor growing up,   so he's a master at making his  money go as far as possible. 00:50:50:00 - 00:51:06:09 Unknown  He's always been great at bargaining and finding  excellent stuff at a bargain price. He also,   as far as I know, has never had a problem  with debt because he's always lived below his   means. This is a great lesson that I've taken  from my dad and place a lot of emphasis on in   my adult years. My mom, on the other hand,  is frugal, but she also likes nice things. 00:51:06:14 - 00:51:20:15 Unknown  So while I was growing up, there were times  when I know she was in debt and she would   actively tell me about it, which really  helped me understand a little more about   how that worked and how it's best to just  stay out of it as much as possible. There   have been a few times in my life when  I was in debt and it felt pretty scary. 00:51:20:17 - 00:51:35:04 Unknown  So the last time was about ten years ago. I signed  up for a course to improve my business acumen,   which was expensive for me at the time  and unfortunately just didn't really   come close to paying itself off. But I  was left with obviously this huge bill   because I had to pay for the course,  which I paid for with my credit card. 00:51:35:06 - 00:51:49:23 Unknown  Unfortunately, this was during a time where I  was making enough money that paying that debt   off would have taken a lot longer than I would  have liked it to. And that meant paying a lot of   interest. But as I began thinking more deeply  about where I could come up with more money,   I remembered that I've actually been  saving money each month to pay my taxes. 00:51:50:00 - 00:52:05:05 Unknown  So I checked with my financial advisor,  who'd been managing that for me to see if   I had any extra savings that I could dip  into intelligently. And that completely   saved me. I use my excess savings as kind of  my safety fund, which really helped me avoid   paying excessive interest on my debt,  which I certainly did not want to pay. 00:52:05:07 - 00:52:21:18 Unknown  So my mom and I have spoken about that  period in my life, which was painful for me,   and I could tell that she could understand  the pain that I'd gone through because she'd   been through it as well. And that  was a really good lesson for me,   because I ended up taking a risk that  didn't pay off. But the savings that   I'd made over the years helped me avoid  getting into too much financial trouble. 00:52:21:20 - 00:52:43:03 Unknown  But since then, I've been debt free, and  ton intend to change that in the future.   So when Davis hired Chris, he started him  very easily. Chris began writing a few   paragraphs on insurance for his grandfather, and  he noticed that parts of his writing were being   published in Davis's insurance bulletin.  Chris also improved his analytical skills   in the bulletin by using blank space to write  up interesting companies that he was finding. 00:52:43:05 - 00:53:04:05 Unknown  But Chris noticed something interesting. Nobody  really was reading the weekly insurance bulletin.   Curious, he asked his grandfather why he continued  writing it when nobody was reading it. Wasn't that   just a waste of time and energy? And Davis,  his reply was great. It's not for the readers,   it's for us. We write it for ourselves. Putting  ideas on paper forces you to think things through. 00:53:04:07 - 00:53:27:21 Unknown  Great advice. Now, at this time, Davis was  starting to slow down and passing more and   more responsibility to Chris. So he was doing  things like giving Chris some of the personal   accounts that he was managing. One day in 1992,  Davis brought a binder full of computer printouts   with Davis, investing gains and losses from his  entire investing career. Davis asked Chris to look   it over and make some recommendations  about what to sell and what to keep. 00:53:27:23 - 00:53:43:20 Unknown  Chris then bought these trades to his father  and they looked them over together. Shelby   was amazed to see that many of his top picks  were actually purchased by his father. And   this came to him as a big surprise, as Shelby  and Davis had a pretty tepid relationship.   And Shelby felt that Davis didn't really  value his investing opinions that much. 00:53:43:22 - 00:54:05:16 Unknown  But he found picks like Intel, Fannie Mae, and  even the New York Venture Fund in his portfolio.   Chris said that seeing those names in  his father's portfolio were the words   of praise that my father had waited all  his adult life to hear. And my grandfather   had never uttered. But they learned some  fascinating things about Davis's portfolio.   Three quarters of Davis's assets were in  about 100 worldwide insurance companies. 00:54:05:18 - 00:54:24:12 Unknown  The rest were scattered among 1500 companies.  Part of the reason that he owned so much was   that he would buy these 1000 share lots just  to get his foot in the door. And these lots   made up a negligible amount of his portfolio. So I  presume that he may have just maybe wanted to have   access to their financials or as a reminder  to do more research on them in the future. 00:54:24:14 - 00:54:45:23 Unknown  Now, the really juicy information was in just  how Davis had made it onto the Forbes list of   wealthiest Americans. It wasn't in the 1500s  stock pick that Davis made. It was from a few   names that he'd held for over 30 years.  The book intelligently picks the Wyeth's,   Rauschenberg's, and Warhols as an  ode to famous American artists.   Davis kept these business as  part of his own art museum. 00:54:45:23 - 00:55:11:10 Unknown  In the longer he held them, the more valuable  they got. Now, a few of these picks included AIG,   which was worth 72 million. Tokio Marine and  Fire, which he bought at 641,000 and was now   worth 33 million, and three other Japanese  insurance holdings Mitsui, Sumitomo Marine Fire   and Yasuda Marine and fire, worth a combined $22  million. You may recognize Mitsui and Sumitomo,   as Warren Buffett made a basket bet on  five Japanese companies that included both. 00:55:11:12 - 00:55:35:10 Unknown  Now, I mentioned earlier that  Davis regretted selling Geico,   but since Davis followed Geico so closely,  he ended up with a nice stake in Berkshire   shares. He actually owned 3000 shares, which  at the time grew to 27 million. Today. 3000   Berkshire shares are worth $2.2 billion.  Other American holdings were Torchmark, Aon,   Chubb Capital Holdings and progressive,  which were worth a combined 72 million. 00:55:35:12 - 00:55:55:02 Unknown  Now, these dozen or so stocks were worth $261  million. And Chris learned a lot from just how   Davis created all that wealth. It wasn't  from his day trading and tiny value line   bets. It was from allowing time to work  its wonders on a business that compounded   Rothschild rights. All the Davis dozen had been  parked in his portfolio since the mid 1970s. 00:55:55:07 - 00:56:13:15 Unknown  Any young, inexperienced investor has a built in  advantage over a mature, sophisticated investor.   Time. He would have also observed that 11 of  12 of these picks were all from insurance,   Fannie Mae being the outlier. This would have  taught the 25 year old Chris the importance of   being heavily exposed to industries that  you understand at a very profound level. 00:56:13:17 - 00:56:34:04 Unknown  Another observation was that Compounders  can easily wipe out significant losses.   And Davis had those too. His most expensive  flop was a business called First Executive,   which went from 2.5 million all the way down to  zero. But as you can see from his 12 big winners,   that minor loss was just an insignificant  rounding error. Once they wrapped up their   analysis of Davis's assets, they had to  figure out what to do with all of it. 00:56:34:09 - 00:56:50:08 Unknown  There were a few things that they did. First part   of Davis. His assets would be funneled  into Shelby's New York Venture Fund,   to be managed by Shelby, along with some of the  other businesses that Shelby liked. And second,   Chris would manage some of the newer  portfolios, and if they performed well,   they would expand the Davis operation. And  from there, really, the rest is history. 00:56:50:09 - 00:57:11:14 Unknown  As of today, Chris runs the Davis Funds managing  nearly $20 billion, which includes the New York   Venture Fund that his father had managed. Davis  Funds has many different funds. But if you look   at the oldest one on the book, it is the New  York Venture Fund class, which is compounded   at 11.5% since 1969, outperforming the  S&P 500 by 1% over that entire period. 00:57:11:16 - 00:57:32:09 Unknown  Truly an incredible feat. Now, I'd like  to finish off this episode by discussing   a checklist of about six items that we  can think about in our own investing that   three generations of Davises have  used the compound money for many,   many decades. The first lesson is to avoid  cheap junk value. Investors love a good deal,   but you must be able to differentiate between  a good cheap deal and a bad, cheap deal. 00:57:32:15 - 00:57:52:22 Unknown  Shelby learned in the 80s that many  businesses deserve to be cheap because   chances are they would just go nowhere.  Shelby didn't like turnarounds because   they often took much longer than management  would claim, and the capital could be used   much better elsewhere. The second lesson is  to avoid expensive greatness. While Shelby   loved great businesses, he wasn't  willing to pay any price for them. 00:57:53:00 - 00:58:14:04 Unknown  While a great growth company can provide  a great return when growth falters,   it's often punished excessively as investors  who initially assumed a high growth rate sell   out once they realized that the high  growth rate period is now over. Third,   for moderately priced, moderately  growing companies. Now, the reason   for this continues from that last lesson. If  you have a business that's growing moderately. 00:58:14:06 - 00:58:37:21 Unknown  Chances are the multiples won't be bid up or  down too much or below. The growth in intrinsic   value. So your downside is well protected. And  if the business surprises slightly to the upside,   you get the added benefit of multiple expansion.  Before the lesson is to wait for the right time   to enter positions. If you analyze a lot  of companies, you're going to find some   outstanding businesses, but you're also going to  find some businesses that are price to perfection. 00:58:37:23 - 00:58:54:03 Unknown  But the market is an excellent tool for  transferring wealth from the impatient to   the patient. And one way to put yourself on  the right side of that equation is to just   wait for great prices to come to you, rather than  pulling the trigger on businesses that you like,   regardless of the share price. The fifth  lesson is to bet on superior management. 00:58:54:05 - 00:59:12:06 Unknown  Davis made a killing betting on Hank Greenberg  at ECG. Shelby did the same thing with Andy   Grove at Intel. So if you find some executives  that you think are cut above the rest follow   their careers very closely because they may  spark massive upside in a business once they   take over. And the sixth and final lesson  here is that stocks are much less risky. 00:59:12:07 - 00:59:28:17 Unknown  The longer you hold them. Many listeners of  the show have probably seen a chart showing   the index's volatility over one year, five year,  and 20 year periods. The longer you hold a stocks,   the more likely it is that you make money. The  shorter you have them, the more likely you are   to lose money simply because the market  is a voting machine in the short term. 00:59:28:19 - 00:59:47:02 Unknown  So whether you invest in stocks or ETFs,  your best bet is to find businesses that   will be around for a long time, buy them and  do nothing. Thank you so much for spending   time with me today. If you'd like to continue  the conversation, please follow me on Twitter   at irrational, Mr. Cates, or connect with  me on LinkedIn. Just search for Kyle Greve. 00:59:47:04 - 01:00:06:09 Unknown  I'm always open to feedback, so please  feel free to share how I can make this   podcast even better for you. Thanks  for listening and see you next time.   Thanks for listening. To tip. Visit the  Investors podcast.com for show notes and   educational resources. This podcast is for  informational and entertainment purposes   only and does not provide financial  investment, tax or legal advice. 01:00:06:11 - 01:00:26:14 Unknown  The content is impersonal and does not consider  your objectives, financial situation or needs.   Investing involves risk, including possible  loss of principle and past performance is not   a guarantee of future results. Listeners  should do their own research and consult   a qualified professional before making any  financial decisions. Nothing on this show   is a recommendation or solicitation to buy or  sell any security or other financial product. 01:00:26:16 - 01:00:48:02 Unknown  Hosts, guests and the Investor's Podcast Network  may hold positions in securities discussed and may   change those positions at any time without notice.  References to any third party products, services   or advertisers do not constitute endorsements, and  the Investor's Podcast Network is not responsible   for any claims made by them. Copyright by the  Investor's Podcast Network, all rights reserved. 01:00:48:04 - 01:01:06:13 Unknown  So if you're a long term investor, your default  state should be inactivity. If your portfolio is   full of businesses that have high returns  on invested capital, ample reinvestment   opportunities, and are run by excellent management  and have a great culture. Your best activity is   just to do nothing. Chances are the business  will continue doing really well for many years.