Chapter 156 - The Davis Dynasty: Fifty Years of Successful Investing on Wall Street
What I learned from Shelby Cullum Davis
Today’s Chapter is based on the book “The Davis Dynasty: Fifty Years of Successful Investing on Wall Street“ by John Rothchild.
The Davis family refers to three generations of American investors and asset managers who built a long-running Wall Street investing dynasty. Starting with value investor Shelby Cullom Davis, who turned about $100,000 into hundreds of millions through concentrated, long-term stock picking, his son Shelby M. C. Davis and grandsons Christopher and Andrew expanded the legacy by founding and running Davis Selected Advisers (Davis Advisors), a major equity-focused mutual fund firm managing tens of billions of dollars over time.
Here’s what I learned:
Frugality
“A penny saved is a penny earned.”
— Benjamin Franklin
The Davis family’s story is a great example of how relentless frugality can serve as the foundation for extraordinary financial success. Shelby Cullom Davis, the patriarch, exemplified a lifestyle where every penny saved was redirected into investments with the goal of accumulating wealth over multiple generations. This wasn’t mere penny-pinching for its own sake; it was a deliberate strategy to maximize capital for compounding in the stock market. Davis’s habits, often seen as quirky or even annoying by outsiders, instilled in his family a profound understanding that wealth isn’t just about earning more but about spending far less and letting the savings work tirelessly through investments.
One striking example of Davis Sr.’s frugality comes from his everyday choices, like his tennis habits. Rothchild reports that he continued to play with ratty, old tennis balls even though he could of easily afforded new ones. Similarly, this frugal mindset also extended to major life decisions such as housing. He avoided unnecessary expenses, preferring to rent rather than own until circumstances forced a purchase, and even then, he sought a bargain.
“Kathryn had saved $ 30,000-her father had provided all his children the same amount so each of them could buy a house. Davis and Kathryn had continued to rent because Davis thought houses were too expensive to maintain.”
— John Rothchild
While Davis Sr. was known as “the stingy man” among the family as a long-standing family joke, his frugality was instilled at a very young age to his children and later grandchildren. In fact, Rothchild mentions that “the wallet hugging impressed his children and his grandchildren that the surest way to build wealth is to spend less than you make and put the balance to work in stocks.”
As such, frugality was, in Davis Sr.’s household, a deliberate training tool. He wanted children to earn, to respect the value of money, and to avoid the entitlement traps that often accompany sudden wealth. Davis explained his rationale bluntly: “You’re getting nothing from me. That way, you won’t be robbed of the pleasure of earning it yourself.” By consequence, his two children were not entitled to the wealth gained by Davis Sr. Instead, he gave them “a gift that kept on giving: an understanding of the basics of compounding and a primer on how to pick stocks. This was a Wall Street version of teaching a hungry person to fish instead of giving him a filet. Davis decided to ship his filets to the universities, foundations, and think tanks he supported, while teaching his offspring to be a fisherman.“
“Davis passed along his conviction that frugality was more than idle virtue. In his view, a dollar spent was a dollar wasted; a dollar unspent could be sent off to compound. He taught the children not to squander pecuniary resources. At home or on the road, they treated money the way desert tribes treat water—using as little as possible for any given task. Inside an investment account, which was where it belonged, money was a joyous and nourishing substance. Outside an investment account, in the hands of spenders, money was worrisome and potentially toxic. It sapped self-reliance and subverted the work urge of its possessors.”
— John Rothchild
Similarly to his own children, Davis Sr. ensured that frugality was also instilled in his grandchildren. In fact, he once refused to buy his grandson a $1 hot dog and told him: “Do you realize if you invest that dollar wisely it will double every five years? By the time you reach my age, in 50 years, your dollar will be worth $ 1,024. Are you so hungry you need to eat a $ 1,000 hot dog?“ This is eerily similar to Warren Buffett who once told his wife “Do you realize how much that is if you compound it over 20 years?” after she spent $15,000 worth of furniture.
This importance put into frugality reminds me of Benjamin Franklin who had “frugality” as one of his thirteen virtues. In fact, Franklin’s upbringing instilled in him a deep respect for hard work and thriftiness, values that shaped his success and remained central to his philosophy throughout his life. As a matter of fact, Franklin explains that his habits of frugality came from his father who often repeated to him this proverb of Solomon, “Seest thou a man diligent in his calling, he shall stand before kings, he shall not stand before mean men.”
As such, when he first started his career as a printer, his frugal approach was already evident. As Franklin once wrote, “I dressed plainly; I was seen at no places of idle diversion. I never went out a fishing or shooting; a book, indeed, sometimes debauched me from my work, but that was seldom, snug, and gave no scandal; and, to show that I was not above my business, I sometimes brought home the paper I purchased at the stores thro’ the streets on a wheelbarrow.”
Similarly, Franklin was also frugal in the way he managed his household. He explained, “We kept no idle servants, our table was plain and simple, our furniture of the cheapest. For instance, my breakfast was a long time bread and milk (no tea), and I ate it out of a twopenny earthen porringer, with a pewter spoon.”
“In order to secure my credit and character as a tradesman, I took care not only to be in reality industrious and frugal, but to avoid all appearances to the contrary.”
— Benjamin Franklin
Furthermore, his frugality even influenced Benjamin Franklin’s eating habit. As a matter of fact, in order to save money, when he was 16, Franklin started following a vegetable diet as he could end up saving half of what his brother paid him to board himself. This would not only allow himself more money to spend on books but more time to read.
As Franklin mentioned, “I made myself acquainted with Tryon’s manner of preparing some of his dishes, such as boiling potatoes or rice, making hasty pudding, and a few others, and then proposed to my brother, that if he would give me, weekly, half the money he paid for my board, I would board myself. He instantly agreed to it, and I presently found that I could save half what he paid me. This was an additional fund for buying books. But I had another advantage in it. My brother and the rest going from the printing-house to their meals, I remained there alone, and, dispatching presently my light repast, which often was no more than a biscuit or a slice of bread, a handful of raisins or a tart from the pastry-cook’s, and a glass of water, had the rest of the time till their return for study, in which I made the greater progress, from that greater clearness of head and quicker apprehension which usually attend temperance in eating and drinking.
Rule of 72
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
— Albert Einstein
As mentioned previously, after teaching frugality, Davis Sr. ensured his children and grandchildren learned how to invest. In fact, central to the Davis family’s success was an unwavering belief in the power of compounding, where money grows exponentially over time through reinvestment. The Davis didn’t just invest, they viewed stocks as compounding machines that, if chosen carefully and held long-term, could multiply wealth far beyond initial expectations.
This philosophy was passed down at an early age. As a matter of fact, from a very young age, Davis Sr.’s children were immersed in the family business. They did clerical work, listened to dinner-table discussions about companies and were taken on field trips to corporate headquarters. Investing was part of the family trade and it was taught through constant practical engagement. Rothchild mentions that “Shelby’s childhood was his MBA. He’d grown up on dinnertable stock talk, fact-finding missions to Hartford, and annual reports strewn about the house. He absorbed finance the way a musician’s child absorbs syncopation or the diatonic scale.” Similarly, Shelby taught his two sons Chris and Andrew in a similar fashion.
“The most important thing I taught them about the investment business is how I loved 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. The math part-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 Cullom Davis
One important lesson that was passed down among the Davis was the Rule of 72, a simple forumula to estimate how long it takes for money to double at a given interest rate. The Davis didn’t just understand compounding mathematically; they lived and breathed it as an article of faith, a force that could turn modest, consistent savings into staggering wealth over generations.
For one, Davis Sr.’s entire career was a testament to compounding. Starting at age 38 with no formal finance training, he focused on buying shares in insurance companies and held them through every imaginable market condition, allowing time to work its exponential magic. He managed to turn $50,000 into 900 million. Rothchild writes, “Over the next four and a half decades, Davis skillfully chauffeured his portfolio into one of the great Wall Street fortunes. 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.”
The family used the Rule of 72 to make the abstract concept tangible and exciting, especially for the younger generation. They understood that an extra percentage point of return, sustained over decades, made a monumental difference. As Rothchild explained, “Through difficult times, the Davis family has found solace in the Rule of 72, realizing that if you can manage to compound your money at 10 percent per year, you’ll be well rewarded, and if you can compound at 15 percent or better (as Davis did with his own portfolio and as Shelby did with the Venture portfolio), you’ll enjoy an enormous return that will make the recent setback seem as a trivial feint.”
“The more wisely you invest, the faster your bankroll will expand. If you know the rate of return on your investment, the Rule of 72 tells you how long it will take to double your money. The greater the return, the faster the compounding, which is why an extra percent or two makes a huge difference. A 10 percent return over 21 1/2 years turns $ 100,000 into $ 400,000. At 12 percent, the payoff is $ 595,509.”
— John Rothchild
As Charlie Munger once said that the first rule of compounding is to never interrupt it unnecessarily, the Davis were long-term investors. As a matter of fact, Davis Sr. was a student of history and a believer in cycles. When he first started investing, after the end of the worst decade in modern history, 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.”
This reminds me of what we have learned previously from Warren Buffett, who understood compounding at a very young age. He believed that a dollar he spent today could be worth ten some years from now. As such, he “wasn’t going to hand over a dollar more than he needed to spend. Every penny was another snowflake for his snowball.” With his knowledge of this powerful knowledge, he announced to his friend Stu Erickson that he would be a millionaire by the time he would be thirty-five.
One of Buffett’s first business endeavours that shows the power of compounding was to buy a pinball machine and to place them in barbershops around time. He would then use profits he earned from his pinball machine to buy other pinball machines. He also did something similar with weighting machines:
“The weighing machine was easy to understand. I’d buy a weighing machine and use the profits to buy more weighing machines. Pretty soon I’d have twenty weighing machines, and everybody would weigh themselves fifty times a day. I thought—that’s where the money is. The compounding of it—what could be better than that?”
— Warren Buffett
However, the power of compounding is a mental model that shouldn’t be only used in investing. Compounding also works in terms of seeking wisdom or obtaining good habits. As a matter of fact, a one percent improvement every day leads to 37x improvement in a year.
Alternatively, Buffett also uses it to think about his mind and body’s health. As a matter of fact, bad habits can also compound negatively. Even more concerning is the fact that you only get one mind and one body to last a lifetime. As Buffett once said, “It’s what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.”
Buffett often mentions snowball as an analogy to understand compounding. Here’s a few of his quotes:
“I packed my little snowball very early, and if I had packed it ten years later, it would have been way different than where it stands on the hill right now. So I recommend to students that if you start out a little ahead of the game—it doesn’t have to be a lot, but it’s so much better than starting out behind the game. And credit cards really get you behind the game.”
— Warren Buffett
“The snowball just happens if you’re in the right kind of snow, and that’s what happened with me. I don’t just mean compounding money either. It’s in terms of understanding the world and what kind of friends you accumulate. You get to select over time, and you’ve got to be the kind of person that the snow wants to attach itself to. You’ve got to be your own wet snow, in effect. You’d better be picking up snow as you go along, because you’re not going to be getting back up to the top of the hill again. That’s the way life works.”
— Warren Buffett
Davis’ Double Play
“In the book, I talk about the twin engines of 100-baggers. One engine is to have underlying earnings (or cash flow or book value or whatever the relevant metric is for the business) grow at a high rate for a long time. The second engine is to get that valuation lift.
The ideal candidate would have both of these twin engines working for you. But we live in a world that is less than ideal. And so if you get a great business that can compound for a very long time at a high rate, I wouldn’t chafe too much at paying up a bit.”
— Chris Mayer
Finally, another key element for the Davis family’s success is what they called the “Davis Double Play”. They sought companies whose earnings would grow over time, and which would also command a higher price-to-earnings ratio as the world recognized their quality. The synergy of these two factors, held over many years, produced extraordinary returns. Rothchild writes, “His $ 4,000 was now worth $ 144,000 in Mr. Market’s estimation. In terms of profit, he made 36 times his initial outlay, plus whatever dividend checks had landed in his mailbox during the waiting period. Davis called this sort of lucrative transformation ‘Davis Double Play.’ As a company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost.”
“The math was inspirational. In 1950, insurance companies sold for four times earnings. Ten years later, they sold for 15 to 20 times earnings, and their earnings had quadrupled. Let’s say Davis acquired 1,000 shares of Insurance USA (a fictitious example) for $ 4,000 when the company earned $ 1 a share. He held on until the company earned $ 8 a share and a crowd of camp followers pounced on the opportunity. What he’d bought for four times $ 1, they bought for 18 times $ 8. His $ 4,000 was now worth $ 144,000 in Mr. Market’s estimation. In terms of profit, he made 36 times his initial outlay, plus whatever dividend checks had landed in his mailbox during the waiting period. Davis called this sort of lucrative transformation “Davis Double Play.” As a company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost. Davis got a third boost from his margin loans.”
— John Rothchild
Similarly, the son, Shelby Cullom Davis Jr., was burned by paying expensive fast growers in the 1970s market and decided to shift his strategy to acquire moderately growing companies at deeply discounted prices, following the “Davis Double Play” system. Rothchild mentions, “From this point forward, he would shun high-priced fast growers and embrace lower-priced moderate growers. Companies that were nobody’s darlings when stock prices rose, he decided, were less likely to disappoint when the market fell. Why risk a pole vault when you could take the stairs?”
This lesson also reminds us that the “Davis Double Play” can also lead to disaster in the downside. If a company valued at a high P/E suddenly stops growing, the stock price can get a major haircut.
“Memorex was a fast grower with a fancy price tag-a fatal combination when the profits disappear and investors fall out of love. Then, the Davis Double Play goes into reverse. Let’s say a beloved faster grower sells at 30 times earnings and earns $ 1 a share, creating a $ 30 stock. If the earnings drop by half and disenchanted investors decide to pay only 15 times earnings, the $ 30 stock suddenly becomes a $ 7.50 stock. When further disenchantment drops the price to 10 times earnings, a $ 30 investment is whittled to $ 5.”
— John Rothchild
The proof of the success of this philosophy was in the portfolio Davis Sr. held at his death. It wasn’t a collection of thousands of frantic trades that built his wealth, but profound patience with a select few extraordinary investments. Rothchild mentions that “The printout left no doubt what had put Davis on the Forbes list. It wasn’t his phone book of stocks; it was a few names in the phone book. These were oldies from the 1960s that he had faithfully held-his financial Wyeths, Rauschen-bergs, Warhols. With the typical mutual fund turning over 100 percent of its inventory every year, and the public trading in and out of stocks and funds just as readily, Davis remained loyal. Names he owned in 1950 still occupied his portfolio in 1990.”
The “Davis Double Play” obviously reminds me of Chris Mayer’s concept of twin engines:
Beyond the Book
Read "Ben Franklin: The Thirteen Necessary Virtues" by Farnam Street
Read "The Rule of 72" by Mohnish Pabrai
Read "Chris Mayer on Stocks that Return 100-to-1, and How to Find Them" by MOI Global
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