Don't Rush Wealth: Lessons from The Davis Dynasty by John Rothchild

Patience and consistency. No matter who you are talking to possessing these two qualities would be considered a good thing. It doesn't matter the context: raising children, developing new skills, maintaining old skills, earning trust, building a reputation, or creating wealth. It all requires patience and consistency. It isn't easy to have though, otherwise we'd all just get on and be about it. Most of us would love to be known for that, but much like anything else worth having, it requires a lot of effort.

Reading The Davis Dynasty: Fifty Years of Successful Investing on Wall Street by John Rothchild was a lesson in staying true to the course no matter the external factors that swirl around, endlessly trying to knock us off course. The key is in the title. "Fifty years of successful investing." I'll say it one more time for everyone in the back. Fifty years...

Jeff Bezos told a story about an interaction he had with Warren Buffett. He had asked him why more people didn't copy his investment strategy. Buffett's response was: "My approach is a get-rich-slowly scheme. People don't like those." On one hand it's so simple. On the other, for me at least, it can feel like an absolute mental war to remember that there is no rush. Rushing is what will precipitate subpar outcomes.

In the introduction of The Davis Dynasty Rothchild sets the scene perfectly. He runs through a list of all the market affecting events during the 50+ years Shelby Davis was investing. Here it is paraphrased: two long bull markets, twenty-five corrections, two large bear markets, one crash, seven mild bear markets, nine recessions, three major wars, one presidential assassination, resignation, and impeachment, thirty-four years of rising interest rates, eighteen years of falling interest rates, bonds and stocks alike gaining and losing, gold gaining while markets lost, and a stretch when a savings account was more rewarding than the DOW. All of a sudden the current war, the interest rates, and the uncertainty of AI feels so insignificant. How did Davis go from a $50,000 initial investment to a $900 million net worth? Surely patience and consistency made a big contribution... and a little help from Father Time.

One point of emphasis I'd like to note is that Davis did not begin his career in finance. He more or less stumbled into the sector in which he made the majority of his fortune. After graduating from Princeton with a degree in history he landed jobs as a journalist and writer, but struggled to find long-term work. His wife's brother hired him on to his investment firm as a "statistician." In other words he was a stock analyst before that term had gone mainstream. He spent time at his brother-in-law's firm traveling the country prospecting businesses for potential investments. His brother-in-law was boisterous which contrasted with Davis's fairly unemotional and serious nature eventually causing the relationship to strain. Ultimately Davis left the firm and returned to writing, primarily in economics. He eventually found work in government with a handful of different positions ranging from positions in the Governors Office for New York State, the War Production Board in Washington (helped convert US manufacturers into wartime suppliers), and then returning to the Governors Office with a chance appointment as the superintendent of the state insurance department. This is where he would find his expertise and knowledge in a sector he would later begin almost exclusively investing in.

In this position he studied every nook and cranny of insurance all the way from its beginnings. He became an expert. He learned all of the quirks of accounting within the insurance industry with no prior background in CPA work. This gave him an edge over other investors when evaluating insurance businesses. Eventually Davis felt confident about the opportunities available to him and decided to quit his job and become a full time investor.

This upbringing seemed important to me. Although he came from a strong educational background it is a prime example that one can stumble their way into investing without the prototypical wall street career that segues into becoming an independent investor. It is possible for us to learn through unique experience and self-education which I find encouraging.

His story also highlights the significant value in becoming an expert in one area rather than being a jack of all trades, but master of none. His competitive advantage was born of an expertise in a sector that was unsexy and underappreciated. This seemed reminiscent of Buffett and Munger. On many occasions they were asked about their lack of investment in the tech sector. They never felt that it was a bad sector to invest in, it was just that they didn't understand it as well as others. They chose to play a game where they felt they had an advantage over others rather than playing a game where those roles were reversed.

Davis employed his expertise in the insurance sector over the course of his career. It turned out that he did make some small investments in companies outside of insurance later on, but the bulk of his wealth was built upon what he knew best.

When you break down the factors that made Davis so successful, one of the things you'll find is that he just kept swimming. He stayed true to his course and never stopped. He saw his net worth beaten down multiple times, sometimes more than 50%. Barring a few inevitable mistakes that all investors seem make at some point he tended to let his winners ride and let compounding do his heavy lifting.

Davis's investing qualities trickled down to his son and grandchildren indirectly and directly. The book elaborates on the interesting relationships that he had with his own son, but nonetheless he started a legacy. His son and grandchildren carried on a similar mindset to a world where they learned through their own set of trials and tribulations.

Davis's son was his namesake, Shelby M.C. Davis. After following suit to an education at Princeton he graduated and began his career more traditionally, starting by researching companies at The Bank of New York. After accumulating experience he was eventually promoted to Vice President. Fun fact: The only person younger than him at this position in company history was one of our founding fathers, Alexander Hamilton.

Throughout his time traveling the country examining businesses and speaking with management teams he noticed something important. Corporate managers loved talking about all the positives, but rarely talked about the negatives. He found high value in the managers that were able to acknowledge the negatives with humility. He carried this observation with him for the rest of his career correlating strong management teams with the ability to recognize, acknowledge, and correct mistakes. As an investor I hope to do the same with my own failures.

Along with some partners he left The Bank of New York to start his own investing firm. They ran a relatively concentrated portfolio of about thirty companies. Their goal was to outperform in the downturns rather than in bull markets. Shelby initially gravitated towards large growth companies surrounded by hype, but eventually refined his strategy down to smaller companies with above average management teams and strong long term prospects.

While managing his fund (Venture Fund) he managed to beat the S&P in sixteen out of twenty years. The fund averaged 4.7% more than the S&P annually during his tenure. In 1991 the fund was worth about 3 billion, but by the end of 1997 it was worth twenty-five billion. This was accomplished not only by performance, but attraction of new capital. Shelby's son, Chris, took over the fund at the end of 1997.

Chris was quoted at the end of the book talking about his investing philosophy in reference to his attitude for occasional underperformance relative to the market: "We're running a marathon, not a sprint." He's obviously a Davis...

Some key takeaways important to me that were noted in the final chapter of the book:

"Wait until the price is right." Companies can be fantastic investments, but only at the right price. Just because you find one that exhibits all the qualities you want in a business doesn't mean that you should pay any price. Keep a shortlist of companies and wait for the right price. It may never happen, but if it does you'll be researched and ready.

"Let your winners ride." We hear this time and time again from all the greats. They all have examples of when they sold out too quickly and missed out on insane returns. To me this also means that once we made an investment its imperative that you maintain a working knowledge of the company. When the price goes up and you think about selling, is it out of fear that you will lose the gains or is it because the company has peaked and you have noticed a negative transition in the company's operation. If it's the latter then of course you should get out, but if its the former then don't let your emotions take you out of a great business with more runway to go.

"Bet on superior management." Buffett sang this tune every day of his life. He loved strong operators. So many investing success stories were born of putting money where the strongest leaders operated. Tom Murphy at Capital Cities. Mark Leonard at Constellation Software. Steve Jobs and his successor, Tim Cook, at Apple. Learn to sniff these people out before the masses and the returns can be more than the average.

Most importantly: "Stay the course." This book makes that obvious. If you waver in your convictions, let fear take you out of the market, follow the herd, or constantly change your strategy you are giving up so much opportunity. Being able to stay the course is what can separate us from being the average investor to one of major accomplishment.