This Legendary Investor Turned $50,000 Into $900 Million: How Did He Do It?

I had recently read a book called The Davis Dynasty, which illustrated how three generations of the Davis family – father, son, and grandson – had invested successfully over the second-half of the 20th century.

The eldest Davis, Shelby Davis, had started with just US$50,000 in 1947 and steadily built his wealth over the decades, ending with US$900 million by the time he passed away in 1994.

I managed to glean a great deal of investing wisdom from The Davis Dynasty and would like to share one of Shelby Davis’s investing strategies, what he called the Davis Double Play.

The play in action

The Davis Double Play is essentially about buying a company that is growing quickly and yet is neglected by the investing public for whatever reason, perhaps due to its small size.

The first ‘play’ comes from the company’s own growth. As a company grows its earnings per share, its share price should follow over the long-term. For instance, a company with earnings per share that is expanding by 15% annually on average for the long term will see its share price move in a similar manner, assuming that its price-to-earnings (P/E) ratio stays the same.

This brings me to the second ‘play’, which comes in the form of an expansion in the P/E ratio of a neglected company that eventually gets noticed by the investing public. Neglected companies often carry low P/E ratios and if a small company with a P/E ratio of 5 is awarded a new earnings multiple of say, 20, by the market, its stock price would have effectively quintupled even if its earnings stayed constant.

So, if you invest in a company that manages to grow its earnings per share by 15% per year for 15 years and it maintains the same P/E ratio throughout, a $1,000 investment would become $8,137. But, if the same stock initially had a P/E ratio of 5 and it expands into 20 after 15 years, a $1,000 investment would become $32,548 instead. That is the Davis Double Play in action.

The double play at work in Singapore

We’ve worked with a hypothetical example. But let’s see how it can work in real life. Gloves maker Riverstone Holdings Limited (SGX: AP4) is a good instance.

At the start of 2007, the company had a share price of S$0.14 and a P/E ratio of just 7.3. Its earnings per share has since grown at a compound rate of 12.9%, but its share price has climbed by an even more impressive 22% annually to S$0.915 today as a result of the P/E ratio expanding to 15.3.

So as you can see, the Davis Double Play applies to Singapore as well. And, it has a great lesson for us: Neglected companies with great long-term business prospects may make for great investing opportunities.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.