Imagine turning US$50,000 into US$900 million in 47 years. That’s what investor Shelby Cullom Davis did from 1947 to his passing in 1994. Davis, who generated a phenomenal compound annual return of 23% for 47 years, is the titular investor.
For some strange reason which escapes me, not many – even serious investors – have heard of Davis, despite his remarkable achievements in the investing arena. Davis’s exploits are chronicled in John Rothchild’s The Davis Dynasty. In this article, I want to share three lessons I took away from Davis’s story.
Lesson 1: It’s never too late to start investing if you have the right framework
Warren Buffett was a whiz kid who started his own investment partnership at the ripe old age of 26 in 1956. But not everyone starts young like Buffett. For those of you who think you’re too old to start investing because you need to draw upon your savings as you approach retirement, take heed from Davis. He only started his investing career at 39 without prior experience – and he went on to build dynastic wealth.
What made Davis so successful was that he started investing with a great investing process. He was an admirer of Benjamin Graham, the revered investing mentor of Warren Buffett, and subscribed to a similar ‘value investing’ philosophy of looking for stocks with growing and profitable businesses that were trading at low valuations.
Davis also recognised the importance of temperament as he ignored market volatility and did not give in to excessive fear, nor euphoria. He preferred taking the long-term approach and stayed invested in his companies for years through thick and thin.
His experience showed that it is a person’s temperament and investing process that truly matters in investing, not his or her age. With a sound investing process and a focus on the fundamentals, a person can start investing at any age.
Lesson 2: A long term buy-and-hold strategy works
I mentioned above that Davis stayed invested in his companies for years; a better term would actually be “decades.” You see, in The Davis Dynasty, Rothchild wrote that the bulk of Davis’s wealth was built upon a few stocks that he had owned and held from the 1960s till 1992. Notable examples included a US$641,000 purchase of Japanese insurer Tokio Marine & Fire in 1962 that grew to US$33 million, and his shares of American insurer American International Group (worth US$72 million in 1992) that he began purchasing in 1969.
Davis watched unmoved as his portfolio shrunk from US$50 million to US$20 million in the brutal 1973-1974 bear market in the US. Instead of selling out, Davis recognised opportunity and bought shares of undervalued companies very aggressively while holding on to the stalwarts he had purchased in the 1960s. Davis knew that the companies he had invested in were still making profits and growing their businesses, and so he saw no reason to sell as he expected that their value would be far greater in the future.
Davis’s experience is a great reminder that a long-term buy-and-hold approach to investing (which is favoured here at The Motley Fool Singapore in our premium stock recommendation newsletter services) will work if the right companies are chosen. Davis’s focus was on companies with excellent management, good returns on capital, and a strong balance sheet. Some examples of companies in Singapore’s stock market that have both good returns on capital and a strong balance sheet are VICOM Limited (SGX: V01), Micro-Mechanics Holdings Ltd (SGX: 5DD), and Riverstone Holdings Limited (SGX: AP4).
Source: S&P Global Market Intelligence
The company traits that Davis looked for is also favoured by another stock picker extraordinaire, who is none other than Buffett.
Lesson 3: The world is your oyster
In 1962, Davis travelled to Japan and learnt about various Japanese insurers that had solid operations thanks to governmental support. Davis then used what he had learnt about investing in the US, and applied his analysis to the Japanese insurers.
At that time, investors in the US only focused on domestic companies as they felt that investing in foreign stocks was too risky. Davis however, saw value in things others could not and bought four Japanese insurers for an estimated sum of US$2 million. They were Tokio Marine & Fire, Sumitomo Marine & Fire, Taisho Marine and Fire, and Yasuda Fire & Marine. Davis held onto these companies for more than three decades, and by 1992, they were collectively worth around US$75 million.
Davis was not the only one who found spectacular success by investing in foreign shores. Sir John Templeton, an investing legend who achieved a 13.8% compound annual return for 50 years from 1954 to 2004, was also a renowned global stock picker. Even Buffett invested in Korean companies in the early 2000s as he, along with Davis and Templeton, recognised that great investing opportunities need not be bounded by geography.
At the Motley Fool Singapore, we firmly believe in global investing too. This is why our premium stock recommendation services contain international recommendations.
Currency risk is often the main gripe for investors who are considering investing in foreign stocks. But, in today’s globalised world, there are many businesses with substantial operations worldwide that face currency risks as well. This is especially true in Singapore given the small size of our domestic economy. For example, only 42% of Sembcorp Industries Limited’s (SGX: U96) revenue in 2017 came from Singapore.
Currency risk is just one of the many risks that investors will encounter and one of the best ways to mitigate them would be to find great companies with strong competitive positions and sound financials to invest in. As Davis, Templeton, and Buffett showed us, the search for great investing opportunities should never be bounded by geography.
A Foolish final word
I hope you’ve enjoyed this introduction to Shelby Cullom Davis, one of the best investors the world has seen (but hardly know!). If I had to summarise the lessons I had learnt from his story into one sentence, it would be this: Invest for the long run with the right framework, and never let age or geographic boundaries dictate our investing opportunities.
Editor’s note: A version of this article first appeared in the 24 April 2018 edition of Take Stock Singapore.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing owns shares in VICOM. The Motley Fool Singapore has recommendations on Micro-Mechanics Holdings and Riverstone Holdings.