I've been consuming a lot of great books lately. One of the more interesting ones was The Davis Dynasty. If you don't know who Shelby Cullom Davis is, consider this: his portfolio returned 23% annually over 47 years... I originally was interested in this because I wanted to see how successful investors were able to not only stay alive through multiple bear markets, depressions, and recessions but also thrive throughout all of them. Since this book covers 3 generations of the Davis family, I feel it did an excellent job.
Shelby Davis (senior) did a lot of things quite similarly to Buffett. I don't think his strategy was much different than most value investors:
Buy cheap, high-quality companies, with hidden assets, or assets not well understood by the market
Invest in high-quality management.
Invest in your circle of competence.
Hold for a long, long time.
I didn't see much in this book about analyzing businesses for their moat, but given the holding periods that Shelby held onto things, I would say he had a pretty good grasp of a moat as many of his businesses stayed in his portfolio for literally decades.
Since most great value investors have beaten to death the first 3 points above, I won't add to it it. But I would like to go over holding periods and a few other highly important aspects of investing that Shelby shined in.
Hold For A Long Time
When the elder Shelby Davis allowed his grandson to view his portfolio, he found many interesting nuggets. He had many equities in his portfolio in the late'90ss that he'd bought in the '50s. Some of these positions were 100 baggers or more and contributed in a major way to his 900 million net worth when he passed away.
Here is a great quote from the book that highlights his ability to keep his holdings for a long time: "He sat on his insurance stocks through daily, weekly, monthly gyrations. He sat through mild bear markets, and severe bear markets, crashes, and corrections. He sat through scores of analysts' upgrades and downgrades, technical sell signals, and fundamental blips. As long as he believed in the strength of the leadership and the company's continual ability to compound, he held"
Some of the great companies he bought were also then folded into another company. For instance, he owned General Re which was later bought out by Berkshire Hathaway. This investment into General Re turned into 3000 shares of Berkshire A. If he still held these shares today, they'd alone be worth over 1.24 billion dollars.
I want to try and avoid hindsight bias, but from the appearance Shelby's portfolio gives off, buying and holding pay off incredibly well for the long-term. The book doesn't describe many of his duds, but I'm sure there were many in his investing career. His most regrettable mistake was selling Geico for instance, which we'll cover more later.
Avoid Bubbles
The elder Shelby was around for the entirety of the nifty fifty bubble. The eventual popping of this bubble never affected him. The main reason was although these companies were good, they violated one of his main rules: don't overpay.
Another reason he was able to avoid bubbles was that he stuck to his circle of competence. His main area of focus was in insurance companies. Although some non-insurance names ended in his portfolio, the majority of his portfolio was made up of an area in which he definitely had an edge: insurance.
If he'd strayed out of his circle of competence and began investing in areas he had little knowledge of, I think it would have been a certainty that his long-term compounding would have taken a major hit.
Dubious Sell Signals
Learning when to sell (or in Shelby's case, when not to sell) was a major reason for his success. There was a time where Shelby's portfolio went from 50 to 20 million and he wasn't particularly upset. He didn't panic and sell a bunch of his great companies at a loss. In fact, he would only sell when it was clear that there was a secular decline in the outlook of the business.
Daily, quarterly, and even yearly hiccups along the way did not bother Shelby one iota. He understood Mr. Market very well. Just because the market didn't see the value in his holdings didn't mean that the value didn't exist. When the market did enough research or if management let known the value of the company, then the full value would be reached, and he would reap the rewards.
His biggest regret was selling Geico. He was in on Geico for a while. But when insolvency began to be a real likelihood, he didn't like the direction the company was going. Warren Buffett got the company to raise equity by issuing shares. Shelby didn't like this, as he felt they could get out of their monetary issues in other ways and sold his Geico. After he was out, and they began buying back stocks hand over fist, he saw the error in his ways, but couldn't bring himself to buy back in.
For me, the lesson here is that if you have done your due diligence into a company and know that its prospects in the next decade are good, there isn't a reason to get worried about the noise that is constantly surrounding you. A real-life example for me is Micron. If I constantly paid attention to the number of analysts who say the top is in, I wouldn't have made much on my position because I would have panic-sold. Instead, it's almost a double bagger with a lot of room for growth.
Remember to pay attention to the people who are playing the same game as you as Morgan Housel would say. In my example above, I don't care what hedge fund managers are doing quarter to quarter with their Micron holdings. What Li Lu, Mohnish Pabrai are doing is what concerns me, as they have held onto Micron for years now with no trimming of their positions.
Lastly, another nugget I liked was how Shelby came to the same mental model of inverting as Charlie Munger did. Shelby would look at all the ways that insurance companies could fail, then tried to avoid the ones that were making those mistakes. So make sure you are constantly inverting your investment thesis to give yourself a view from both sides of the coin when looking at a company!