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Family affair

In the 1990s journalist John Rothchild co-authored three bestsellers with investing legend Peter Lynch.

In the 1990s journalist John Rothchild co-authored three bestsellers with investing legend Peter Lynch.

By Rich Blake
September 2001
Institutional Investor Magazine

In his new book, The Davis Dynasty: 50 Years of Successful Investing on Wall Street, he takes on a less celebrated but no less successful subject, chronicling three generations of savvy stock pickers. It's an intriguing tale that weaves in nearly a century of Wall Street history.

The well-researched, solidly written book focuses on the Davis clan: Shelby Cullom Davis, who died in 1994 at 85; his son, Shelby Davis, who in 1969 founded what would become the $40 billion mutual fund powerhouse Davis Selected Advisers; and his grandsons, Christopher and Andrew, who manage several of those funds today.

Patriarch Shelby Cullom Davis, who all but cornered the market in insurance stocks in the 1950s, began seriously investing at age 40 with a bankroll supplied by his wife. Over the course of four decades, his initial $50,000 stake grew into a $900 million fortune - a compound growth rate comparable to the one delivered by Warren Buffett, who also has an appetite for insurance stocks.

Born in 1909, Davis grew up in Peoria, Illinois, where his parents ran a corner store. His mother, Julia Cullom, traced her roots to the Mayflower. His father, George Davis, made a small fortune selling horse feed to Alaskan gold prospectors. After attending Princeton University, Davis in 1932 married Kathryn Wasserman, the daughter of a wealthy Philadelphia carpet mogul. He worked as a speechwriter and economic adviser for New York State governor Thomas Dewey, who appointed him to the post of deputy superintendent in the New York State Insurance Department. In 1947, with no MBA and no formal investment training, he quit his job to play the market full time.

In those days most investors shunned insurance companies because of their heavy stakes in low-yielding bonds and mortgages. But Davis shrewdly recognized value in those assets. Between 1947 and 1949 the Dow Jones industrial average fell 24 percent, while Davis's portfolio of seven insurance stocks more than quadrupled in value. By 1954 he had become a millionaire.

Davis frequently interrogated company managements. One of his favorite questions: "If you had one silver bullet to shoot a competitor, which competitor would you shoot?" A feared company must be doing something right, he reasoned. Rothchild writes of Davis, "He was a walking Rolodex of industry notables, an encyclopedia of actuarial trivia."

Shelby Davis, born in 1937, "grew up on dinner-table stock talk and annual reports strewn around the house." The elder Davis's advice to his son: "You can always learn accounting on the side, but you've got to study history. History teaches that exceptional people make a difference."

By age 25 Shelby was off to a quick start in his own investment career. In 1966 he left Bank of New York, where he worked as a stock analyst, to go into business with Guy Palmer, a fellow bank vice president. Jeremy Biggs, a portfolio manager for the U.S. Steel pension fund, joined them in 1968. (Biggs, the younger brother of Morgan Stanley strategist Barton Biggs, is now the chief investment officer at Fiduciary Trust Co.)

The group bought big stakes in technology names of the go-go '60s. Most portfolios lost money in 1969; the partners' New York Venture Fund, a large-cap value fund, gained 25.3 percent. The fund beat the market in all but six of the next 28 years. An original investment of $10,000 would have grown to $379,000.

Shelby's self-made success pleased his father, who by the late 1950s had made it clear that his children would not be the beneficiaries of a large inheritance. In 1961 Davis squabbled with his daughter Diana over his plan to donate $3.8 million in her name to Princeton. Feeling cheated, she refused to sign the necessary papers and waged a public battle reported in the society pages of The New York Times.

Shelby, like his father, was determined not to spoil his children. "The most important thing I taught them about the investing business," he recalls, "is how I loved being in it."

It wasn't long before the third generation got in the game. By the end of 1999, Christopher Davis's New York Venture Fund had beaten the Standard & Poor's 500 index for the sixth year in a row, and ranked near the top of Morningstar's large-cap value category for five straight years. Venture gained 10 percent in 2000, while the S&P 500 lost 9 percent.

"We try not to be too positive about short-term success or too negative about short-term setbacks," says Christopher Davis. It's a sensible approach that has served the clan well.