American Consequences - May 2018

Virtually everyone reading this story will find a reason not to pursue this strategy: “It takes too long”... “It’s not exciting”... “Nobody I know invests this way”... Or – the most likely reason – “I don’t understand the jargon at first glance.” It’s fine by me if you never, ever make an investment using the strategy I outline below. But if you’re not willing to make these investments, you should really ask yourself why you’re in the markets in the first place. Let me begin with a story... His life, until he was almost 40 years old, had mostly been a failure. He’d been given every advantage in life, including an education at the exclusive Lawrenceville School, then Princeton for college. He’d gotten a master’s degree at Columbia and then a doctorate in Geneva. He, like so many other young men of his class and upbringing, then headed to Wall Street. It was the Roaring ‘20s and stocks were soaring. He worked as an investment analyst for a brokerage firm and, I’m sure, thought he was a genius. But he didn’t avoid the crash. And by the mid-1930s, he was wiped out, just like almost everyone else. To survive, he got a job in politics, writing speeches. But his candidate, Thomas Dewey, lost. Twice. By the mid-1940s, he was completely washed up. Finally, at 35 years old, he found himself working as the deputy superintendent of insurance for the state of New York – about the darkest hole you can fall into in politics. He had virtually no His name was Shelby Davis...

savings and no prospects. Nevertheless, after making just one

investment in 1947, Shelby Davis became a billionaire. His fortune required no trading. He simply bought a handful of stocks (using money borrowed from his wife’s family) and sat on them, reinvesting dividends along the way. Today, his family continues to own these investments and are among Wall Street’s most elite private money managers. Shelby Davis is the only investor I know of who actually became a billionaire solely through the long-term ownership of passive interests in public companies. Yes, plenty of investors have used other people’s money and lots of trading to become wealthy in the markets. But Shelby was using his own money. And he didn’t do any trading. All he did was hang on. He almost got wiped out in the early 1970s bear market (‘73-’74) because he routinely employed as much margin as his brokers would allow, but he survived the storm. By the early 1980s, he was on the Forbes 400 list of the richest people in America. Insurance stocks. But not just any kind of insurance stocks... he specifically bought property and casualty (P&C) insurance companies that focused on unregulated insurance markets. Sitting at his desk – remember he was the deputy superintendent of insurance for New York – he had access to the books of all the insurance companies that operated in the state, which was virtually every large What did Shelby Davis invest in?

These firms had a completely legal way to acquire enormous amounts of money by routinely overcharging, by large amounts, for the insurance

they were providing

36 May 2018

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