The Greatest Value Investors of All Time - Shelby Cullom Davis

I will play with the content and then make my study notes. 

Shelby Cullom Davis: The insurance investor

Shleby Cullom Davis (it is important to use his middle name because his son by the same name was also a successful investor) is unique because he did not start investing until he turned 38. Before turning to a life in investment, Davis was a freelance writer and economic advisor to New York Governor Thomas Dewey. In 1947, Davis took an inheritance his wife received from a family owned furniture chain, and began investing. For years, Davis would stick almost wholly to investing in insurance companies because he liked their business model of being able to invest the float, the money insurers can invest between the time they collect a premium to when they have to pay out a claim.

Davis studied the principles of Benjamin Graham religiously and purposefully sought out insurance companies with low P/E ratios and good management teams. He also checked their balance sheets to ensure they did not invest the float in risky assets like junk bonds, debt issued to companies with questionable credit ratings . A trip to Japan in the 1960s proved especially fortuitous, as he discovered Japanese insurance companies were not only more undervalued than American insurance companies but also enjoyed a bigger moat, or competitive advantage, due to regulations limiting the number of insurers allowed to operate.

Investment track record: Davis started investing with $50,000 and ended, at the time of his death in 1994, with a fortune worth more than $900 million, an incredible 23% average annual compound growth rate! His most notable investments, outside of Japan, included insurers such as American International Group, Chubb, and Progressive.

Important lesson: Davis liked to buy companies with low P/E ratios that would double their earnings growth over time. As the earnings grew, however, so did the companies' valuation levels as expressed by metrics such as the P/E ratio.. When the P/E ratio and earnings both doubled, Davis would affectionately call this the "Davis Double Play". Each of these, by definition, would result in an investment returning at least four times its value. As John Rothchild wrote in his biography on the Davis family, The Davis Dynasty, this quickly became powerful math:

"In 1950, insurance companies sold for four times earnings. Ten years later, they sold for 15 to 20 times earnings, and their earnings had quadrupled ... What he'd bought for four times $1, they bought for 18 times $8. His $4,000 investment was now worth $144,000 in Mr. Market's estimation ... Davis called this sort of lucrative transformation "Davis Double Play." As a company's earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost."

While it might be almost impossible to find a stock with a valuation that has the potential to double in a few years in this market, the principle behind the Davis Double Play is as powerful as ever. Stocks with potential for earnings growth and multiple expansion, provide a powerful combination to boost investors' returns.