How Shelby Davis Made $900 Million Investing In Insurance Stocks Starting At Age 37 by Sure Dividend
Warren Buffett, Benjamin Graham, and George Soros are all household-name investors (well, in some households anyway). Shelby Davis does not enjoy the same recognition, but perhaps he should.
Shelby Davis did not start investing in the stock market until he was 37. Still, he managed to amass a $900 million fortune and join the Forbes 400 list of wealthiest individuals.
Shelby Davis & Insurance Stocks
Shelby Davis started investing in earnest in 1947 when he was 37. He invested almost exclusively in insurance stocks for much of his career. Shelby Davis recognized that insurance is an excellent industry in which to invest for several reasons.
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First, insurance is arguably the slowest changing industry of all. There are incremental improvements that can be made as technology changes, but by-in-large, insurers do not face product obsolescence or industry threatening disruptive technologies. Insurers are insulated from the most damaging effects of creative destruction.
Insurance companies cannot differentiate (very much, anyway) based on their product offerings. There is only so many ways you can package insurance products. Competitors can easily copy any successful pricing innovations or new plans. This makes insurance a commodity business. It also puts a high premium on managerial talent. The best insurance managers are conservative and write policies where claims are fully covered by premium income. A quality insurance manager will keep costs as low as possible while growing by writing profitable policies.
The real income generator for insurance stocks is their large investment portfolios. Insurers take the money they receive in premiums and invest it in stocks and bonds. Insurers with intelligent capital allocation policies and excellent investment managers will be much more profitable than insurers with weak investment skill. Insurance companies that write profitable policies essentially get the funds for their investment portfolios for free.
The largest and most successful insurer over the last several decades is Warren Buffett’s Berkshire Hathaway. Berkshire Hathaway has benefited by writing profitable policies and having some of the best investors at the helm (including Warren Buffett himself). Berkshire Hathaway was one of Shelby Davis’ most successful investments.
Shelby Davis did not invest in all insurers. He looked specifically for well-managed insurers with a history of growth. Additionally, he looked for undervalued insurers. Shelby Davis was an avid Benjamin Graham reader. Benjamin Graham is the father of modern value investing. In 1947, Shelby Davis was elected President of Benjamin Graham’s stock analysis organization. Shelby Davis was very much a value investor.
As a value investor, Shelby Davis looked for insurance companies trading at low price-to-earnings ratios. He looked for companies that would increase his wealth by both growing earnings and benefitting from rising price-to-earnings ratios.
Finding undervalued insurers was not difficult in the 1940’s. Wall Street had long ignored the industry. Insurers attempted to under-report or obscure their earnings to appear less profitable and avoid regulation. This had the negative effect of making these stocks appear less-than-worthwhile to Wall Street. Shelby Davis’ deep analysis of the industry helped uncover the value in insurers. To this day, however, many insurers trade at price-to-earnings ratios lower than most other industries.
Shelby Davis invested in high quality, well managed insurers that were trading at a discount to fair value. He did not dart in and out of his favorite insurers. Shelby Davis held many of his largest investments through his entire investment career. He practiced the same type of buy-and-hold investing that Warren Buffett preaches.
Buying and holding has advantages over constantly switching stocks. Buy and hold investors reduce frictional costs such as: taxes, brokerage fees, and slippage from trading. By minimizing frictional costs, buy and hold investors allow their money to compound year-in-and-year-out in their most profitable investments, building wealth over time.
In the excellent paper Buffett’s Alpha, Frazzini, Kabiller, and Pedersen show that Warren Buffett’s great wealth has come from investing in high quality value stocks and applying low-cost leverage. Shelby Davis followed a very similar path to wealth, except he focused almost exclusively on insurance stocks.
Shelby Davis used leverage to boost his returns. He purchased a seat on the New York Stock Exchange which gave him access to lower margin rates than the typical investors. He used the maximum allowable amount of margin (slightly over 50%). The interest payments on his margin were tax deductable, which helped him save money on taxes.
The combination of high quality insurers, low valuations, and leverage gave Shelby Davis very strong returns over a multi-decade period. He generated a 20%+ compound annual growth rate over his investing career. Leverage boosted his returns out of the teens and into the 20%+ range.
Shelby Davis started investing relatively late in life. Still, he amassed a fortune worth nearly $1 billion. Shelby Davis invested in high quality insurers trading at low prices and held them for the long-run. He used a sensible amount of leverage to boost his compound annual growth rate and more quickly build his wealth.
I believe that investing in high quality businesses trading at fair or better prices in possible for everyone. Using leverage to boost returns may not be the best course of action for everyone, however. Leverage causes higher drawdowns that may unsettle investors who are not sure of themselves. Additionally, margin calls can force selling at the worst possible time.
Warren Buffett and Shelby Davis have very similar investing styles and compound annual growth rates. Both employed about the same amount of leverage (1.5x) to their investments. Warren Buffett is the more well known of the two because he started investing earlier, which has given him a far larger net worth. His folksy Americana wisdom and well-thought-out public persona add to his fame, whereas Shelby Davis was known almost exclusively in insurance circles.
Dividend Aristocrat Insurers
There are currently 3 Dividend Aristocrat insurance companies. Two of the three (Chubb & AFLAC) have regularly ranked in the Top 20 using The 8 Rules of Dividend Investing. The links below show detailed analysis of the 3 Dividend Aristocrat insurers.
- Chubb (CB)
- AFALC (AFL)
- Cincinnati Financial (CINF)
- The Davis Dynasty by John Rothchild available for purchase on Amazon
- Warren Buffett’s Alpha by Frazzini, Kabiller, and Pedersen
- Understanding Insurance Float on Aleph Blog