Shelby Davis Demystified

One of my favorite investing stories is the one where Shelby Davis...... turns a paltry $50,000 into a fortune of $800 million by the end of his life. It's a story that lures ordinary folk into thinking they too can make it big in the stock market.

There a couple of problems to this story for us ordinary folk today, which indicate to me that it is highly unlikely anyone in our generation will match the performance.

First, his $50,000 start was in about 1946. Using my favorite inflation calculator, I see that $50,000 in 1946 would be equivalent to about $540,000 in 2006 money. So, Mr. Davis was hardly an ordinary working stiff who happened to know how to value insurance companies.

Second, if I remember the story correctly, the Davis family bought their house during the Great Depression for about $5,000. Assuming he bought in 1936, that means he picked his house up for about $71,000 in today's dollars. See any houses for that price you'd want to live in?

Third, buying stocks in the late 40's and early 50's was brilliant because they were starting from very low values. It was precicely these low values that led to the legendary "Davis Double Play" where the earnings rise and P/E ratios also rise due to better prospects. Picture this: a company earns $1 per share, but trades at 5X earnings. Share price = $5. A few years later, company earns $2 per share, but trades at 20X earnings. Share price = $20. 700% gain.

Put it all together, and we find our man had substantial means to begin with and almost no overhead due to buying an inexpensive house at the bottom of the market. This allowed him to use all of his earnings to buy more stock, which was severely undervalued during the first decades of his investment career.

I am not trying to demean what Mr. Davis accomplished. It is still a phenomenal record which shows the power of value investing over the long haul. It also shows that a housing crash and a prolonged bear market in stocks, combined with a bit of cash, patience, and a long-term buy and hold strategy can lead to huge wealth.

What I am saying is that with current values for houses and stocks, it will be difficult for an Average Joe to acheive the same performance as Mr. Davis over the next 50 years. Bring on the housing crash and bear market, that's what I say...