Growing Rich - Arabictrader.com

KIRK KAZANJIAN
You’ve lost 25 percent of your money. That’s a lousy way to compound
your wealth. Many people find this truth hard to comprehend.
It’s just math, though. Investors will often say, ‘I’ve got a stock that’s
going to go up 50 percent, but it might drop 50 percent. If it does,
that’s all right because I’ll break even.’ However, that’s not the case.
You would be down 25 percent. You see, if a stock is up 50 percent,
it can drop only 33 percent from that level for you to break even.
Likewise, a stock with a PE ratio of 50 has a lot farther to fall when
things go bad than one with a PE of 15.”
BUYING SUSTAINABLE GROWTH
By 1982, New York Venture was ahead of the game, even though
the market averages were going nowhere. By then, Davis had changed
the fund’s investment focus. “As I got more experience and gray hair,
it turned into much more of a combination growth and value fund,”
he says. “I was never that comfortable buying popular stocks at any
price after 1970. In 1973-1974, unlike a lot of growth funds, we didn’t
do any worse than the market, because we had sold most of our highmultiple
stocks. It was still a horrible time, but I got rid of companies
such as Avon, Polaroid, and Xerox, which were selling for 50 times
earnings. I concluded that I was only getting a 2 percent earnings
yield on my money in an environment where interest rates were going
up. I didn’t need that.”
This experience caused Davis to combine the best traits of growth
and value investing at the hip. “I now ask two questions before buying
any stock: ‘How much can I make, and how much can I lose?’ I guess
it goes back to my roots, but I’m much more comfortable with the
insurance-type stocks that are growing between 7 and 15 percent a
year,” he says. “That’s my sweet spot. I love the 7 to 15 percent
growers. There are a broad array of industries and companies that
meet these criteria. I also think the growth rates in that range are
more sustainable and plenty good enough to make your money go
up eight- or tenfold in a generation.”
DAVIS DOUBLE PLAY
The most important thing, in Davis’s assessment, is to reduce the
risk of what his father referred to as a “Davis double play” on the
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