Growing Rich - Arabictrader.com

KIRK KAZANJIAN
tential, even if that potential is modest. “In cyclical businesses, you
have to make two right decisions,” he observes. “You have to get in
and out at the right time, because if the business keeps going up and
down, you’ll never get ahead. I’ve gravitated more and more away
from cyclical companies because you have to be correct twice and
pay taxes along the way. I try to find companies that have the kind
of cyclical movement I can stomach, if they’re cyclical at all. I don’t
mind variability in earnings. I call that volatility. What I don’t want
is a purely cyclical business that goes up and down to the same point.
I want a rising sequence of bottoms and tops.”
The auto industry is an interesting case in point. Davis has tried to
make money in that business several times with little success. “The
way you’ve made money with the auto companies in recent years is
to say if you broke them up, they’d be worth more in pieces than they
are whole,” he concludes. “I tried that with General Motors, but later
sold it and bought something else. One reason is that fundamentally
it’s a one-shot play, and I don’t think the automobile business is a
good growth business. Let’s compare the auto industry to the investment-banking
brokerage industry. Both are very volatile businesses,
with varied quarterly earnings. But there’s an underlying growth trend
with investment bankers that you don’t see with the automakers, at
least there has been for my entire investment career.”
Davis offers an example to prove that. “I went to Princeton with
Dick Fisher, who eventually became the head of Morgan Stanley,” he
says. “When he went to work at Morgan, it was located at 23 Wall
Street, employed about 60 people, and had stated equity capital of
less than $20 million. One generation later, forgetting about the
merger with Dean Witter, Morgan Stanley is operating on five continents,
has revenues in the billions, and earnings of around $1 billion.
So if it started with $20 million of capital in 1962, and now earns $1
billion, I would say that’s a good growth business. But it’s very volatile.
I don’t mind volatility. I obviously grew up with it. My father
never cared to predict the earnings of property-casualty companies
by quarters. In fact, they didn’t even used to report by quarter because
you can’t plan for hurricanes, earthquakes, wicked storms, or any
number of calamities that come along out of the blue. So quarterly
earnings have always been somewhat irrelevant to me. They’re useful
as checkpoints and maybe to take advantage of short-term disappoint-
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