For reading books, you should read one book, and you don’t have to be greedy for too many books, because there is nothing worth showing off in how many books you have read. This is not a book review, nor is it a matter of knowing how much you have judged the outcome. The key is how many life philosophy you have learned? How many have you truly practiced in life and work? —Kunpeng Theory
1. What is Davis double killing?
1. Where does the original intention of double killing come from?
double kill, in English, it is DOUBLE PLAY, but in China, it is often expected that the text will be meaningful and written incorrectly as DOUBLE KILL.
It is originally a special term for baseball games, referring to a series of coherent defensive actions of one side to cause two offensive players to be eliminated at the same time.
To put it more specifically, it means that the defender hits the ball, causing the offensive runner to the base to be eliminated, and this ball makes the number of eliminated two people at the same time. This form of defense is called double kill.
Later, the word was also used in football, basketball and other sports competitions, but the meaning was basically different. It was generally used in two situations: one was that both men and women won the opponent at home and away games in one season; or both men and women won the opponent in the same game.
Strictly speaking, "Davis double kill" is the rule summarized by Davis. He has summarized many such thumb rules in his life.
thumb rule, also known as "rule of thumb", is a simple, empirical, exploratory, but not very accurate principle that can be used in many situations.
For example: Experienced carpenters do not use a ruler, but extend their thumb to measure the length or width of the wood; those who sell meat can know how much meat they have in their hands.
Davis borrowed the word "double kill" to convey the essence of the investment strategy he has adhered to in his more than 40 years of investment career.
With its annualized return on investment comparable to Buffett and its remarkable results in this theory, "Davis double kill" has become a famous vocabulary in the investment world and is often called "Davis double click" in China.
2. From the essence, Davis double kill
Let Kunpenglun start with the most essential point.
share price = Earnings per share (EPS) × Price-to-earnings ratio (PE)
where EPS is the actual performance of the company's operation, and PE is mainly controlled by investors' emotions.
At different market stages, investors will give a company different valuation levels regardless of its EPS.
Just like in a bear market, people may only be willing to give valuations of 10 times PE or lower, but in a bull market, it doesn’t matter if they are willing to give 20 times or higher.
Many investors want PE, and only look at PE. They are more like speculators, making money from stocks.
, while Davis wants both stocks and stocks, that is, both EPS and PE must be satisfied before starting, hold them patiently for a long time, and finally enjoy the dual returns of EPS and PE.
He clearly understood that behind a real good stock, good companies must be behind a real good stock. Only a real good company can make EPS continuously improve, so Davis's first step is to choose a good company.
Next, it depends on the price - PE. Only when it is low PE and is lower than the value of the company itself will there be room for growth in the future. In the second step, Davis basically only buys good companies with PE below 10 times.
. As long as this kind of stock encounters a boost in confidence in the bull market, its PE will increase, and even rise to an irrational level.
Davis calls this profitable conversion process "Davis double kill".
means that the company's revenue increases and the stock rises for the first time. Then, investors label the profit at a high price, and the stock will rise again. This is the double kill return.
For example: The EPS of a certain stock is 1 yuan, the PE is 10 times, and the stock price after 1×10 is 10 yuan. When the company's profit increases to 2 yuan, it happens to encounter a bull market. If the PE increases to 20 times, the stock price becomes 40 yuan, which means that when the profit increases by 100%, the stock price can rise by 300%.
Another example: In 1950, American insurance companies generally had a 4-fold return rate. After 10 years, they basically reached 15-20-fold return, achieving more than 3-fold growth.
Suppose that Davis bought 1,000 shares of "American Insurance" stocks for $4,000 that year, equivalent to 4 US dollars per share. If the price-to-earnings ratio is 4 times, it is equivalent to he can earn 1 US dollar from each share. The formula is:
4 US dollar stock price = 1 US dollar EPS × 4 times PE
If PE rises to 18 times in 10 years and EPS rises to 8 US dollars, then the stock price is equal to:
8 US dollar EPS × 18 times PE = 144 US dollar stock price
At this time, 1,000 shares of "American Insurance" will cost 144 US dollars to buy.
, and Davis's net worth of $4,000 has increased to $144,000, a 36-fold increase.
Please note that this does not count the dividend income per year.
However, when the company's profits decline and encounter a bear market again, there will be an extremely fierce reverse effect, which can be called Davis' double kill reversal.
Davis has accumulated huge wealth based on the strategy of "double killing" and uses insurance stocks as its "main mine", and its investment targets even include Buffett's Berkshire and many Japanese insurance companies.
3. Davis double killing means "a good company, buy cheap"
Davis double killing, to put it bluntly, it is the "a good company, buy cheap" that Kun Penglun has always insisted on.
Find a good company, buy at a cheap and discounted price at a good time, and then hold it patiently, and take advantage of the dual gifts of listed companies and "Mr. Market".
So, the simple summary of Kunpenglun is as follows:
Davis' double kill strategy is to have high EPS and low PE. After long-term holding, investors can obtain the continuous growth of EPS. In a bull market, they can also harvest the PE that is driven by emotions. Multiply the two, and the stock price will grow at multiple levels with the same return!
4. Chris's profit rate of return indicator
, while Davis's grandson Chris often directly looks at the countdown of PE and calls it the profit rate of return.
For example: a stock with a stock price of 30 yuan has an EPS of 2 yuan, its PE is 15 times, and its profit rate is 6.6%.
Then Chris will use it to compare it with the Treasury bond. If it is high, it is worth buying , and if it is low, it is not worth buying .
For example: a stock with a stock price of 60 yuan has an EPS of not 2 yuan, a PE of 30 times, and a profit yield of 3.3%, which is lower than the yield of treasury bonds.
"If you give up 6% of Treasury bond yields and invest in stocks with only 3.3% yields, it must be crazy. Unless the company can boost its profits in the future, in other words, its profits must keep growing," Chris said.
"But, the difficulty lies in the fact that predicting growth in 8 or 10 years is a challenge. In order to make the prediction close to the facts, the company must be relatively predictable. You cannot predict what a high-tech company will look like in 10 years. Even if you buy technology stocks at a relatively cheap price, it may have to wait several years for its profit rate to catch up with the Treasury bonds."
5. The simpler the reason, the harder it is to stick to
?
is really simple!
Moreover, many investors are swearing that they are looking for Davis double-kill stocks.
However, whenever the stock market plummeted and a good opportunity arose, that is, when Davis actually came to knock on the door, no one bought the stock.
Where have those investors who are swearing to find Davis double-kill stocks?
Many investors chose to turn a blind eye, or flee like the one in "Ye Gong Haolong"!
6. Stock investment focuses on the essence of making money
The essence of stock: it is a leverage game based on profits and price-to-earnings ratio as the standard.
As Kun Penglun has always said, if you want to accomplish something, you must first find its essence and then try your best to live with the essence.
So, the same is true for investment, and you understand the essence of stocks:
Stock price = Earnings per share (EPS) × Price and Earnings ratio (PE)
Then we just need to pay attention to the two variables of profit and price-to-earnings ratio.
In addition, Kun Penglun once said in "What is the yield rate? Why do I want to recommend bank stocks now" that another formula for stock price:
Stock price = PB×Net assets per share
Follow the route of Davis double kill theory. For cyclical stocks, its double kill is to focus on PB and net assets per share, and the same thing is needed is low PB, and then study and analyze whether the net assets per share can continue to grow for many years. As long as the latter's growth is highly likely to determine, then buying under low PB is also highly likely to be a beautiful Davis double kill.
2. Why Davis invests in financial stocks
The fundamental reason why he invests in financial stocks is that "money never goes out of time."
is like fast-moving consumer goods. Humans can never leave it. No matter whether the economy is good or bad, they will eat, drink, defecate, urinate, sleep as usual. In modern society, none of these five things can be separated from money.
At this point, do we also have some understanding of Buffett's favor of financial stocks in addition to fast-moving consumer goods!
3. Davis successfully adhered to the circle of competence
Through Kunpeng The brief history of the Davis family and the "main line" between Davis and insurance, we can know that Davis' research on insurance companies has achieved the ultimate goal:
was in the Insurance Department of the New York State Department of Treasury, and spent four years to read the most detailed materials and data of insurance companies;
learned financial report analysis and how to disassemble and study various data tables;
visited all parts of the country to find excellent insurance companies, and conducted comprehensive research;
and CEO directly "meet my partners", and through conversations, cross-examination and other means, they found good companies, and determined which company has excellent managers.
It can be said that Davis gained fame in the insurance industry in the 1950s. Industry insiders called him the "American Insurance Director". Someone once described him like this:
He is a living business card holder or a who's in the industry;
He is an insurance company yearbook;
He is an actuary encyclopedia;
He is a database of income, assets and liabilities, and there are also footnotes and appendixes of source.
He is good at calculating, but he does not just choose stocks based on numbers.
For example: his emphasis on history, strict standards for corporate management, etc.
Here is a little more to say.
If investors want to make profits in the insurance industry, they must buy stocks of companies that keep operating costs low. This has always been the practice of Buffett and Davis.
They all look for insurance companies with high returns, good management and low daily expenses, such as government employee insurance companies and AIG.
, and it is extremely important to open up Naxian's leadership. "You will see many surprising things in the insurance industry," Buffett wrote. "This industry often exaggerates the management talent that people have mastered or lacked to an unreasonable level..."
It can be said that Davis has given the insurance stocks all his life. Although he had the problem of "invest everything" in the later stage, the flaws do not cover up the merits, and his entire investment context is still closely related to insurance.
Buffett, Peter Lynch and other investment masters have always emphasized that investors should invest in areas they are familiar with.
It’s a pity that few people can really listen to it.
and Davis' success fully proves the importance of the circle of competence.
At the beginning, he wanted to lobby others for purchase of insurance stocks, but unfortunately no one listened to his opinion.
But he was not discouraged by it, but chose to take the initiative and take the lead.
Successful investment requires independent spirit and a courage to abandon others.
is often the disdain of others that can make your own money worth it.
4. Interesting news: The secret battle between the Davis family and Buffett
Davis not only invested in Buffett's Berkshire early, but he was also the largest shareholder of Buffett's government employee insurance company (GEICO, Gaike). At the same time, the two have had deeper intersections in this company, even secret battles.
Kunpenglun believes that if we only look at the investment history, government employees and insurance companies can be written with a few highlights.
Because it attracted Davis, Buffett, and the latter's mentor Graham , which can be said to be the three most powerful masters in the history of value investment gathered here.
They all admire the practice of government employee insurance companies only providing necessary insurance services, and their return rate was even more "spectacular" by Graham!
, Buffett used the weekend to go and interview the vice president, and found in subsequent research that the company's profit margin was five times that of ordinary insurance companies, and its profits grew rapidly.
Davis began investing in government employees insurance companies around 1958, and he was deeply impressed by the fact that the company was able to pay claims on customer premiums to keep the portfolio intact.
Later, Davis Direct Investment became the largest shareholder, and the company specially invited him to serve as a director.
Just like Kun Penglun wrote before, since the 1970s, insurance companies have not had a good life.
, and insurance expert Davis had previously accurately predicted that the auto insurance and accident insurance industries would face difficult times.
htmlIn the 1970s, the U.S. population became younger than ever, and the road was crowded with young teenage drivers, and the car’s horsepower increased, which encouraged them to risk driving without regard for the consequences.accident rate has increased seriously, and that era is far superior to the inflation rate in the 1960s, which has increased the cost of repairing cars and treating wounded people. The jury has meddled more and even sent small matters such as torticollis patients to court to demand compensation from the insurance company.
And Ralph Parker, the then CEO of the government employee insurance company, chose to relax the rules and sell the insurance policy to private people in the most difficult time in the company's history.
The increase in new customers not only did not bring better returns, but instead made the company face a heavier price - increasing claims and reducing reserves.
From 1974 to 1975, the company has been concealing issues from the media and directors including Davis, and the biggest problem is that the amount of claims has exceeded the company's assets.
When the company announced that its loss in 1975 reached an incredible $1.26 billion, its stock price fell 90% from $42 to just $4.8.
As the largest shareholder, Davis became the biggest loser.
The board of directors directly ousted CEO Parker and invited Jack Byrne, who had been at Traveler Insurance.
Despite rapid measures such as closing offices and laying off employees, Bourne is still hovering on the brink of bankruptcy, and its stock price has fallen to $2.
At this time, Buffett appeared.
He asked the Washington Post issuer Kay Graham to come forward to meet Jobne in secret.
Buffett, who once regretted selling the stocks of government employees insurance companies early, has long been looking forward to the arrival of this day.
The two talked until the evening, and Buffett confirmed that the company would still maintain low-cost action, and Bourne promised that as long as the company survived, it would definitely return to the legendary profit margin.
So, Buffett purchased 500,000 shares at a price of US$2.125 per share, and issued a regular payment order, and then purchased several million shares in the future.
At the same time, he also suggested that Bern raise funds, and the latter followed the advice and soon raised funds by selling 27 million new shares.
However, Buffett Bourne's emergency financing calculations polarize the board.
Davis opposes the issuance of new shares. He believes that excessive issuance of new shares will dilute future profits and lower the stock price, which is not good for shareholders.
After a solo conversation with opponents, Davis stormed out of the conference room and immediately threw out all his stocks in the company after returning to the office.
Buffett transformed into the largest shareholder of the insurance company for government employees.
This is one of the few emotional out-of-control in Davis's investment career and it lasted for a long time because he had the opportunity to reinvest the company since then, but he has not acted like this.
In his later years, Davis regretted this matter.
Kunpenglun believes that the inspiration this matter gives us is that we should never be dominated by emotions, especially investment.
One of the keys to investing is rationality, and the result of rationality is often to move forward in the opposite direction. If emotions dominate, it is to merge into the flock and run towards the cliff without knowing it.
Later, Davis's son Shelby also had an encounter with Buffett at a government employee insurance company.
In 1990, after the company's stock price reached a high of $194 (think about how much Davis had to regret it. In 1970, it was $2 per share), the company began to squander its own advantages.
It gave up its original policy of focusing on the auto insurance business and began to enter the fields of housing insurance, aviation insurance, consumer finance, etc.
As the largest shareholder, Buffett will never sit idly by and watch the company enter unfamiliar fields and make high mistakes.
At his urging, the company's CEO was fired.
In 1994, Buffett acquired all the remaining shares of the government employee insurance company in cash, and the company officially became a wholly-owned subsidiary of Buffett.
However, Shelby was unhappy about this because the New York venture fund he was in charge holds shares in the company. He believes that the cash acquisition will involve tax issues, and Buffett should complete the acquisition in the form of exchange for Berkshire shares, so that it can be tax-free.
Shelby considered opposing the acquisition, and hesitated again and again, but still did not exercise his objection power because he did not want to have a holiday with Buffett about this matter.
In fact, Buffett had a precedent for stock exchange acquisitions before, but since 1993, he has basically no need to live or die. Simply put, he has suffered a big loss.
In 1993, he acquired Dexter Shoes for $433 million in Berkshire.
, and the company is quite unsuccessful, and its profits have been declining and even losses after the acquisition.
In 2007, Buffett explained the bad decision in a letter to shareholders in 2007, "The sustained competitive advantage I have evaluated disappeared within a few years."
He admitted that the move cost investors $3.5 billion, which was equivalent to 1.6% of the net worth of Berkshire Hathaway.
Buffett wrote: "So far, Dexter is the worst deal I have ever made, but you can bet that I will make more mistakes in the future."
In 2014, the resentful Buffett once again revealed in a letter to shareholders that those stocks are worth up to $5.7 billion. "As a financial disaster, this should be the most worth seeing in the Guinness World Record."
This article is original by "Kunpenglun". Please keep it when reprinting it."
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. Please pay attention to this headline account. Since its establishment in early 2016, Kunpeng is the founder of Feng Lipeng, Teng Dapeng, and Jiang Likun. He is a special expert or columnist of many famous websites or self-media platforms including Toutiao, Snowball, Sohu , NetEase, Sina , etc. He has published more than 6,000 original articles and Q&As, the number of articles has been reproduced more than 8 million times, and the total number of articles is read by nearly 2 billion.
