An interview with Digest founder Dick Davis.
Chloe Lutts interviewed Dick Davis, the original stock market commentator and founder of the Digests in September 2011.
Prior to founding the Digest, Dick Davis worked at Merrill Lynch, where he began a prolific career as a stock market commentator for radio, television and newspaper. His daily TV market report was the first of its kind, laying the groundwork for shows like PBS’ Nightly Business Report.
After leaving the Digest, Davis published a book, The Dick Davis Dividend: Straight Talk on Making Money from 40 Years on Wall Street. He’s now retired, but took some time last week to talk to Chloe about the Digest and his investing philosophy.
Chloe Lutts: When did you start publishing the Dick Davis Digest?
Dick Davis: I started the Digest in June of 1982.
CL: Why did you decide to found the Digest at that time?
Dick Davis: I decided to do it because, in my experience, the way to succeed in any business venture is to find a need and fill it. At that point in time, in June of 1982, there was no newsletter that offered the investor a cross-section of opinions on the overall market and on individual securities from the advisors and analysts with the best track records.
CL: What do you think are the advantages of a digest-style publication, compared to portfolio-based newsletters?
Dick Davis: Each one has its place. A portfolio-based newsletter that monitors and recommends a specific portfolio can serve a useful purpose, providing that whoever is providing the ideas, whoever is steering the ship, is someone who has demonstrated an ability to outperform his peers—not the market—on a consistent basis. In other words, he’s a proven commodity. His excellence, his wisdom and his expertise have been demonstrated over a long period of time
I also feel that since nobody can predict the market—since the market is unpredictable and unknowable and random and perverse—that being exposed to a cross-section of ideas, by its very nature of diversification and variety, limits the amount of mistakes and errors that you’re likely to make. Because you’re tapping the brains of a lot of people—of proven winners. There’s a certain amount of safety and a limitation of error that you get through that type of diversification.
CL: Can you tell me about your investing philosophy, and if it has changed since you founded the Digest?
Dick Davis: My investing philosophy has been confirmed over the past few years, not changed.
In my book, I talk about the three most important things for the new investor to have to succeed in the market. I call them the three Ls: luck, loot and longevity. By far the most important is luck. And in my opinion, when discussing the success of a particular advisor or portfolio manager, luck is never given the due that it deserves.
Loot is an obvious one: the more money you have, the more you can implement the wise thing to do. Deep pockets are always an advantage. If you’re right, you’re going to be more right with more money.
The next thing is longevity. The stock market has had an unwavering upward course over the past 100 years. However, in the past 10-12 years, it has become obvious that it’s going to take a longer time for the historical returns of the market to play out. If you saw a chart of the S&P 500 over the past 12 years, you would not see the long-term upward trend. The historical annual compounded return of the S&P 500 between 1928 through 2008 has been about 10.4% annually, including dividends. So to return to that average, after the last decade, is going to take obviously more than 10 years. Long-term investing used to mean three, five or maybe eight years, but now we have to expand it, maybe to 15 or 20 years.
So the implication behind longevity is, in my opinion, that the stock market is basically a young person’s game. (I’m 83 so to me young people are anybody that’s under 50.) The “young” person has enough time in front of him to make all kinds of mistakes and for the market to have all kind of bad declines and for him to still come out ahead. That’s if he’s a long-term investor, if he buys quality stocks, if he rebalances on a periodic basis and most of all if he buys right. It’s essential, if you’re going to be successful in the market, to buy in a reasonable buying area. What you pay for a stock is going to determine how successful you are. The way most investors act, they’re not buying when their stocks are out of popularity or when stocks in general are unpopular. It’s always hard to buy when nobody else is buying. By human nature, 95% of us are not built to succeed in the market because were too emotionally oriented and we buy when our emotions compel us to buy and sell.
CL: So what advice would you give investors to make money and succeed in the market?
Dick Davis: If you buy right and you hold on to a diversified portfolio that’s correctly allocated you can at least perform as well as the market does over a period of years. I would allocate 80% of your money to index funds, and with 20% of your money I would be an active investor. With that 20% I would buy either individual stocks or outperforming mutual funds, using the guidance, advice and selections of proven newsletters and advisors. But one of the reasons for actively investing that 20% is just that it’s more fun. And it’s a challenge: you’re competing with the best investment minds in the world.
And finally, there are very few absolutes in the market, very few things that happen all the time. Because there are so few of them, the ones that there are should be religiously observed, and all investors should be aware of them.
These absolutes, I have six of them. Number one I’ve already mentioned: it’s that nobody knows the answers. Because of the unpredictability, randomness and perversity of the market, it is impossible to predict what’s going to happen. Unfortunately, most investors are exposed to a media that tries to explain everything. And people in the media always have a ‘Column A’ and a ‘Column B,’ where A is all the positives about the market or a stock, and B is all the negatives. So when the market is down, like yesterday, all of the commentators writing about the market go to their Column B, and they’ll talk about the turbulence in the European markets and the vulnerability of Greece to a default and all the other items in Column B. And those are the reasons that are given to explain why the market went down 400 points. But the truth is nobody knows. All of the negatives that person is pointing to have been around for days and days. Why all of a sudden did the market react to those things yesterday? Nobody knows.
The second absolute is that there’s always an exact opposite opinion. I don’t care how savvy and astute and experienced and wise an advisor is, there’s always another advisor who is equally experienced wise and savvy that has the exact opposite opinion. The investor has to be aware of that. When he buys or sells a stock based on the opinion of an analyst or advisor, it behooves him to know that there is someone out there with an exactly opposite opinion. Being aware of that opposite opinion and the reasons for it prevents surprise.
The third thing for all investors to know is that we’re all predisposed to fail in the market, but we’re not predestined to fail. Emotionally, human nature-wise, we all have a DNA that predisposes us toward buying when we should be selling and selling when we should be buying. However, we’re not predestined to do that. We have the ability, if we can develop the discipline, and we learn from the wisest investors, to put the odds in our favor. So it’s not hopeless, but it requires much discipline.
The fourth absolute is that there is symmetry in the market. Over a period of time there is a rhythm—bull markets are followed by bear markets and bear markets are followed by bull markets. That’s a symmetry that never changes. The market goes to extremes. It always goes to extremes, and sometimes it goes to extreme extremes, on both sides. But there is an underlying inexorable trend toward correcting those excesses and moving toward the median.
The fifth one is the fact that the market is king. That means that the market will do what it will do. And it will do it, sometimes, in its own sweet time. For example, right now we may be in the process of correcting the excesses of the last historic bull market, where the Dow Jones Industrial Average exceeded 14,000 and the S&P 500 exceeded 1,500. And when the market corrects these excesses they’re explained by news, but the news is irrelevant. What’s relevant is that the market is doing what is has to do, and we only know it after the fact. We’re observers, the market is king.
And finally is something that I don’t hear or read about, and that’s the persistence of major trends. The durability of major trends is simply not recognized—it’s underestimated. Invariably, trends last longer and go further than widely anticipated. Once a trend is entrenched, it is extremely difficult to reverse. And people who are aware of this truth are usually far more successful than those who aren’t, because they stay on the right side of the market. For example, for the past two to three years, at least, we’re been hearing about the inevitably of interest rates going up. And yet interest rates continue to stay low. And that’s not an exception. There are countless examples of trends that are widely predicted to reverse that do not reverse. Of course at some point at time they do, but invariably it takes longer than people expect.
