Book Review: The Dick Davis Dividend

I must confess that I had merely heard of Dick Davis, but did not know much about him until reading his book. I enjoyed his book, and think it is useful to new investors, and investors that have been unsuccessful in actively managing their own portfolios. I have read the whole book; this is not a review that comes from bullet points suggested by the publisher or author (sent to me and others, I have ignored them). I do have a minor criticism of the book; more on that later.

The Book

The first thing to appreciate about the book is its structure. After learning about the long career of the author, the book begins with a small amount of basic ideas per chapter, moves to progressively larger numbers of ideas per chapter that are less basic, and then returns the way it came, ending with progressively fewer ideas per chapter, but more basic ones.

The second thing to appreciate is the humility of Mr. Davis. His first answer to most investment questions is “I don’t know,” followed by reasons for and against the proposed course of action, after which he would indicate an opinion if he has one, and then say that he could be wrong, and that it would be good to do further study.

What does the book emphasize?

  • Passive investing (ETFs and index funds)
  • Careful selection of active managers.
  • Imitating those carefully selected active managers if one decides to invest in common stocks directly.
  • Avoiding too much trading, because the average investor tends to panic at bottoms, and get greedy at tops. Buying and selling have to be properly timed, because the average investor tends to do worse than the buy-and-hold investor.
  • Be careful with costs on mutual funds. Most aren’t worthy of the fees, and with bond funds, cost advantages are the most durable.
  • Invest for the long haul, realizing there will be bumps along the way, and keep enough excess liquidity on hand.
  • There is no one right person or opinion. Things shift in the market, and trends often last longer than expected.
  • Be wary of news flow; get a thick skin toward the multitude of opinions presented.
  • Asset allocation is the key discipline to risk control; diversify broadly by asset class, country, style, etc.
  • You can’t win every time, but you can tilt the odds in your favor.
  • Use stop losses to limit losses. (I disagree. Use loss points to review your thesis, and if it is wrong, sell. Get a second opinion also. Otherwise, buy more.)
  • Rising dividends beat high dividends
  • Many strategies can work in the market; it’s more a question of when and how you apply them.
  • Macro forecasting rarely works.
  • Buying and holding the equity market tends to work over the long run, so have a core investment in the equity markets.
  • Humility is a core character attribute of good investors. (Be more like Charles Kirk, and less like Jim Cramer… he spends several pages on this.)

Beyond that, Mr. Davis gives lists of good investment books, good investment blogs (I‘m not on his list, so it goes), quotations, and active managers. I thought his favorite active managers to be a very good list for those looking for active mutual funds. The investment books were generally classics, though some are too new to tell. As for the blogs, well, we are here today and gone tomorrow. We are only as good as the last few things we publish, so good financial blogging is not something that a book can capture. We vary too much.

Now for my one criticism. The book has one long chapter on index fund portfolios that takes up 20% of the book, and gives 28 models (with sub-models) for “set it and forget it portfolios.” There are a couple of problems here: first, there are too many strategies here, and many don’t differ enough to deserve separate inclusion. Second, it would be better to spend more time on the factors behind why someone might choose one approach rather then another. What goes into creating a good asset allocation? How much should I have in bonds? Foreign bonds? Foreign equities? Cash? Obscure asset classes? I’m not asking for detailed math, but rules of thumb for average investors to follow, so that they could find a passive strategy that is among those strategies that would be more likely to meet their needs.

But with that one cavil, I can recommend this book to investors, particularly those that have not done well with active management. This book won’t teach you what to do, as much as how to think and discipline yourself. Most investors should limit their options in investing because their emotions and abilities aren’t suited to the violence of the markets.

For investors that do well with active management, you don’t need this book, but you might like it for the stories that he tells, or as a gift for relatives who need to follow a more passive style of investment management.

Full disclosure: I get a modest amount of money if you buy the book through the link above.