James Davolos of Horizon Kinetics

Douglas Ott (0:05)

Preferred Shares is a podcast started by three guys interested in business, history, and business history. We follow our interests and go down the rabbit holes of current and bygone topics. We'll talk about individual companies, product wars, famous founders, forgotten failures, and anything else that strikes our fancy. To find our episodes and show notes, please visit our website at preferredsharespodcast.com.

The hosts for the podcast are Devin LaSarre, Douglas Ott, and Lawrence Hamtil. Devin is a private investor with a background in design and brand development, and is the author of the Invariant newsletter. Douglas is a founder and chief investment officer at Andvari Associates, a registered investment advisor. Lawrence is a co-founder and principal at Fortune Financial Advisors, also a registered advisor. All opinions expressed by the podcast hosts and guests are solely their own opinions and do not reflect the opinions of their respective employers. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Andvari and Fortune Financial may have positions in any of the securities discussed in this podcast.

Devin LaSarre (1:27)

Hello, and welcome to episode 38 of the Preferred Shares Podcast. I'm Devin LaSarre. I'm joined by my co-host, Douglas Ott and Lawrence Hamtil. Today, we have the great privilege of talking with James Davolos, portfolio manager and director of research at Horizon Kinetics, the firm renowned for its independent research and investment management. James, thank you so much for joining us today.

James Davolos (1:48)

Thanks a lot for having me, everyone.

Devin LaSarre (1:49)

Now, I know the three of us have been following you in Horizon Kinetics for years. I'm certain many of our audience members are familiar with you in Horizon Kinetics. For the listeners that maybe aren't so familiar, could you share what your firm does and distill the philosophy that guides you?

James Davolos (2:05)

Sure. I think that we're best known as being a contrarian value investment firm with very long-term thinking. So Horizon, a long-term investment horizon. And everybody says that they're long-term, but the partners that founded the firm really practice what they preach. And I think the firm is probably best known for Murray Stahl, our late founder and CIO's discovery and conviction in Texas Pacific Land Trust over 30 years ago, when he stumbled upon a little sleepy trust, which is now Texas Pacific Land Corporation. That's a S&P 500 constituent, which I wasn't in the business or anywhere near the business. In fact, I was in grade school in 1995 But I think if you told most people that it would be a S&P 500 constituent in 2026, they would have laughed at you. But again, a testament to the true unique value methodology and the true compounding of long-term investing that Horizon is probably best known for.

Devin LaSarre (3:06)

Fantastic. And yeah, actually, we did cover TPL in an episode earlier.

Some listeners probably have listened to it. Others should go back and give it a whirl. James, can you tell us a bit about your own background and kind of how you ended up at Horizon Kinetics? What drew you to the firm and what that path was like all the way to the position you find yourself in today?

James Davolos (3:28)

Yeah, I think it's probably encouraging to the 99.9% of people that don't have the perfect Wall Street pedigree of a target undergrad school, top five investment banking consulting job, top five MBA, and then you go to this other job and you're top of the world. Well, that's great if you are privileged enough to have that pedigree. I come from much more humble beginnings where I really became fascinated in investing, being very involved in my family's business, which was a seasonal motel restaurant operation on the Jersey Shore. I ended up going to Loyola University in Baltimore, a small Jesuit school. I went to a Catholic high school that was run by, or actually not run by, but heavily influenced by Jesuits on the staff. And they really believed in kind of continuing that in the education course. And I think I got a great education there, just it was not necessarily a Wall Street target school. And I was coming out in kind of the go-go era of 2005

But I moved, I was lucky enough to have a friend who grew up in New York City. And his dad let us rent below market rate a small apartment under the elevated subway tracks in Astoria, Queens. So that was my way of being able to get to New York and afford to be able to go to interviews and try to find a job because it was a bit too far from the Southern New Jersey shore. But anyway, I'd love to tell you that I sought out Horizon Kinetics and I was an acolyte of Graham and Dodd, Buffett Munger, Peter, Steve, Murray. But as many things happen in life, it kind of fell on me by chance where they needed a clerk slash trading assistant on the trading desk. I applied for the job. I thought it went great. Got a phone call a few days later and they said they went with an internal hire. Very dejected. Got a phone call a few days later that that internal hire wasn't working out. And when could you start? I said I could come right now. They told me to calm down and if I could show up on Monday, that would be great. But anyway, it was an entry level job. And people think I exaggerate, but Murray would come into my office, which I shared with four other people, with a yellow legal pad, with handwritten trades. And that was how he always operated. He never liked computers, never liked email, but literally written out by hand. One day, as the firm was doing better and better, I actually calculated, so I put all this into Excel and order management system, sent it out to trading firms. I calculated it. And one day after a particularly large amount of inflows from European fund to funds, Murray had handwritten something on the order of $375 million worth of trades. And it was kind of humbling, but also scary that I was charged with making sure I didn't transcribe something differently. But suffice it to say, I checked things very thoroughly, but it ultimately was not real. I mean, I was a clerk and I didn't, I wasn't fulfilled by it. It was interesting. It was energetic. I got to see all these things that I had no idea about, but I wanted more. Ultimately, Peter Doyle allowed me to be an assistant taking notes in the research department. And as a testament to Horizon, they saw my aptitude and willingness to learn, willingness to work. Without going into too much detail, the chaos of the GFC of 08, 9, 10 was really an opportunity for me. I probably didn't know any better about how bad it was, but better yet, I didn't have much money to lose. So everybody else was worried about how much money they were losing. And full cycle now today, 21 years later, director of research and trying to really continue the legacy that Murray built. James, I have a question going back to your kind of childhood you alluded to, helping your parents with their hospitality business. I believe in a prior interview I listened to of yours, you talked about how that shaped your view of risk management, kind of what happened to that business during the SNL crisis. Can you kind of expand on that? Because I know I myself was shaped by early experiences with our family business and so on. So I'm just kind of curious how that experience worked for you. Yeah, I'm glad you brought that up because it's such an important formative experience. And my father was a developer of these motels down in the South Jersey shore, when kind of Atlantic City South to Cape May, when it was really a nascent kind of backwater development opportunity. And the business was very successful. And basically what he did is he kept cross-collateralizing each property to develop the next. And I think the hubris of success, he was very intelligent, very hardworking, very successful. But you just keep going, keep going, keep going. And then you keep going for a bigger and bigger and bigger reward. But leverage builds, cross-collateralization builds. And then ultimately, all of the systemic forces that were in, led up to the S&L crisis, led to all of that cross-collateralization, spiraling from all of his properties down to one last property that my mom had to basically scrape and claw to basically keep in our family and raise us by. My father had passed away at that point. She, with no formal business background, really credit to her because it was determination, grit. And then ultimately, she restructured a property that had zero equity. The banks did not want to take the paper. She made it into a servicing asset, and then ultimately sold it many years later, but turned it into a great investment. But the lessons to your question, Lawrence, is however great things might be going. And obviously, 8 was a rude awakening, maybe kind of the compounding era of 2010 to 2019