We had the pleasure of visiting value superinvestor Edgar Wachenheim, chairman of Greenhaven Associates and author of Common Stocks and Common Sense, at his offices in Purchase, New York, in 2016. In the wide-ranging exclusive conversation, Ed talked authoritatively about contrarian investing and whether contrarianism can be learned. He shared numerous investment case studies, including discussions of IBM, homebuilding companies, the airline industry, and railroads.
What does “common sense” have to do with great investing? Not much, you might think, if you’ve been listening to smooth-talking hedge fund managers or so-called investment experts. In order to succeed, we are told, you need a distinct edge, and in order to have edge, you must do something special or complex. In the old days, you needed access to non-public information. Today, you may need to get fancy, sniff out information others don’t have, or act faster than the rest. Economists would have you believe you need to be able to anticipate where the macroeconomy is going, what the impact of major political events might be, and the like.
In comes Edgar Wachenheim, mentor to great investors like Glenn Greenberg. Ed took over Greenhaven from the Gottesman family in 1998 and has amassed a strong long-term track record. Impressively, Ed’s strategy does not rely on fancy concepts or some complex construct of “edge”. Instead, he manages a concentrated, multi-billion dollar portfolio of long-term investments in high-quality public companies.
Ed has acquired notoriety in value investing circles for his uncanny ability to find opportunity before others see it. He developed a contrarian thesis on IBM when it was looked on with “tremendous disfavor” in the 1980s. He warmed up to housing in 2011, when the common wisdom on Wall Street was that the housing market would stay weak. He started to get interested in airlines in 2010-2012, well before U.S. airline stocks took off. He developed a long thesis on railroads even before Warren Buffett.
Watch Ed talk about how he came to appreciate the improved business model of railroads even before Berkshire Hathaway purchased Burlington Northern:
A few highlights from the full interview:
Most people in the investment business are followers and they don’t have the ability to really go out with confidence and say, “Yes, everybody thinks this, but I’m going to do that, and I’m going to lead everybody else to that.” That’s one important trait — to really be able to be a contrarian.
[In my] letter to Jack Elgart… I go into a whole list of dos and don’ts. Realize that the trees don’t go to the heavens, that when you get stocks that go up a lot and that are fully priced, there’s a good chance that they’ve reached a proper valuation and you should consider selling them. Don’t fall in love with stocks and don’t think the trees are going to go to the heavens because they don’t is one advice. Seek simplicity.
Warren Buffett said it better than I could, “At an auction, the right side to be is the losing side,” and so you’ve got to assume that if a company has been put together and a lot of the subsidiaries have just been acquired that they were acquired at prices that were equal to or more than they’re really worth. You can value the company. Many companies that have been put together aren’t worth any more than their stated book value.
Be wary of projections by managements. Managements have an ax to grind. I have an expression, “Never ask your barber if you need a haircut.” We are very cautious about listening to managements and just copying down what they say and taking that for the gospel.
You’re right a certain percentage of the time and you’re wrong a certain percentage of the time and when you’re wrong, you need to recognize you’re wrong, continually analyze stocks when the fundamentals are not working out as you expected and be willing to reverse yourself and sell the stock when you were wrong, before the stock goes down more. It’s very bad to let your mistakes fester.
It’s imperative to be creative because a stock currently is selling at a price that the average investor thinks is the right price, so you have to come to a decision that that price is wrong and that the price deserves to sell, the stock deserves to sell at a higher price for some reason. That reasoning is creative thinking…
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About Ed Wachenheim’s Common Stocks and Common Sense:
Common Stocks and Common Sense provides detailed insight into common stock investing, using a case-study approach based on real-world investments. Author Edgar Wachenheim is the 28-year CEO of Greenhaven Associates, boasting an average annual portfolio comparable to Warren Buffet’s. In this book, he shares his knowledge and experiences by providing detailed analyses of actual investments made by himself and other investors. The discussion covers the entire investment process, including the softer, human side, with candid insight into the joys and frustrations, intensities and pressures, and risks and uncertainties. The unique emphasis on behavioral economics and real-world cases set this book apart from the herd—but it’s Wachenheim himself and his deeply-examined perspective that elevates the book beyond a mere investing guide.
Between 1990 and 2014, a typical portfolio managed by Wachenheim enjoyed an average annual return in excess of 18%, achieved using relatively conservative stocks and no financial leverage. As a proponent of evidence and example, his analysis of real cases serve as a valuable education for anyone looking to improve their own investment practices.