Common Stocks and Common Sense
Wiley edition confirmed elsewhere.
Summary
Wachenheim has run Greenhaven Associates since 1987, and he wrote this as a set of case studies of individual investments rather than as a statement of method. Each chapter takes one position, explains what the firm saw, what it estimated, what it paid, what happened and what it got wrong.
The cases include IBM, Whirlpool, Union Pacific, Lowe's, Boeing, AIG, Interstate Bakeries, Southwest Airlines and others. The recurring analytical pattern is that Greenhaven buys large, well-known, financially sound companies whose earnings are temporarily depressed by an identifiable and reversible cause, holds them for three to five years, and sells when the market has repriced the normalised earnings. Wachenheim explicitly avoids obscure small companies, distressed situations and businesses he cannot model. He builds an earnings estimate for a normal year several years out, applies a multiple, and requires the resulting value to be substantially above the price.
He is unusually direct about failures. The Interstate Bakeries chapter documents a total loss and identifies what he misjudged. He also says plainly that the firm's returns have come from a modest number of large winners and that most positions have performed adequately rather than well.
The method is transparent and the cases are documented with real numbers, which makes it more useful than most investment books. The limitations are that the sample is chosen by the author from his own record, that the approach depends on judgement about what constitutes a temporary problem, which is the hard part and cannot be taught by example, and that the strategy requires holding through periods when the position looks wrong.
Key takeaways 7
- Buying large well-known companies whose earnings are temporarily depressed by an identifiable and reversible cause is the whole of the strategy.
- Estimating normalised earnings three to five years out, then applying a conservative multiple, is more reliable than forecasting near-term results.
- Financial strength is the precondition for the strategy, because it determines whether the company survives the temporary problem.
- Investment returns come from a small number of large winners, and most positions produce ordinary results.
- Deciding whether a problem is temporary or permanent is the analytical judgement on which everything turns, and it cannot be reduced to a rule.
- Holding a position for years through periods when it looks wrong is a requirement of the method rather than a virtue.
- Documenting the reasoning at purchase makes it possible to identify later whether the thesis broke or the price merely moved.
Who should read it
Investors who want to see a working manager's actual analysis on specific positions, including the losses, rather than a statement of principles.
About Ed Wachenheim
Chairman, Greenhaven Associates 1988-present
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