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, head of investment firm Greenhaven Associates, mentor to great investors like Glenn Greenberg, and author of Common Stocks and Common Sense. 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.
My colleague, Shai Dardashti, managing director of The Manual of Ideas, recently visited Ed at his office in Purchase, New York. The two of them engaged in a fascinating hour-long conversation in which Ed highlighted the investment principles behind his long-term success. Here are a few highlights:
How does your personality shape the way you invest?
Some people are born contrarians and some people are not born contrarians, they’re born followers. You’re either a leader or a follower and most people are followers. It’s very important in the investment business to be a leader and to be a contrarian because theoretically the price of any stock at any one period of time reflects the opinion of the average investor. Stocks are appropriately priced to the average investor. To take an opinion that the stock is mispriced and its worth substantially more than the average person thinks they’re worth, you’re being a contrarian because you’re going against the grain and taking a position that is very unusual…
Most people can’t do that. I’ve thought hard and long about it, and it is just purely hardwired. I have a friend who I occasionally have dinner and I’ll call him ‘Danny Dinner Date’ because I call him that in the book. Often, I will discuss a stock with him and he will say, “It’s a great idea.” The theory of this stock is the company has a temporary problem. It’s the highest of probabilities the problem will be solved or go away by itself within a short period of time and I’m saying the stock is down because of the problem, the problem will disappear and the stock should go up substantially. Danny Dinner Date says, “Ed, that’s a great idea. I’m going to do research on it.” I will call him a week or two later and I’ll say, “Danny, did you buy the stock?” He’ll say, “I’m waiting to see the improvement come. I’m waiting to see the problem dissipate and then I’ll buy the stock.”
Of course, by the time he sees the problem dissipate and it makes the newspapers that the company is solving its problem, the stock is probably up substantially and he doesn’t have an opportunity. This has gone on year after year after year. This is a bright man, he graduated near the top of his class at an independent school. Then went to an Ivy League college.
This is purely hardwired. The ability to become contrarian becomes critical and being hardwired goes way back. I have a thesis, which I can’t prove – I don’t think anybody could prove it – and that is that our DNA is essentially the same as the DNA of human beings when they were hunter gatherers. They were hunter gatherers for 200,000 years, and we’ve been civilized for roughly 10,000 years; our DNA has not changed. The survival technique that was important when you were a hunter gatherer is different than the survival technique that would be successful now…
How does creative thinking lead to better results?
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 because other people aren’t thinking that way because if other people were thinking that way, the stock would be at a higher price. Every idea is a creative idea.
Are there any cases from the book that you think stand out as being most creative, most counterintuitive?
It’s very hard to isolate one or two. I could probably talk about a number talk about a number and the creativity is, in my opinion, the exciting part of the business. I am at an age where I don’t have to work. I work because I love the business and I love the business because when you do get a creative idea, it’s really exciting. The adrenaline flows. You can hardly wait to go home, let’s say, at the end of the day, get a scotch, sit by your computer and work out the creative idea. I’m sorry weekends come and I have to go on the tennis court and beat my friend at tennis, which I do. It helps to be competitive in this business and I tend to be a competitive person. Definitely the adrenaline flows. I will just give you a couple of examples of when the adrenaline really made it exciting and we got a creative idea. One was IBM. IBM was looked on with tremendous disfavor in the 1980s…
There’s a chapter dedicated to the railroad industry, which you discovered quite early. What did you notice?