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Common Stocks and Common Sense: The Strategies, Analyses, Decisions, and Emotions of a Particularly Successful Value Investor



"Ed Wachenheim has been an extraordinarily successful value investor for decades, and in this well written and engrossing book, he explains his investment approach through case studies, including mostly investments that went well but also some that went badly. The key takeaways are that success requires intense commitment to research, a probabilistic mindset, and the temperament to remain rational in the face of market irrationality."
—ROBERT E. RUBIN, Former U.S. Secretary of the Treasury

"Ed Wachenheim often emphasizes the great value of using one's 'common sense' as an investor. But after he describes how he has analyzed every imaginable dimension and variable of several organizations before deciding whether to buy their stock, we quickly realize that there is nothing even remotely 'common' about his ability to be both prescient and wise. This is a fascinating and enlightening book that is completely accessible to the layman, and should be required reading for professionals."
—NEIL L. RUDENSTINE, Former President of Harvard University

"Ed Wachenheim is a very successful investor who has never sought the limelight. He has written a book on investing which is a kind of confessional, talking openly about his stock picking experiences with humor and candor. Reading about his odyssey over the past several decades will prove to be a useful apprenticeship for both the novice and the experienced investor. I learned a lot and I've been doing it longer than he has."
—BYRON R. WIEN, Vice Chairman, Blackstone Group LP

ED WACHENHEIM is chairman and chief portfolio manager of Greenhaven Associates and one of Wall Street's preeminent investors. Greenhaven currently manages about $5.5 billion in funds and has a client list that includes the Wachenheim family, university and college endowments, retired Wall Street executives, and wealthy families.

Introduction ix

1 My Approach to Investing 1

2 The Brief Story of My Life 17

3 IBM 31

Successful investing is about predicting the future more accurately than the majority of other investors; we predict a change in IBM’s cost structure.

4 Interstate Bakeries 49

Successful investing often is heavily dependent on the capabilities and incentives of corporate leadership.

5 U.S. Home Corporation 63

Investors can become frustrated when their swans are priced as if they are ugly ducks.

6 Centex 67

Large profits can be earned by successfully predicting a major positive change in the fundamentals of a company or an industry.

7 Union Pacific 79

Investors often do not adequately differentiate between short-term discrete problems and long-term systemic weaknesses.

8 American International Group 91

I went to bed with Miss America and woke up with a witch; this can happen to even the most careful of investors.

9 Lowe’s 101

Using common-sense logic, we conclude there is a high probability that the U.S. housing market will improve markedly in the near future; investing is logical and probabilistic.

10 Whirlpool 113

We conclude that the company’s earnings and share price are being depressed by cyclically low demand for appliances and by

abnormally high costs for raw materials; successful investors should purchase their straw hats in winter.

11 Boeing 133

Opportunities can occur when great companies develop temporary problems.

12 Southwest Airlines 153

When tight markets lead to sharply higher prices for goods or services, earnings and share prices can become buoyant, even for normally unattractive businesses

13 Goldman Sachs 165

Large profits can be earned when perceptions temporarily differ from realities.

14 A Letter to Jack Elgart 181

A letter that summarizes my approach to investing and that includes a number of do’s and don’ts that I found useful in my career.

About the Author 193

Index 195