Book review: Common Stocks and Common Sense: The Strategies, Analyses, Decisions, and Emotions of a Particularly Successful Value Investor by Edgar Wachenheim
Finished reading: 26 Dec 2016
The book provides a good summary of the investing philosophy of Greenhaven Associates.
Investing approach
Greenhaven looks to hold positions for 2 to 3 years and is often betting on companies that have disappointed recently and are out of favour with analysts. They are typically companies that have good medium term potential but perhaps the short term potential is lacking and therefore is being applied a discount valuation by the market.
His style lends itself to cyclical companies where he forms a view that the company will not continue its recent malaise and has catalyst to improve their earnings.
His valuation approach is quite simplistic where he will use either a market multiple or more arbitrary multiple based on the quality of the company to determine its valuation.
When forecasting earnings he will often use a probabilistic approach using a number of different scenarios.
Ultimately it is a contrarian investing approach buying stocks that are out of favour. This is necessary because Ed aims for 15 to 20% performance a year and has achieved that historically, however most companies are not generating that level of earnings per share increase consistently and therefore it is necessary to buy companies that are out of favour and sell them when they approach their value. This approach can generate much higher returns for the portfolio than what the underlying companies in the portfolios are achieving. He does not think a buy and hold approach works as companies that were once exhibiting moats can easily find themselves uncompetitive due to increased competition or technological advances.
Ed also follows value investing principles such as looking at the balance sheet first to determine the riskiness of the company and its potential for permanent impairment.He also maintains a flexible mindset and will often sell positions as soon as his investment thesis is incorrect.
Another interesting market valuation approach was considering the market grows EPS at 6.8% growth and regressing the market valuation based on its historical multiple to find the level it should be trading at.
Ed runs a concentrated portfolio where his maximum position size is 12% at cost and who whole typically between 15 to 25 positions.
It also advocates staying in control of your emotions and not panicking or seeking confirmation bias for your positions and also not attributing too much credit for appreciating stock positions when the market is having a good run.
Feedback
What I did find lacking was the process between researching a company and then buying the company which often was a very quick process but different between each of the investments profiled. There was not a systematic investment research process followed or if there was it was not detailed in the book.
Conclusion
Overall I would recommend the book and it is an easy read from a manager who there is very little previous literature available.
