Common Stocks and Common Sense

An incisive and comprehensive exploration of value investing in the real world

In the newly revised second edition of Common Stocks and Common Sense: The Strategies, Analyses, Decisions, and Emotions of a Particularly Successful Value Investor, celebrated Wall Street value investor Ed Wachenheim walks readers through eleven revealing case studies of real-world investments made by the author's firm, Greenhaven Associates. Each case uncovers unique insights into the technical and human elements that go into any profitable investment transaction.

This latest edition includes brand-new content with coverage of the electric vehicle (EV) market, and in-depth discussions of General Motors. Refreshed and renewed content also appears throughout the book, with several new investment theses appearing for the first time in this edition. Readers will also find:

• An emphasis on the softer, human side of value investing, including the biases and emotions that can get in the way of successful investments
• New material covering emerging and high-growth industries
• Value investing advice that goes beyond balance sheets and technical ratios

An essential handbook for retail value investors everywhere, Common Stocks and Common Sense will also earn a place on the bookshelves of portfolio and fund managers, securities analysts, and anyone else with a personal or professional interest in the financial markets.

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 Corporation 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 (Railroad) 79

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

8 American International Group (AIG) 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 Corporation 113

Extraordinary patience is required when a deeply undervalued stock continually remains deeply undervalued

11 Boeing 137

Opportunities can occur when great companies develop temporary problems

12 Southwest Airlines 157

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 169

Large profits can be earned when perceptions temporarily differ from realities

14 General Motors 187

One must rely on judgment and a sixth sense when the fundamentals of a company become unclear

15 A Letter to Jack Elgart 221

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

About the Author 233

Index 235

EDGAR WACHENHEIM III is Founder, Chairman, and CEO of Greenhaven Associates and one of Wall Street’s preeminent investors. Greenhaven manages approximately $8.5 billion in funds for wealthy families, college endowments, and charitable foundations. Wachenheim is a graduate of Williams College and Harvard Business School and is a former securities analyst at Goldman Sachs.

While more academic works on common stock investing would have you believe that the discipline is largely mathematical and analytical, any accurate and realistic study of the subject must include a detailed examination of the “softer” side of stock selection and investment, including the feelings, emotions, and biases that can turn an otherwise successful transaction into an unsuccessful one.

In the newly revised second edition of the popular book, Common Stocks and Common Sense: The Strategies, Analyses, Decisions, and Emotions of a Particularly Successful Value Investor, renowned Wall Street investor Ed Wachenheim delivers a startlingly insightful and practical take on the investment strategies and experiences that have allowed the author to enjoy an annual return of close to 18% between 1990 and 2021.

In the book, readers will find eleven in-depth case studies, each detailing a particular investment made by Wachenheim and explaining the investing process from start to finish. Each case includes a particular emphasis on the human side of investing: the emotions, intensities, and pressures that often dictate how well an individual investor can ride out the ups and downs of the market.

The latest edition offers brand-new content on the electric vehicle (EV) market and an in-depth discussion on General Motors. Revamped and refreshed content appears throughout, and new and updated case studies showcasing real world investments made by the author are also included.

An essential handbook for retail investors, fund and portfolio managers, and securities analysts, Common Stocks and Common Sense will earn a place in the libraries of anyone with a professional or personal interest in value investing.

PRAISE FOR Common Stocks & Common Sense

“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 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