Saturday, 11 November 2017

Book Review: 5 takeaways from Edgar Wachenheim's Common Stocks & Common Sense


About the Author:

Edgar Wachenheim is the founder, chairman and chief portfolio manager of Greenhaven Associates. The fund currently manages over US$6 billion. In the 25 years since the founding of the fund in 1987, Greenhaven Associates had produced market beating returns of 19% per annum on average.

About the Book:

Unlike other books which discuss theories on stock pickings, investment principles or even investing psychology, this book adopts a case-based pedagogy. 

Edgar shares details of several investments made by Greenhaven. He illustrates methodologically how each investment thesis surfaced before detailing the probabilistic approach towards assessing these theses and finally discusses how he appraises the target price of each firm in question. 

Here goes the 5 takeaways:

1) The first goal of investing is to control the risks of permanent loss

Edgar shares his belief that a shareholder makes money off the income statement, but survives off the balance sheet. Because of his keen desire to minimize risks of permanent loss, the balance sheet becomes a good place to start efforts to understand a company.

Debt-to-equity ratios, liquidity, depreciation rates, accounting practices, pension and health care liabilities, and "hidden" assets and liabilities are all among common considerations of Edgar.

2) We cannot completely eliminate large risks

Investors have to accept that relatively unpredictable outlier developments can sometimes quickly derail otherwise attractive investments. 

Investors must be prepared and willing to change their analyses and minds when presented with new developments that adversely alter the fundamentals of an industry or company. In practice, when one becomes aware of adverse changes, one should then sell shares before any loss becomes too large.

3) Other great investors' purchases provide for a good source of investment ideas

Edgar admits a liking towards following sound and successful investors who are particularly knowledgeable about a company or industry they are investing in.

4) High growth rates are unsustainable over time

Over time, the growth rates of almost all technologies, products, and services slow because of saturation, obsolescence, or competition. 

It is therefore not advisable to project high growth rates far into the future.

5) Remain fully invested

Edgar advises for investors to remain fully invested as long as their holdings remain reasonably priced and free from large risks of permanent loss. 

Sometimes holdings that initially appear to be less exciting eventually benefit from positive unforeseen events and unexpectedly turn out to be a complete winner. The only way to benefit from these events is to remain fully invested.

However, Edgar clarifies that in situations where investors are unable to find a sufficient number of attractive securities to remain fully invested, investors should be willing to hold cash. 

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

No comments:

Post a Comment