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

by Edgar Wachenheim

I isolated five fundamentals and estimates that appeared critical to our analysis of the company: (1) the balance sheet was OK; (2) management seemed competent and motivated; (3) the business was low-margined and otherwise unattractive; (4) as a best guess, revenues might grow at a 5 percent average annual rate; and (5) a projection by Bob Hatch that pretax margins could increase to 3.5 percent within a few years seemed credible.

After completing my valuation, my first reaction was that Interstate’s shares were not sufficiently inexpensive enough to purchase given the unattractiveness of the business.

I find that, in the stock market, it is best to be flexible and not be tied to conventions or rules.

On March 27, Goldman told a committee of the board that, if the company was auctioned, its shares might be worth $32 to $35 if the purchaser was not in the baking business and might be worth up to $40 if the purchaser was a baker that could achieve strategic or synergistic benefits and eliminate a competitor.

Wow the people in the same industry buy higher price

Bob Hatch, however, owned relatively few shares. In my opinion, his primary incentive was to maintain his position as CEO. As CEO, he earned more than $500,000 per year and enjoyed substantial perks and prestige. What role did Bob Hatch’s personal interests play in his initial opinion that the

company should not be sold? What role did his interests play in the high price that Hatch–First Boston bid for the company, a winning bid that permitted Bob Hatch to remain CEO, but a bid that must have been based on

I probably have run thousands of screens, but only a tiny fraction of 1 percent have resulted in a successful investment idea. Using screens to find investment ideas is like searching for a single pin in a field of haystacks.

I immediately developed the thesis that U.S. Home’s shares were undeservedly depressed because of the stigma of the bankruptcy. I reasoned that, with time, the stigma would diminish and the shares would appreciate.

What was going on? If the public homebuilders were growing faster than their industry, then the private homebuilders must be lagging. Why were they lagging? I picked up the phone and called a friend who built a few homes each year in lower Westchester County. My friend thought that my inquiry was ill informed—in fact, dumb: hadn’t I ever heard of the S&L crisis?

Trigger

Creativity is the ability to generate new ideas by combining,

changing, or reapplying existing ideas. Very few works of creative excellence are produced with a single stroke of brilliance or in a frenzy of rapid activity. Creativity is also an attitude: the ability to accept change and newness—a willingness to play with ideas and possibilities, a flexibility of outlook, the habit of enjoying the good, while looking for ways to improve it. Creative people usually do not have a need to conform and are not afraid of failure.2

If you have reason to believe that the price of oil will increase sharply, but if the likelihood of sharply higher oil prices already has become the conventional wisdom among investors, then it probably is too late to purchase the shares

On a warm and humid day in mid-July 2003, I found a number that intrigued me. The U.S. Census Bureau keeps track of the number of housing units being built in the United States.

Those are large increases for an industry that should only

grow in line with the growth of the U.S. population.

These predictions incentivized additional families to purchase new homes before prices did increase further. Hence, the boom fed on itself.

However, if the industry cycled downward, we might suffer through a period of declining earnings and declining PE ratios.

Double double in both ways.. if the industry is growing then the PE ratio and the earnings might go up.. when it’s in decline, the PE ratio and earnings can decline.. hence negative double double

Also, the company was aggressively purchasing additional land at a time when land prices had risen sharply in response to both strong demand from the homebuilders and limited supply due to frogs and other environmental concerns.

He maintained that the large homebuilders would continue to gain market share and therefore that Centex would need all the land it was purchasing. He thought it unlikely that housing prices would decline,

It is akin to steering a car by looking through the rearview mirror (which is OK while the road remains straight, but a catastrophe when the car comes to a curve).

I decided to sell all our holdings in the homebuilders. I could not wait for signs that the demand for new homes was weakening. When purchasing or selling securities, we try to act ahead of developments.

In my opinion, greedy bankers and Wall Streeters contributed to the housing and financial crises, but the families who purchased homes in 2004–2006 at inflated prices were the root cause of the crises.

It seemed logical to us that Union Pacific’s congestion problems could be and would be solved within a few years. New employees could be hired and trained, new locomotives could be purchased, some trains could be rerouted away from congested lines, and new track could be added in some of the more congested corridors. Decongestion should not be a difficult task. It also seemed logical that