Edgar Wachenheim III, the legendary founder of Greenhaven Associates, presented an investment strategy of profound simplicity and power. His approach eschews macro-forecasting and short-term benchmarks, focusing instead on a repeatable, bottom-up process grounded in behavioral discipline and a two-to-three-year time horizon.
The Greenhaven Method and Behavioral Edge
Ed’s method is a masterclass in common sense. First, project what a company can earn under normal economic conditions two or three years in the future. Second, apply a reasonable multiple to those earnings, using the 65-year average P/E ratio of the S&P 500 (16.5x) as a baseline for an average-quality business. Third, only invest if the resulting target price offers the potential to double one’s money, providing a margin of safety. The crucial fourth element is having a variant perception—an original, well-researched concept that explains why the market is mispricing the stock.
This analytical framework is powered by a keen understanding of behavioral finance. Ed posits that our modern brains retain the DNA of our hunter-gatherer ancestors, making us inherently poor investors. We are wired to be short-term focused and overly emotional about perceived threats. He recounted the market crash of October 1987, when an emotional friend was panic-selling a stock at $7 that, just the day before, he believed was worth $14. This irrational, fear-driven behavior, Ed argues, is rampant on Wall Street and creates opportunities for the disciplined, long-term investor.
A Cautious Stance with Concentrated Conviction
Reflecting the market’s high valuation of 28x earnings, Ed revealed that Greenhaven holds a historic 45% cash position, finding few new ideas that meet its strict criteria. This cautious stance makes his deep conviction in one particular sector—U.S. homebuilding—all the more compelling. His portfolio is 30% invested in homebuilders, a concentration built on a structural, not cyclical, thesis.
The Bull Case for Homebuilders
Ed outlined a multi-faceted case for the major homebuilders, arguing that the market has failed to appreciate a fundamental transformation in their business model.
Structural Demand: The U.S. faces a chronic housing shortage of between two and four million units. Given the physical constraints on building capacity, this deficit will take a decade or more to close, providing a durable tailwind of demand.
Industry Consolidation: The industry has been steadily consolidating. Large, well-capitalized builders like D.R. Horton (NYSE: DHI) and Lennar (NYSE: LEN) are gaining share from smaller private players, leveraging economies of scale in land acquisition, procurement, and labor.
The Transformation to Asset-Light: This is the core of Ed’s variant perception. Historically, homebuilders were capital-intensive, asset-heavy businesses that tied up enormous amounts of capital owning land, often for years. This resulted in high debt and poor returns on capital. About a decade ago, led by D.R. Horton, the industry shifted its strategy. Instead of buying land, they began to control it through options. This seemingly simple change completely transformed the economic model. It freed up massive amounts of cash flow, which was used to pay down debt and fund aggressive share repurchases. The market, however, still seems to view these companies through the lens of their cyclical, asset-heavy past, failing to properly value the high-quality, recurring cash flow streams of the asset-light model.
Focus Idea: Lennar (LEN)
Ed identified Lennar as his favorite idea, as a temporary strategic misstep has caused it to lag its peers, creating an attractive entry point. He then provided a detailed, step-by-step valuation:
Revenue Projection: Lennar is growing its community count by 10% per year. Assuming a stable absorption rate, this implies they will be selling roughly 100,000 homes in 2027. At a normalized average selling price of $420,000, this yields $42 billion in revenue.
Earnings Projection: Applying a conservative 13.3% net margin (below the five-year average of 14.7%) to this revenue, plus another $600 million in profits from ancillary financial services, results in $6.2 billion of pre-tax profit.
Per-Share Calculation: After a 24.5% tax rate and factoring in an aggressive share buyback that should reduce the share count to 236 million, normalized EPS in 2027 should be ~$19.75.
Valuation: Applying a 16x multiple to these earnings—justified by the historical valuation of high-quality peer NVR (NYSE: NVR)—yields a target price of $315 per share, as compared to the recent price of $127.
Focus Idea: Oshkosh (OSK)
Ed also presented a thesis for Oshkosh (NYSE: OSK), a high-quality manufacturer of specialty vehicles like fire engines and garbage trucks. The investment opportunity was created when a spike in inflation compressed margins, as it was locked into long-term contracts without adequate price protection. That headwind is now turning into a tailwind. As those old, lower-priced contracts roll off, they are replaced by new contracts at higher prices that include inflation protection. Management is projecting EPS of $18 to $22 by 2028. Using the low end of that range ($18) and applying a 16x multiple suggests a target price near $290 per share, offering significant upside from its recent price of ~$135.
Let’s go deeper.
Transcript
The following transcript has been lightly edited for readability.
Saurabh Madaan: If you haven’t read this book yet, the first thing you should do after today is read Common Stocks and Common Sense. The second edition was updated more recently, three or four years ago. The back flap says Ed Wachenheim is the founder, chairman, and CEO of Greenhaven Associates, one of Wall Street’s preeminent investors. Greenhaven manages $8.5 billion, a number that is far outdated now. But from 1990 to 2021, the compounded annual returns are about 18% according to the flap in the book.
Ed is an investment legend. There’s no denying that. But I think for anybody who knows how he’s lived his life, his work in charity and giving, they’d consider him an American hero. I do. I also consider myself lucky to call him a friend, teacher, and exemplar.
For today’s talk, since we have limited time, I thought we could bucket it into three different themes. First, the investment approach, behavioral and analytical. Second, current market and opportunities. And thirdly, life and giving.
Ed, can you give us an overview of Greenhaven’s strategy? What is it that you’ve been doing?
Ed Wachenheim: It’s a very simple strategy. We do not pay attention to the big picture. If we can find enough stocks that are attractive to us, even though the stock market may be very high—which it is today at about 28 times earnings—we will buy the stocks and be fully invested. If we can’t find enough stocks that are attractive, we’ll hold cash.
When we analyze companies, we usually look two or three years ahead. We project what their earnings will be under normal economic conditions, and then we judge what that company will be worth. Since the average P/E ratio of the S&P 500 over the last 65 years has been about 16.5 times earnings, we say that an average company is worth 16.5 times earnings. If it’s better than average, maybe it’s worth 20 times earnings, etc. So we put a multiple on the earnings two or three years out. That is our valuation.
If we can buy the stock cheaply enough—and usually that means we want to double our money in two or three years to get a return close to 20%, and we make plenty of mistakes—we need to be able to see a double. We also need to know something else. Why isn’t the stock above where it is today? We need to have some concept that is different than the prevailing concepts on Wall Street. We have to have an original concept that’s not already discounted into the price of the shares. That makes it difficult to find stocks, but it also makes it fun.
Saurabh: Positive developments that are not priced in. This phrase is repeated over and over again in the book. With so much data available now, and people understanding cycles, what kind of positive developments are not priced in?
Ed: We have an advantage. Our business historically is managing our own money. We do not have to compete with the S&P 500. We do not have to compete with short-term benchmarks at all. We can look out two or three years and buy stocks that are unpopular today because there’s no reason for the stock to appreciate over the next quarter, two quarters, or year. But on the other hand, it has very great possibilities to appreciate sharply over the next two, three, or four years. It’s a time differentiation that most investors cannot make because most investors have clients that want high performance in the short term and want to be able to beat some benchmark, usually the S&P 500, in the short term. It’s a luxury we have.
Saurabh: That brings to mind something you emphasize over and over again, which is the behavioral aspect of investing. You also share some anecdotes and stories because you think how we train our minds or how our minds are conditioned, both things matter. I was wondering if you could recount either your anecdotes from New Rochelle High School, being a contestant in the Westinghouse Science Talent Search, or—Ed, I have a firm that’s named after a teacher of mine.
Ed: Yes.
Saurabh: And you gave Mr. Erickson a hard time. Tell us what these things have to do with investing.
Ed: I have what is going to sound like an absolutely crazy thesis that cannot be supported by science. But our DNA today is virtually the same as it was for the hunter-gatherers that lived for maybe 200,000 years, from 200,000 BC until we became civilized. To survive as hunter-gatherers, you needed certain characteristics. You needed to be short-term focused; you needed to be concerned and emotional about the possible negatives that could happen.
Because if you were, let’s say, a tribe sitting around a fire and you were eating and you were very happy. And one of your scouts went out and said, “Help! There’s an enemy tribe out there, they look hungry, they are doing a war dance, they have black paint on their face, and I’m scared.” Now, go back and tell my tribe that, and the tribe is sitting there around the fire very comfortable. The short-term oriented, emotional people of the tribe got up and said, “Help, I’m not going to stay around here. I’m going to flee. I’m going to get out of here.” The people who were cool, calm, and collected with a long-term perspective tended to stay around, and they’re the ones who got attacked and eaten and didn’t survive and didn’t produce children.
So the prevailing gene in us today is we’re over-emotional about the market, we’re too short-term oriented, and that leads to mistakes in judgment in the investment business. That’s a thesis, but I see it over and over again.
I’ll give you one example, which I did refer to in the book, which is on October 17th, if I have my date right, 1987, when the market declined, the S&P was down 20.5% in one day. I was riding the train home with a friend, and he said to me, “Ed,” he was emotionally upset, had lost a lot of money for his clients that day, “I sold some stocks today. I’m going to sell some stocks tomorrow. Wall Street’s not going to get over this. Nobody is going to have the confidence to buy stocks. The stock market is going to go down further.”
Let’s say my friend owned a stock that was selling at $10 on October 17th and he thought it was worth $14. The stock that day went down 20.5%, to something like $7 and change. So he was going to sell a stock at $7 and change that he thought the day before was worth $14. It makes absolutely no sense. He was acting completely on emotions. I think Wall Street tends to act more on emotions because that’s the prevailing gene that came from being hunter-gatherers, and I certainly could not prove that.
Saurabh: You had an opportunity to attend a history class with Mr. Erickson that led you to work with a former vice president, where you wrote a paper and still got away with a good grade. Tell us about the contrarian gene in yourself.
Ed: I don’t know why they’re talking about my high school experiences. They have very little to do with the investment business. That was a long time ago. I forget most of them. Let’s talk about the current environment.
Saurabh: Where are you seeing opportunities today? I bring this up because you were on a podcast a few months ago. You talked at length about D.R. Horton as well. Talk to us about the current investment landscape.
Ed: Because the market is so high, many of our stocks reached levels where they were no longer attractive on a risk-reward ratio, and we sold them. With the market this high, we are having great difficulty finding new ideas. We’re 45% in cash. And that is historic for us. The market is at 28 times earnings. It’s hard to find good ideas that are cheap on a normal valuation when the market’s at 28 times earnings. We have 30% of our portfolio in home builders, 10% in General Motors, and 15% in everything else, three or four or five smaller holdings.
I can talk about the home builders if you want because you mentioned D.R. Horton. I would say my favorite stock today is Lennar. They made a temporary mistake this year. They tried something and it didn’t work. It’s not an error in judgment; it’s just an outcome that didn’t work. They left the stock behind the other large home builders, so I focus on Lennar, even though we own Horton, Toll Brothers, and Pulte, and all the stocks are cheap.
First of all, on the home builders, I think it’s an excellent business. They are high-quality companies. Importantly, we all need to live somewhere. And 70% of Americans choose to live in single-family houses as opposed to an apartment. There are advantages to that, of course, because you build up equity and you’ve got a backyard. You have a greater chance of being out of an urban area with poor schools and being in a good area with good schools. Owning a house is a good thing.
You can relatively predict the demand for houses because we need about 1.5 million housing units per year to satisfy the needs of our growing population through family formation, and about 400,000 houses per year are torn down either because of age, fire, flood, location, etc. So we can really build in the demand for houses. The market was underbuilt after the financial crisis, and we now have a shortage in the United States of somewhere between 2 to 4 million houses. Because we can’t build many more than the normal 1.5 million housing units per year, it would take a decade or two to absorb that underbuilding. We just can’t build much more than 1.5 million houses a year in the United States.
There have been two dynamic changes in the business that make it attractive that I don’t think people are really focused on. One, it’s a consolidating business. Thirty or 40 years ago, there were dozens and dozens of medium-sized home builders. Over the years, the good home builders became better at what they did and gained efficiencies of scale. Now the very large builders have vast efficiencies of scale, which is very difficult for the private builders and the small public builders to compete against. One of the theses for owning the home builders is not only that owning a home is a good thing and we’re underserved in the United States because of the underbuilding, but also that the large builders are gaining market share. You can look at Toll’s website; they have a chart which shows the gains in market share of the largest builders. You can look at Horton’s website, and they have a chart that shows their gains in market share over the years. So that provides some growth to the industry.
An even more important change started happening about 10 years ago that changed the industry from being a fair business to being an excellent business. Ten years ago, the home builders, who need land to build on and typically need five, six, or seven years of land under their control, would own the land. They’d find some land they wanted to build on four, five, six, or seven years hence, and they would buy the land and hold it on their books. That meant they had a lot of capital tied up in land. They needed to finance the land, so they had debt on the balance sheet, typically a debt-to-cap of 20%, 30%, or 40%. It meant a lot of their cash flows were not available to the shareholders but instead went to buying land. And land was a poor investment because land appreciates a little more than the inflation rate over time. The return on this capital employed in land was typically only 3%, 4%, or 5% per year. That was a bad investment and it made home building only a fair business.
About 10 years ago, led by Horton, the home building industry completely changed its strategy. They transformed. They decided increasingly to hold their land under option or to make agreements where they will buy land but pay for it in installments over several years. As they did this, they were selling the land they owned but not buying new land because it was under option. They generated tremendous amounts of cash flow, paid off their debt, and got to the point where the home builders had more cash than debt for a period of time.
Incidentally, if you look at what Greenhaven does, my firm, we are sticklers on the balance sheet. We are risk-averse, and you tend to protect your assets and your net worth on the balance sheet, and then you make money on the income statement. We look at balance sheets first when we look at companies. With the home builders, they suddenly transformed from having quite a bit of debt and having to reinvest money in land to having virtually no debt and now having large amounts of cash flow available to shareholders. With the shares selling at depressed prices, virtually every home builder decided to buy back a lot of stock. This has transformed the business into being a very good business in our opinion.
Our favorite is Lennar, a company that was started by the current CEO’s father. Leonard Miller is the current CEO. He controls the company through B stock and has about $5 billion of stock. Lennar developed a bit of a problem this year because, as you know, interest rates went from 6% to 7% between last November and earlier this year, and buyers slowed down their purchases of houses, leading to a weaker market. That meant that the home builders either had to sell fewer houses or reduce their prices or a little bit of both. Lennar chose to pursue selling 87,000 homes this year, which was their goal, and to reduce prices to achieve it. It didn’t work. So Lennar this year has lower margins than they normally should have. Now management realizes that, and they’ve changed their strategy. We spoke to them recently.
We can build a model for Lennar, which is what we do, of what they should earn in a couple of years and what the company is worth. They were originally supposed to build 87,000 houses this year; it’s now going to be about 82,000. They’re increasing the number of communities they operate from at about a 10% rate per year. So if their absorption rate, the number of homes per community, stays the same as it is today, in two years they will be selling about 100,000 houses. Their average price last year and the year before was about $420,000 per house. It’s going to be a little lower this year because they’ve discounted their houses to sell them. So if it’s $420,000 per house in two years, their revenue is going to be $42 billion. These are big companies. $42 billion today is the size of Honeywell. It’s another thing that’s not well known. Horton and Lennar have become pretty good-sized companies.
Next, I’ll apply margins to the $42 billion of sales. Over the last five years, including this year, their net margins—which are gross profits less SG&A and, for Lennar, corporate expenses, which the other home builders don’t have a separate line for—are 14.7%. I am estimating 13.3%, which adds some conservatism. I speak to management about that, and they say, “Ed, we hope we can beat that by a percent or two when the market returns to normal,” but let’s use 13.3%. So 13.3% times $42 billion is $5.6 billion of operating profits from home building. They have another $600 million or so of profits from originating mortgages—they don’t hold the mortgages very long—from a title insurance business they have—again, they don’t insure the titles, but they arrange for the title insurance—and then they have a small multi-family business that generates some profits. Total pre-tax profits in a normal year—and we do things based on normal years—should be about $6.2 billion.
The tax rate is 24.5%. They currently have 260 million shares outstanding. They’re buying back stock at least at 5% per year. I think it’ll be a little bit more than that this year. They also own a billion dollars of a company they formed called Millrose; they distributed the rest of Millrose’s shares to their shareholders earlier this year but kept a billion dollars. They intend to sell that billion dollars in the open market and repurchase shares with the proceeds. That’s another 3% of the outstanding shares. So I think if I say that they’re going to reduce the share count by 5% per year, I’m being conservative. That gets you to 236 million shares outstanding, and it would get you to $19.75 per share of earnings, which we would consider normal in 2027. The stock today is about $127.
Now I’ve got to put a multiple on the $19.75 of earnings. I think that the home builders today are at least average, so they at least deserve the average P/E ratio the S&P 500 sold at, which is 16.5 times earnings. I actually end up putting a 16 multiple on it. And I’ve got a marker for the 16 times earnings because the nation’s medium-sized home builder called NVR, which some of you may know about, is an excellent, very well-managed company. It is an asset-light company. Remember, one of our excitements about the home builders is their transition from being asset-heavy to asset-light. Lennar is now asset-light like NVR. Lennar has some advantages over NVR because Lennar is a national company. NVR tends to be regional, and the region they’re in does not grow that fast. So Lennar is growing in terms of units and gaining market share, and NVR is not. But NVR has historically sold at 16 times earnings. I have that marker, so it’s reasonable to assume at some point, when Wall Street wakes up to our investments, which I hope they do, that Lennar sells at 16 times earnings, which would mean the stock would be $315 a share. The stock is $127 today. That’s how we try and make money in the stock market.
Saurabh: Thank you, Ed. That was wonderful. Another interesting stock in your 13F, which is in a different sector than home builders, is this company called Oshkosh.
Ed: Yes.
Saurabh: What makes it a good business and a good investment in your opinion?
Ed: Oshkosh a couple of years ago was operating on six or seven cylinders in terms of demand, and the stock was well below $100. They are a Midwest company that manufactures a number of products in a way that a lot of Midwestern companies do. They just seem to have a knack for making high-quality products, like Caterpillar Tractor or Deere, to name two other Midwest companies. Specifically, they make access equipment, which they sell to Ashtead. They make fire engines, they make garbage trucks, they make vehicles that are used at airports to transport things to airplanes back and forth. They make fire emergency equipment for airports. And they recently, two or three years ago, won the contract to make delivery vans for the Post Office. They seem to be very high quality in making these. They have a strong balance sheet, which we like, in addition, and very solid management.
The company is coming through. They got caught a little bit, and the opportunity to buy the stock was that they tend to sell on long-term contracts, typically two, three, or four years, to communities. If you want a fire engine today, you probably can’t get one from them for two or three years. They took contracts and then inflation hit, and they did not have protection in their contracts to offset the inflation. So the margins went down, which was the opportunity to buy the stock. That is correcting itself because those lower-priced contracts have worked through and the new contracts not only are at a higher price, but they also have protection against inflation.
The company is projecting for 2028, and we agree with these projections, we speak to management, of between $18 and $22 per share. Let’s just use $18. I think the stock is at least an average company. Again, if I put a 16 multiple on it, you probably get something like a $300 stock. The stock has been selling at about $135 to $140. There’s a lot of upside potential over a three-year period, again in a high-quality company.
In an environment today when the stock market is selling at a high price, and when there’s been prosperity in this country for a long period of time, we tend to be more cautious than ever and look for quality. I think it’s said that long periods of prosperity breed an overconfidence in shareholders and investors that leads to a misassessment of risks. We really have to ask ourselves that question today. We’ve had an incredible period of prosperity in this country. We have to be very careful not to take long risks because most of the things we’ve done over the last couple of years have worked out. We’re more cautious than normal.
Saurabh: Thank you for that. You mentioned quality. That brings to mind a study that was recently done by an academic called Professor Bessembinder. Are you aware of the study, Ed?
Ed: I don’t know.
Saurabh: He looked at companies over a period of 100 years. If we’re in 2025, let’s say you were looking at 1920 to 2020. What he found was, if you owned every public company and never sold it, you would have generated a tremendous amount of wealth. Having said that, more than half the companies, about 60%, actually lost money, not even keeping up with inflation. Most of the money was made by 4% of the companies, about 1 in 25. In fact, within that 4%, the top 1% did most of the hard work. So one school of thought is, buy good businesses and never sell, and if you’re right even 4% of the time, you’ll end up doing very, very well. How does your approach compare and contrast with that line of thought?
Ed: I would say yes and no. The yes part of it is we have made a disproportionately large share of our profits on a relatively few holdings. A lot of our holdings, some of them don’t work out—we make mistakes—and then some are just home runs. It is lopsided, if you want to put it that way.
In terms of holding stocks forever, we’re looking to make 15% to 20% per year. To do that, if we own the stock for a long period of time, the P/E ratio would at some point level off. We can’t obviously count on making money off the P/E ratio increasing. You do that for a short period of time, it reaches a level which it deserves to sell at, and then it levels off. We would have to have a company where the earnings increase 15% to 20% per year, on average, to reach this 15% to 20%. Now, I would love to find a company whose earnings are going to increase 15% to 20% per year for 100 years that we can buy at a decent P/E ratio to begin with, because of the risks of buying stocks at high P/E ratios. It’s absolutely wonderful. Pragmatically, we can’t do that.
Tom mentioned he likes to hold stocks for 10 or 20 years, with a 5% per year turnover, which is 20 years. We can’t do that. We buy stocks that we think are undervalued for a particular reason. When that reason happens, we tend to sell the stocks. We hold typically for three or four years and then go on and do something else as long as we have creative ideas. I don’t think we could achieve 15% to 20% per year if we held stocks for long periods of time.
Saurabh: Thank you. Even despite that, your time horizon is much longer than 90% of people who are in the investing business. Despite doing all this work on underwriting and understanding the business, things sometimes suddenly happen. Things don’t always go your way. How should a sensible and rational investor deal with events that one may not have forecasted, or sudden news, like, for example, a CEO of a semiconductor distributor company announcing their departure? What is a rational investor’s approach to things like this?
Ed: It’s a really good question. We study companies and study companies and study companies, and then we’ve got to admit to ourselves that we really don’t know the companies that well, number one. And number two, new factors, black swans, can come around and really surprise us, and our analysis has to change.
I’ll tell you, one of the most valuable things that happened to me: I was at Goldman Sachs, and I left Goldman Sachs mainly because I was working such long hours that I wasn’t spending an adequate amount of time with my family. I joined the predecessor of my present firm, Greenhaven Associates. At that time, I had a boss, and my boss said to me, “Ed, you’re not going to learn a lot sitting at your desk and looking at annual reports. Go out and become a director of companies.”
And I did. I became a director of three. I was about 30 years old, I had a crew cut, I looked about 20. And no company in their right mind would have me as a director. I think one of the comics once said, “I would not join any country club that would take me as a member.” I should have said, “I will not join any board of any company that would take me as a director.” But I did join some boards. Later on, I was on the board of a medium-sized company, and today I’m very involved with a company, it’s got about $9 billion of revenues, as vice chairman. When you get into a company as a director or get involved as a vice chairman, you realize that it’s very difficult to project the future in a company and how little we sitting on the outside—and that’s me and my firm—really know about companies. You get a general thesis and then you get surprises and you have to adjust to the surprises.
Sometimes you have to sell the stock because new events occur. We at one time loved Whirlpool. They made an absolutely dumb acquisition, paying a very high price, leveraging their balance sheet. As soon as the balance sheet was leveraged and I saw that management made a major mistake, we had to sell our stock. We only made a little money in it. I was hoping to make a lot of money. Things happen. You really can’t know companies as well as you think you know them. I think we all think we know companies better than we really do.
Saurabh: You mentioned something, and please correct me if I recall this wrong. It is important not to dwell on mistakes. There’s a lot of emphasis placed on, “Rub your nose in your mistakes, learn from your mistakes.” But what do you mean by not dwelling on your mistakes?
Ed: I think it’s very important. To make money in the stock market, you have to have an opinion that is different from the prevailing opinion because the prevailing opinion is reflected in the price of the stock. You’ve got to have the confidence to buy a stock where you have a judgment that is different from most other people’s. That takes confidence. If you dwell on your mistakes, you tend to lose confidence, and then it’s very difficult to go ahead and make the decisions in the future that you should make.
The way I look at it, and what I try and talk about in our office is, if we spend a lot of time analyzing a company and come to a rational, unemotional decision, we’ve made the right decision. The outcome may not be what we wanted. The outcome in Whirlpool was something we certainly didn’t want because we had no idea that the CEO was going to go out and overpay for a company. We take the attitude that our decisions were always correct, but the outcomes many times are not correct. Therefore, it’s an outcome, not a decision, that was faulty, and that helps us keep our confidence for the future. I think it’s very important.
Saurabh: Does this flow into life, this attitude?
Ed: I’m very lucky. I really enjoy what I’m doing. Warren Buffett said he dances to the office every day. I’m a terrible dancer, I can’t keep rhythm, but if I could dance, I’d dance to the office every day. I love what I’m doing.
I think it’s important to have other interests in life. The object in life is to have fun. I mentioned that I left Goldman Sachs to spend more time with my family, which I did. Family is extremely important. Just Sunday, two days ago, a friend of mine wanted to play golf with me, and I said I can’t play because I’m going to my grandchildren’s fall fair at their school. I’m glad I did. I spent quality time with three little ones between the ages of 9 and 12. That is very valuable for me. It’s really partially what life is all about.
My wife and I invite our entire family every Sunday night to dinner. The family is 17. I’ve got four children, they have spouses, so that’s seven, and then I’ve got eight grandchildren, and there are two of us. We will have 17 at dinner some Sundays. It is so great to have the family together. It keeps us together, we’re all friends, we all love each other, and it is fun and rewarding. It is what life’s for. It makes making money on Wall Street worthwhile because now I can spend it buying dinners for my family.
Saurabh: You do a little more than that. Tell us about giving. I ask this also in the spirit of different people being in different phases of their career and life journeys. But Warren Buffett himself said that giving money away well is actually even harder than making money. How should an individual think about the aspect of giving, and what is the practical relevance, if any, in life? How does one go about it?
Ed: You want to lead an enjoyable life. I’m a person that likes, on a subway, to stand up and give somebody else my seat if they’re older than I am. There are not many people older than I am anymore, so I don’t have to give my seat to too many people. Or it used to be to a lady; now a lady might want to give up her seat to me, now that the times have changed.
Being altruistic is a good feeling. I get enjoyment out of financially giving money to charities and then seeing the result, through scholarships, etc., that my wife and I fund, and we’re happy to do it. But I also think there are two elements to not-for-profits. The other is to actually become involved with a not-for-profit and use whatever you’ve learned in life to give back and give the not-for-profit some advice. I give a lot of advice, and not many people listen to my advice, but I still give it. Better than not giving it.
I have become involved in not-for-profits over the years and still remain involved in a number of them. It takes time. But the time is synergistic with what you do because I go out and I meet people and I see how other organizations run. I hear from other trustees or operational people within the company what’s going on with the economy. It’s not wasted time at all in terms of my profession of managing portfolios of stocks. And I get great enjoyment out of it.
In terms of synergy, I remember Bob Rubin wrote a book, I think it was called In an Uncertain World. He was, of course, head of Goldman Sachs and then later Secretary of the Treasury; he’s a very smart man. He said that his boss at the time, Gus Levy, who was very busy at Goldman Sachs—Goldman Sachs is extremely demanding—was at the same time chairman of Goldman Sachs, chairman of the board of a hospital, and chairman of the board of the New York Stock Exchange. Bob Rubin said this helped Gus in his business because it was synergistic. He met people, he learned, he got experiences that helped him manage Goldman Sachs. So, it is fun being involved with not-for-profits, but it has also helped me develop as a person and as an investor.
Saurabh: Ed, there was a video making the rounds recently where a 96-year-old woman was sharing her thoughts on life, and your comment, “She has it all figured out,” was interesting. What do you mean by having it all figured out?
Ed: I do not have it all figured out. Certainly. There are always things I could do better. There are always things that might lead to a more enjoyable life, a healthier life. But you know what? I’ll turn it around. If I had it all figured out, life would be boring. If I could just find stocks that went up, life would be boring. It’s good to have a struggle in life.
I play tennis, and my hope is to—I told my pro, I take a lot of lessons—my goal is to be in the US Open. “How do I get to the US Open?” And he said, “Buy a ticket.” So that is my future in tennis. But if I wasn’t improving in tennis and I was already good and I’d figured it out, it wouldn’t be enjoyable. But to try and go out and drill and learn something even at my age is great. I hope I haven’t figured it out, and I know I haven’t figured it out.
Audience member: You mentioned the historical P/E of the market is 16.5 times. Is there anything structural where you think if you look over the next 30 years, the average company P/E should be higher than 16.5, or do you think it will still average that over the next 40 years?
Ed: Very good question. AI is transformative. So you could say AI might lead to a better economy and deserving of a P/E greater than 16.5 times earnings. However, if you look back at the last 65 years, there have been other very transformative technologies in our country. There was the “X” period in the late 1960s when electronics industry companies were hot. Then there was the development of the chip, I think in 1972 or ‘73 by Intel. Then there was the personal computer, then there was the iPhone, and of course the internet was completely transformative.
Maybe I could answer your question by going back to the period when the internet was hot, the equivalent of AI today, and stocks at that time sold at 28, 29, 30 times earnings. The outcome was bad. Multiples went back to roughly 16.5 times earnings three, four, or five years later. There have been a lot of other transformative things in the United States, and the market, with those transformative things, has sold at 16.5 times earnings. I think it would be hard for me to imagine that any one new technology will cause a better situation than we’ve had for the last 65 years and cause stocks to be worth much more than 16.5 times earnings.
I don’t want to be the skunk at the picnic, but the last time stocks sold at this price because of a concept—the internet, the new economy, the old economy, and now we have the AI concept—it ended up very badly. From top to bottom, the Nasdaq went down about 75%. It took 15 years for the Nasdaq to go back to its former highs that were reached in early 2000. I certainly would not bet that a new P/E ratio for the next 30 years is going to be materially higher than 16.5 times earnings.
Audience member: You mentioned you were very strong in the home building area. In an ancillary area, things like the lumber companies like Weyerhaeuser and Interfor, and land companies like Five Point, and smaller builders like Tri Pointe, what’s your thought on the ancillary aspects of the home building markets?
Ed: I want to be with the final seller to the consumer: the home builder. The lumber companies and other suppliers have to sell to a Lennar. As Lennar and Horton gain market share and become bigger and bigger, they get more purchasing power and can negotiate discounts. There’s nothing wrong with the lumber companies. First of all, 30% of our portfolio is in home builders. That’s the limit, and we can’t buy other companies that surround that just because of diversity.
You mentioned Tri Pointe, which is a smaller home builder. I strongly feel, and we had studied Tri Pointe at one point, that the very largest home builders, particularly Lennar and Horton, have such efficiencies of scale that they are going to continue to earn higher profit margins. They’re going to continue to grow faster at the expense of the smaller ones. You can always look out and buy another company at a cheaper ratio to earnings or to book value, but I think it would be a mistake. I would stick with the bigger, higher-quality companies because they’re selling at such low P/E ratios to begin with. Frankly, I would avoid the Tri Pointes.
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