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.
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