Because I believe that so much of an investor’s success is a function of his personality, I believe that it is useful for a reader of this book to have a substantial understanding of my DNA and my life experiences. If I had been born with a different personality or been mentored by different educators or bosses, my investment styles, decisions, and successes likely would have been quite different from what they are. Therefore, before trying to understand why I made certain investment decisions, I have provided substantial background about me. The background is divided into eight sections.

1. WILLINGNESS AND ABILITY TO BE AN INDEPENDENT THINKER AND A CONTRARIAN

I always have been an independent thinker who is willing and able to make decisions that are counter to the conventional wisdom.

According to my parents, I was an independent thinker at a young age. Evidently, when in first grade, I gave my parents a difficult time by questioning the existence of a myriad of intangibles, including God, Santa Claus, and the tooth fairy (even though the tooth fairy regularly placed quarters under my pillow whenever I lost a first tooth). I was the consummate Doubting Thomas. In high school, college, and, especially, Harvard Business School, I enjoyed the intellectual process of pioneering positions that were original or that were counter to those of other students and, sometimes, even to those of my teachers.

One example of my contrary and contrarian nature sticks out in my mind. In high school, my American history teacher was Mr. Donald Erickson. Every school day, Mr. Erickson lectured on a particular event in our nation’s history and then assigned us to read about the event that evening. His classes were boring. Totally boring. There was almost no class discussion, no critical thinking. I decided to be a renegade. At home, I found my father’s college textbook on American history, which was considerably more detailed and sophisticated than our high school text. I decided to read about various events in the college textbook before Mr. Erickson discussed them in class and to memorize critical dates and outcomes. Then, when Mr. Erickson lectured about the events in class, I was ready and eager to correct him if he made a mistake—or to provide additional detail if he did not do an event sufficient justice: “Mr. Erickson, I believe that the defender of the Boston Tea Party was Samuel Adams, not John Adams, as you stated. Samuel Adams and John Adams were second cousins.” A few days later in class: “Mr. Erickson, I believe that the Battle of Saratoga took place during the fall of 1777, not during the spring as you mentioned. It had to be the fall because General Burgoyne did not start marching south from Quebec until June 13 and did not defeat the Americans at Fort Ticonderoga until July 7—and then he continued south to Saratoga, arriving in that area in mid-September.” Finally, Mr. Erickson had had enough of me. He offered me a deal I could not refuse. Mr. Erickson was a neighbor and acquaintance of Henry A. Wallace, the former U.S. secretary of agriculture and vice president under Franklin Roosevelt. When serving as secretary of agriculture, Henry Wallace championed a plan he called the Ever-Normal Granary. Mr. Erickson’s deal was that if I interviewed Henry Wallace and wrote a paper on the Ever-Normal Granary, I would be excused from attending classes for the remainder of the semester. I accepted the deal in two seconds (it took me that long to say “yes”). Interviewing a former vice president of the United States was a heady proposition for a high school senior. Much better than attending a totally boring class.

The Ever-Normal Granary was a simple concept. When large crop sizes of corn, wheat, or soybeans led to surplus supplies and consequent downward pressures on prices, the government would intervene and purchase sufficient quantities of the crop to stabilize prices. The government would store the purchased inventories in granaries. Then, when small crop sizes led to threatened shortages and upward pressures on prices, the government would attempt to stabilize the market by selling part or all of the crop being held in the granaries. The government’s actions to stabilize the agricultural markets theoretically would be good for both the farmer and the consumer. It was a win-win situation.

I had two interviews with Henry Wallace. Both went well, and I started to write the requisite paper. Mr. Erickson believed that the Ever-Normal Granary was an excellent concept and, of course, Henry Wallace was in love with it. I thought about the practicality of the Ever-Normal Granary and, with a sly sense of pleasure, arrived at a differing conclusion. My conclusion was that, if the government stabilized prices at a relatively high level in a year that farmers produced excess supplies of a crop, the farmers would have economic incentives to continue planting large quantities of the crop. Thus, except in rare times of poor weather, farmers would continually produce excess supplies that the government would have to purchase. Eventually, the granaries would be filled to capacity. And then what? Furthermore, if the government stabilized U.S. prices at artificially high levels, what would prevent importers from flooding the market with crops purchased at lower prices from other countries that also were experiencing surplus crops? The concept of the Ever-Normal Granary sounded good on paper, but I concluded that it simply would not work in practice. Mr. Erickson, of course, was not happy with my conclusion, and he made me promise that I would not share it with Henry A. Wallace. So I was a 17-year-old contrarian to a former vice president of the United States—and to my teacher to boot. But I did receive an A+ as my final grade in American history, and I scored 97 on the final exam, even though I was absent from class for a large percentage of the semester.

I strongly believe that my willingness and ability to be a contrarian is part of my DNA.

2. MOTIVATION TO SUCCEED FINANCIALLY

At one time, there was considerable wealth in both my parents’ families. But unfortunately or fortunately for my brother and me, most of the wealth was lost over the years.

My father’s great-grandfather, Michael Sampter, became prosperous as the founder of M. Sampter & Sons, one of the first “ready-made” clothing companies. My grandmother, Elvie Grace Sampter Wachenheim, grew up in a Manhattan mansion with governesses and tutors. She vacationed with her parents and sister in Europe and spent summers at a family-owned lakefront estate in the Adirondacks, where an Indian guide from the Abenaki tribe led the Sampter girls on fishing, canoeing, and mountain climbing trips. However, by the time my grandmother was in her mid-teens, M. Sampter & Sons no longer was profitable¹ and much of the family fortune was lost.

In 1906, Elvie Sampter married Edgar Wachenheim, who at the time was a successful investment banker at Speyer & Co. Thus, my father, Edgar Jr., also grew up in a household of some wealth. However, the Great Depression changed the fortunes of the Wachenheim family. My grandfather shared in the profits and losses of Speyer & Co. By the mid-1930s, the profits had become losses, and my grandfather decided to stem his losses by retiring. While the senior Wachenheims remained wealthy by the standards of the 1930s, because of Speyer’s losses in the early 1930s and because my grandfather retired at a relatively early age, he never became wealthy by today’s standards.

On my mother’s side of the family, my great-grandfather, Samuel “Boss” Davis, founded a cigar company that, by the early 1900s, had become, according to one of Boss’s obituaries, “one of the best known and most prosperous cigar manufacturing establishments in the country.” When Boss developed diabetes, he sold Samuel I. Davis & Co. to the American Tobacco Company for $1 million, then a large sum. Upon Boss’s death in 1918 (diabetes usually was fatal before insulin was purified in the early 1920s), my great grandmother, Elizabeth “Biggie” Abohbot Davis, inherited the $1 million plus substantial other assets. Biggie largely invested her fortune in mortgages and fixed-income bonds and, for the next 36 years, spent a meaningful percentage of her fortune on luxuries, including the upkeep of a large apartment that overlooked New York City’s Central Park. When I was a small child, I visited the apartment frequently. To this day, I have memories of dozens of large potted plants filling the spacious foyer and spilling over into adjoining rooms. To enter the large living room, one walked through a forest. A servant spent a large percentage of each day caring for the plants. Biggie’s lavish lifestyle was unfortunate (pardon the pun) for the wealth of future generations. Upon Biggie’s death in 1954, inheritance taxes were paid on what remained of her assets and the then residual was divided between her three daughters, with one-third going to my grandmother, Leonora “Lennie” Davis Lewis. Sadly, Lennie’s husband contracted multiple sclerosis at a young age and could not work. Lennie had a sufficient income to live comfortably and to send my mother to private schools, but the Davis fortune largely was lost to poor fixed-income investment strategies, lavish spending, high taxes, and disease.

When I was growing up in the 1940s and 1950s, my parents’ income consisted of my father’s modest salary and some dividend and interest income from family trusts. My parents could afford to live in a nice neighborhood in New Rochelle, New York, and could afford some luxuries, but I was aware that they lived on a tight budget. They definitely were not close to being wealthy. I also was aware that there had been considerable wealth in the family and that the wealth had been lost. I am convinced that this knowledge motivated me to work hard in life to achieve financial success. Would have I worked as hard if I had grown up in a mansion serviced by servants? Probably not, and my observations of families that are wealthy support this conclusion.

I strongly wish to add a paragraph in this book about values. My parents and grandparents were adherents of the ethics and values taught by the Ethical Culture Society, which is a quasi-religion that teaches morality and ethics. My mother attended the Ethical Culture–Fieldston school system from kindergarten through 12th grade. Certain values were ingrained in the character and conduct of my parents and grandparents—and, in turn, in my brother and me. We were taught that money should be used as an opportunity for achievement, not for vainglory. We were taught that one should care greatly about the welfare of other people and that one should not spend lavishly on oneself. With these values in mind, the present conspicuous consumption of many ultra-successful newly rich investment professionals makes me sick. Enough said.

3. EDUCATION

I was lucky enough to be continually stretched intellectually at rigorous schools and at demanding corporations. After two undergraduate years at MIT, I transferred to Williams College after deciding not to pursue a career in science. After Williams, at the suggestion of Harvard Business School, I accepted a job at IBM, where I was forced to quickly learn a sufficient amount about accounting and business to participate in selling and installing large computer systems. I then attended Harvard Business School, where I was exposed to three business cases per day, six days per week, for two school years. Upon graduating from Harvard, I worked (too) long hours as a securities analyst at Goldman Sachs. After three years at Goldman, I accepted a job at Central National–Gottesman Corporation (CN-G), which is owned by my wife’s family. CN-G is a worldwide marketer and distributor of almost every grade of paper and pulp. In the 1920s, CN-G started investing some of its excess cash flows in the stock market—and by the 1950s the company had formed an Investment Management Division headed by Arthur Ross. Mr. Ross, as he liked to be called because he was a most formal man of the very old school, was a particularly successful investor and a particularly demanding boss. Soon after I joined CN-G, Mr. Ross called me into his office: “Ed, you are not going to learn much sitting at your desk. You need to be on the boards of companies. You need to be on the boards of companies” (whenever Mr. Ross wished to emphasize a point, he repeated it at least twice, and sometimes thrice). Well, I was about 30 years old, had a crew cut, and looked about 21. No company of any size and quality would want a relatively inexperienced 30-year-old on its board. Groucho Marx once said, “I don’t want to belong to any club that would accept me as a member,” and I should have adopted the position that I would not want to be a member of any corporate board that would accept me as a director.

After much cajoling, three companies invited me to join their boards. Each was small. Each was weak. Each had serious problems. One was a small, publicly owned grocery chain located in Portland, Oregon. At the start of my first board meeting, I was given a warm welcome by the chairman and other directors. Then, as the meeting progressed, I quickly reached the conclusion that the company’s earnings outlook was terrible, that the company’s internal accounting controls were almost completely nonexistent, that the board therefore needed to meet monthly rather than quarterly, that I did not have the time to fly to Oregon for monthly meetings, and consequently that I should resign from the board posthaste—which I did. Alas, I was a director of the company for a grand total of one hour and forty-eight minutes. Maybe Groucho Marx was right.

I then went on the board of a lead smelting company but resigned after a few years because my Ethical Culture background was at odds with management’s continual delays installing proper equipment to eliminate the emissions of poisonous lead dust from the smelters.

Finally, I went on the board of American Saint-Gobain, a manufacturer of glass that just had completed the construction of a brand new plate glass plant that immediately was obsoleted by the new and materially more efficient Pilkington float method of producing glass. American Saint-Gobain’s new plate glass plant was a spanking new watermill at a time when American manufacturers were beginning to tear down watermills in favor of steam engines. American Saint-Gobain then had to struggle to convert its new plant to Pilkington’s technology without going broke first.

Thus, my experiences as a 30-year-old director of three marginal companies were trials by fire. However, Mr. Ross was correct. Being a director of marginal or submarginal publicly owned companies was a valuable educational experience that did make me a better investor. So thank you, Mr. Ross.

When Arthur Ross retired in 1979, I assumed responsibility for the Investment Management Division of CN-G and became a director of the parent company, which was run by my brother-in-law. Eight years later, my brother-in-law and I decided that paper and investments were two disparate businesses that best should be separated from each other. I then became the owner of the investment operations, which I renamed Greenhaven Associates. For the next three years, I solely managed money for the Gottesman and Wachenheim families, but eventually decided to manage money for some non–family members and for some not-for-profits as well.

4. ANALYTICAL SKILLS

All my life, I struggled with verbal skills, but had the innate ability to cut through complex math, science, and logic problems. I believe that this skill is part of my DNA and has been reinforced by my continuing rigorous education.

There is one part of my science background that I am not proud of, however. When in high school, I was asked to compete in the Westinghouse Science Talent Search. Competitors had to sit for an exam and then submit an original research project. As a 17-year old member of the New Rochelle High School varsity hockey team, my immature and unrealistic ambition was to become an NHL hockey star, not a scientist. Almost every afternoon, when the ponds were sufficiently frozen, I would drive to a nearby pond for a game of shinny hockey, often cutting a class or two or three or four in the process. I was a hockey player, not a budding scientist. I had neither the time nor the interest to spend afternoons in an indoor lab performing experiments for some dumb and stupid research project. Westinghouse definitely was a near-bottom priority. But I found a solution to having my cake and eating it too. I adopted the convenient thesis that inhalation of ozone would improve an athlete’s performance. My brother and I had an old transformer from our Lionel electric toy train set. By crossing a wire attached to one of the transformer’s two terminals to a wire attached to the other terminal, I could create sparks. I had read that sparks convert some of the oxygen in the air into ozone. I borrowed 10 test tubes and 10 corks from my school’s chemistry lab. One day, I rushed home from school and crossed the transformer wires inside each of the test tubes, quickly corking each after removing the wires. I then grabbed my skates and a stopwatch. Reaching Larchmont Reservoir, I laced my skates and then placed two sticks on the ice about 200 yards apart. I gave the stopwatch to a friend and instructed him (my trusty research assistant) to start the watch when I said “go” and stop the watch when I said “stop.” I then uncorked two of the test tubes, placing the open end of each to each of my nostrils. Luckily, nobody, except my friend, saw me do this. Otherwise, they would have sent me to a lunatic asylum or worse. I inhaled the ozone from the two test tubes, skated to the starting stick, said “go,” raced as fast as I could to the finishing stick, and, upon reaching it, said “stop.” I repeated this procedure four more times. Then, without the benefit of either the ozone or much rest, I raced five more times between the two sticks. That was my control data. Voila, I had skated faster after inhaling the ozone than during the subsequent five control skates. I had proved beyond my doubt (but nobody else’s) that ozone is a performance enhancer. Thoughts of glamour ran though my head. Maybe I would win first place in the Westinghouse. Maybe I would be the youngest person ever to win the Nobel Prize in Chemistry. I could see the headlines in the New York Times: “Seventeen-year-old Edgar Wachenheim III, star rookie center for the New York Rangers, was unanimously awarded the 1955 Nobel Prize in Chemistry for his pioneering work on the use of ozone to enhance athletic performance.”

Of course, in reality, my research project probably was the worst ever performed in the entire long history of the Westinghouse Science Talent Search, and my chemistry teacher summarily rejected it long before it was to be submitted to Westinghouse. “Wachenheim,” the teacher criticized, “did it ever occur to you that exhaustion might have played a role in your slower times during the last five skates? Wachenheim,” the teacher continued, “did it ever occur to you that the small amount of electricity released by the transformer is totally insufficient to convert any oxygen into ozone? Thunderstorms, yes. Toy Lionel transformers, no. Wachenheim, I hope you play hockey better than you perform scientific experiments.” And to complete the return to reality, not only did I fail to earn any prize in the Westinghouse, but I was not even elected to the 1955 Westchester County High School All-Star Hockey Team. So much for the Nobel Prize. So much for playing in the NHL. Dreams lost to reality. But it is far better for adolescents to dwell on dreams of future glory than to go through youth without ambitions—without passions.

5. CONFIDENCE

Because I was a strong student of math and science (in spite of the Westinghouse folly) who continually tested high for both achievement and aptitude, I gradually developed confidence in my innate analytical skills. This confidence was reinforced at Harvard Business School when, after my first year of study, I was elected a Baker Scholar. First-year Baker Scholars are those students whose grade average is among the top 2 percent in their class.

By the time I became responsible for managing portfolios of stocks, I was confident that I had the skill sets to become a successful investor. Importantly, this confidence gives me the ability to be a contrarian and to make decisions that are counter to the prevailing wisdom.

I am aware, however, that investment success can breed overconfidence and a resulting unrealistically low assessment of risk. Luckily, I have made a sufficient number of mistakes in my life that there is little danger that I will become overconfident. In my opinion, a good investor needs to strike the right balance between confidence and humility.

6. PRAGMATIC GOALS AND AMBITION

Lucius Annaeus Seneca, the Roman philosopher and statesman, once said: “If one does not know to which port one is sailing, no wind is favorable.” I agree that investors should develop sensible and realistic goals. My goals have been to achieve average annual returns of 15 to 20 percent over the longer term without taking large risks of permanent loss.

I wish to emphasize the words longer term. Most hedge funds, mutual funds, and other investors are under pressure to please their clients by achieving favorable results in the short term. Many of these investors will shun (or even sell) a stock that has an uncertain short-term potential, even if the shares appear to be an excellent investment for the longer term. We are disinterested in short-term results and thus have the luxury of focusing our research and purchases on the much less competitive universe of stocks that have less promise of near-term appreciation, but that have exciting longer-term potential. This gives us a competitive edge.

I note that achieving relatively low volatility is not a goal. However, because I tend to purchase undervalued securities of high-quality companies with strong balance sheets, over the years our portfolios have experienced less volatility than the stock market has. The lower volatility has been the outcome, not the objective.

7. CONTROL OF EMOTIONS

Over the years, I have learned to control my emotions, especially when the prices of some or all of our stocks are falling sharply. I believe that part of the control is due to experience (I have been through so many bear markets that I am used to them) and part to my DNA. I simply find that, during times of stress, I am able to keep a relatively level head and to continue to think and act rationally.

8. FUN

I enjoy researching companies, I enjoy the thrills of generating creative ideas, and I enjoy making money. It is fun to come to the office most mornings. I am convinced that all this makes me a better investor.

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The following timeline of my life might be helpful in understanding my investment career:

• 1937: Born in New York City.
• 1955: Graduated from high school and enrolled at MIT.
• 1957: Transferred to Williams College.
• 1959: Graduated from Williams College and went to work for IBM.
• 1962: Married Sue Ann Wallach; the first of our four children was born a year later.
• 1964: Enrolled at Harvard Business School.
• 1966: Graduated from Harvard and started working for Goldman Sachs.
• 1969: Accepted a job offer at Central National–Gottesman, Inc. (CN-G), a paper and investment management company owned by my wife’s family (my wife’s mother was a Gottesman).
• 1979: Became chief investment officer at CN-G.
• 1987: Spun off the investment management operations of CN-G into a new company, Greenhaven Associates, which I own. Greenhaven manages portfolios of common stocks for my family, my wife’s family, and a limited number of non–family members.