Greenhaven Ed Wachenheim Goldman Sachs

Ice Water in His Veins

There are a number of reasons Greenhaven Associates' Ed Wachenheim [VII, April 29, 2016] has had a uniquely successful investing career spanning some 40 years, but his own description of his emotional makeup speaks volumes: "I honestly don't feel any of the emotional ups and downs from the market's day-to-day activity. I just don't worry about short-term volatility." 


This beneficial lack of empathy for the market's mood swings isn't just tested when something goes against him, of course. Which got us wondering how Wachenheim was processing the market's election-related euphoria for Goldman Sachs, which he recommended in VII last April when its rather moribund shares were trading at just over $164. Considered a prime beneficiary of a more relaxed regulatory regime and of rising interest rates, the blue-chip investment bank's stock, now $238, is up a cool 50% over the past 12 weeks, adding more than $30 billion to its market cap. 


It would not be uncommon for such a swift rise, however welcome, to somewhat unsettle the typical value investor. We tend to be a worrisome sort, so the "gut" response in such a situation is often to want to at least take some profits and lock in gains before the market winds shift yet again. We feel the pressure of that in our stomachs, which the best of us balance with our heads, assessing unemotionally the investment prospects for the stock at the changed price. 


True to his nature, in response to our questions about how he's handled his Goldman stake Wachenheim sent us a thoughtful and analytical note on the subject, detailing his original thesis, what has transpired so far in the business and with the stock, and how he has responded. His basic contention is that Goldman – "the gold standard of its industry" – has significant latent earnings power in its market-making operations, which have been unusually unproductive in recent years but should benefit both from more normal market conditions and from the pullback of competitors from the business. If the bank's market-making operations get back to even 10% returns on capital, he expects the company overall to earn a 15% return on its tangible book value, translating into estimated earnings power of close to $28 per share in 2018. At what he considers a conservative multiple range of 12.5x to 13.5x, that would translate by mid-2018 into a share price for Goldman of $350 to $380. 


His summary conclusion: "When we purchase a security, we normally hold it for several years as our thesis develops. This has been the case with Goldman. While the shares appreciated sharply after the election of Donald Trump, the price of the shares remains far below our 2018 goal. Except to satisfy the needs of clients who added or withdrew funds from their accounts, we have not purchased or sold any Goldman shares – and do not intend to until we determine if our thesis on the future earnings power of the company proves true." 


Would that we all had such ice water in our veins. A worthy aspiration for the new year! Here's wishing you all a happy, healthy and prosperous 2017.