WALTER & EDWIN SCHLOSS ASSOCIATES, LP’S WALTER & EDWIN SCHLOSS – PART I

Found via ValueInvestingWorld

From the Outstanding Investor Digest March 6, 1989 edition

Walter Schloss attended Ben Graham‘s finance course before World War II and went to work for Graham-Newman in 1946. Leaving to establish Walter J. Schloss Associates in 1955, he was joined by son, Edwin, in 1973.

As one of Warren Buffett‘s “Super-Investors of Graham and Doddsville” in his Hermes article of the same name, the Schlosses have run circles around the indexes. For the 33 years ended 12/31/88, Walter J. Schloss Associates earned a compound annual return of 21.6% per year on equity capital vs. 9.8% per year for the S&P 500 during the same period.

Here are Walter & Edwin Schloss Associates’ annual return figures along with those of the S&P 500 for each of the 33 years ended 12/31/88. All performance figures were provided by Walter & Edwin Schloss Associates,

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With a long waiting list of individuals wishing to become limited partners, the Schlosses have the luxury of picking and choosing among them. Highly unusual within business generally and the investment field in particular, the Schlosses give preference to clients with a demonstrable need for their services.

Somewhat publicity-shy, the Schlosses consented to an OlD interview in an uncharacteristic lapse of judgement following prolonged begging by an unidentified editor party.

The following excerpts were selected from a series of highly enjoyable conversations with the Schlosses at their office in Manhattan. The first part of a two-part interview, we hope you enjoy it as much as we did.

OID: Thanks for agreeing to an OID interview. Where should we begin?

Walter Schloss: In The Merchant Bankers, there’s a chapter I find particularly interesting. Mr. Warburg, who just recently passed away, lived in pre-Hitler Germany with his family. The Oppenheimers, the Mendelsohns and the Warburgs had been living there for many years.

When Hitler came to power, Warburg became very concerned. He arranged to meet with one of the top people in Hitler’s government. Afterwards, he told his wife, “We’ve got to get out.”

And they did. In 1934, they took their two children and they went to London giving up most of their wealth in the process. They were criticized by all of their friends. “Why are you leaving Germany?”

He gave up a lot to get out. But he saw what was coming. Most of the other people who were wealthy and had been living there for years just ignored it.

But Warburg was a non-conformist.

Edwin Schloss: Thankfully for him and his family, he was a contrarian.Walter Schloss: Starting nearly from scratch, he didn’t do very well at first.

But then, after the war, he backed Reynolds in an aluminum deal that worked out very well and put him on the map. Anyway, he became very successful.

He made the point that it was good for families to lose their money every third generation. Otherwise they got too soft.

OID: Good thing for you, Edwin, that you’re generation number two. Anyway, it sounds like a page straight out of Warren Buffett‘s book.

We understand that Peter Kiewit, whom Buffett often speaks of admiringly, had a father who felt the same way as Buffett does about the evils of inherited wealth.

As we recall, much to Kiewit’s surprise some years after his father’s death he received a delayed out-of-the-blue inheritance of a few million dollars. While it was peanuts compared to the estate his father had built and relative to the success he himself achieved, he said it made him feel like his father was extending his approval from the grave.

Walter Schloss: I’ve noticed that children of very successful fathers quite often don’t get along with their fathers and leave. But in many cases where the sons and the fathers do get along, the sons do much better than the fathers.

Apparently, they use the springboard of the first generation. The father has a little store on the Lower East Side and through the son’s efforts, it becomes Macy’s.

Some of it has to do with the power of compound interest. If you start with a dollar and you double it every so many years, it builds up. In the first twenty years it doesn’t look like much but eventually it does.

OID: Compound interest – the eighth wonder of the world.

Walter Schloss: Government Employees’ Insurance was a case in point. It started in 1936. Graham-Newman bought its interest in 1948 as I recall. But it took a long time to build up.

When Graham-Newman bought it, GEICO was ready to take off but they didn’t know it. Nobody recognized that their gradual growth was about to accelerate. It was viewed as just a nice little company making money.

After they bought it, of course, it suddenly took off and their timing turned out to be brilliant.

OID: Better rich than right, I believe the saying goes.

As I mentioned to you in a prior conversation, Templeton‘s worst ten years investment-wise were his first ten years. And you told me that the same was true for you.

Walter Schloss: Yes, that’s right. I think the first ten years you get kind of acquainted with what you’re doing.

OID: So we shouldn’t feel too bad about not knowing what we’re doing in our fourth year at OID?

Walter Schloss: Hope springs eternal….

But I honestly don’t see how you’re going to be able to use this material – unless it’s possibly to keep it in the file to blackmail me.

Full PDF here Walter Schloss – OID Interview (1)

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