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Walter Schloss On His Early Days And How He Met Ben Graham

Legendary value investor Walter schloss spoke at the Ivey School of Business on 12th February, 2008. He discussed a variety of topics related to investing spanning his vast career starting with his early days with Ben Graham. Readers can find a transcript of the 60 minute or so talk below. This is the full transcript this might contain errors and should not be relayed upon – furthermore this is for information purposes only.

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Walter Schloss Favorite Books

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Books mentioned in the talk all favorably

I just want to say a couple of things, I started the fund that I managed in 1955 when Benjamin Graham said he was going to retire and that I liked them very much and one of the people who rested with them said, Walter if you start a fund I will put money in it so, I said, it was a good idea and we got nineteen partners and they most of them put five thousand dollars in and we started off with 19 partners on $100,000. I didn't want to say I never worked with Goldman Sachs, my job was basically with Loeb family who was kind of related to the Lehman family as opposed but, anyway I just wanted you to know that, so, I started1955 and I stayed in the field until 2003 and nice 2003 nicest 2001. I think I'm not quite sure how and I what I know is that my son turned to me one day and said dad, I can't find any cheap stocks and I said in my age let's go out of business and I just know that the market was going to bubble because of the high tech stocks were acting very crazily and when these things happen you find that you have to work about three years to catch up to other things that went wrong and the previous three years and life's too short for that and I enjoy investing and I would make one other comment, actually I was written up by Forbes magazine and this came out I think of the issue is February 11th and you might find that interesting. And I'm ready to answer any questions you may have even if I don't answer them right you tell me.

You just talk about the relationship with Ben Graham and how it started your relationship with Ben Graham?

Well what happened was I went to work in nineteen my father lost his job and there was no money the family and so I got a job as a runner and a column loading company which came Loeb Rhodes later on was the big brokerage firm but it was small when I went there and then they put me into the cashiers Department. And the year later I went I thought I only get a little more money I was making $15 aweek and I thought I could get a little more, so, I asked about it if I could get into the security analysis department, which is as they call it this tickle department in those days and I spoke to the partner who had got me the job as a runner and I said could I become a security analyst instead it is just and he said, though I think maybe I had no money and I couldn't bring in brokerage fees and in those days all commissions were fixed so that the wealthy people would send their family and then they would get fixed commissions now ofcourse it's about competitive field, so, anyway, he said, no you can't do that but, he said there's a book called Security Analysis by Benjamin Graham and if you read that book you won't need anything else, so I got all the security analysis that it was a very good book and I found that Benjamin Graham who had written the book was a customer of Loeb’s and I could see the stocks they owned and it seems that load would send me to it called the New York Stock Exchange Institute, they were trying to teach the employees on a small basis. How the stock exchange worked and they also Benjamin Graham taught a course in statistical analysis and I took two in this course of security analysis that a great security analysis and I told Graham was wonderful it's not like Warren Buffettever you see Graham you understand the way he thinks and it works and incidentally after I worked for Graham for a number of years they omit his office but he gets a phone call from Israel say that government employees insurance which she had brought to a million he bought that day for $1,700,000 he turned the business and Walter if this doesn't work we can always liquidate it and get our money back. That shows what sometimes happens when you make a good purchase you don't always realize how great it's going to be, so I'm open to questions if you have as I don't know if I answer anything so far but, ask me and if I don't know I'll tell you.

Can you just start a little bit about, how do you choose stocks? How, what process do you follow to choose stocks?

Well, I like to buy stocks that are hitting new lows. I like to look at the stocks, I incidentally find value line very helpful because I don't have a computer and it's easy to see the statistics then when I then the statistics, I can sort of make a judgment about the company I don't really talk to the management. Back in the days when I started back, I was in World War II, I enlisted the day after Pearl Harbor and I was sent overseas to her and I'm just telling you this little background in life you sometimes are affected by what happens. We wanted to keep washer in World War II, in the World War 1, they collapsed and the Germans beat them and we were afraid that in World War II, that this would happen because of Russians were being beaten by the Germans and they decided they we couldn't forgive them equipment through the Murmansk and the North Sea of Russia. So, that we decided to open a second front as it were by setting up we had a truck assembly plant there, we were the first troops there we had ordnance people who put the trucks together, you loaded them up with supplies, you drove it to the northern part of Iran and then turned it over the everything in the truck for the Russians. The Battle of Stalingrad was going on and that was probably the place where the Germans took a big beating because they never got any further and by doing this we kicked the Germans from going into back into France and as you remember a couple of years later, we invaded France and partly because the Germans wanted they'd be able to be there. So, I felt that it was a veryimportant thing we were doing but because we weren't being killed nobody know anything about the Persian Gulf command that you might find it an interesting thing so when I came back with him about a year and a half and then I applied to go to officers Candidate School so they sent me back toUnited States in the United States, the Signal Corps was really the place where you learned about communications and I went in and that's because I had enlisted, I, they say they sent me there and I got training and I was paid back the 15th of December remember Pearl Harbor was only December 7th and on January 31st, I was on my way to Washington did you see it, I've not sure if you're aware of it but, before Pearl Harbor ,the Americans were trading in the south because it was warmer there and so that when we where the war broke out we didn't have any communications to speak of and they were short cold clerks. So I became a cold clerk in Washington DC back in 1942 and I worked there for about six months and then the armyfounded a company called the 8:30 third signal service company with a bunch of cracker jack ham operators, people who really do something about the communications and since I was there a sergeant and I was kind of in charge of some of this stuff and I'monly telling this so you get a little background because after I've became an officer and they sent me that I didn't, I the bed glad knew about me because I be sending a post card from time to time where I was and he won't be, after World War II and I'm still in the army at the Pentagon in Washington and the y, he asked me, when I was going to get out? I said well I can get out pretty soon because I've been in for four years and he said well he is losing a security analyst who is going to work with his father would I be a security analyst and I said yes I was very thrilled about it and I went to work for him and beginning of 1946 and in 1955 when Graham decided to retire that's when I went into the business myself.

You know what process did you follow to minimize any mistakes, and all mistakes are unavoidable evaluations and security collection I guess. What steps do you follow to minimize any mistakes?

I don't like to lose money, and therefore I try to buy stocks which I think it's somewhat protected on the downside and then the upsides well it takes care of itself so the main thing I think is to look for companies which don't have a lot of debts, and I don'tlike the idea of people, well I'll put it this way, I'd like to get their valuable reports, and you can see a little bit about, from the proxy statements and the annual report how much stock the directors own? Who owns fair amount of stock and also the history of the company and I thought the idea of buying a company with a large amount of debt even though I it could work out well because of the leverage I don't like it, so I look for companies in the selling at new lows well when you buy a stock at a new low is you have problems, so I don't like debts. Debt get people a lot of trouble as you know if you read about MBIA and these other companies that have lent money and then find out they're in really in trouble. So, I like buying companies which are usually love a simple capital they don't have a lot of debts, they have that management owns a fair amount of stock, they are, they have a history about them too, you look at it you look at a company you see how long has it been in business and what kind of business are they in? Now, I would never very good at judging people's character as such if you go to a talk to a management they may be charming people, they may be very nice but, you don't know anything about them. So I found it really was better, for me to look at the numbers and to try to look at the people themselves and it shows you particularly if they don't have a lot of debt. If they don't have a lot of debts usually that's fairly safe that once in awhile a company after you own it, decides they're going to buy another company and they issue a lot of debts but, if you look at the background of a company and see the history and that's where value line is somewhat helpful because they usually have 10 or15 year back, so you can see where the company was, where it is today. And I don't know if I answer your questions but the idea is, I don't like to lose money.

Now when the stock was down, do you automatically buy more or you reconsider the purchase, so when you buy a stock, and the price goes down, you keep buying?

The rest goes down. I like you I mean if you like it to at ten you're going to like it more at five. Well what happens is, a lot of times you buy a stock and if it's having a problem which is the reason stock as the press it can go lower and that what you want to do is to be satisfied, that buying it at a lower price is a good idea so you look to see how much debt, they have, you look at the past history of the company, you see it there if the stock may have going from12 to 100 and it goes down from 100 to70s a boils down to 170 that's great but, you forget that a few years before they are selling to ten so, what you're really trying to do when you invest is to protect your capital. Now, different people have ways of doing that, sometimes they have they think they have a better information than you have which they may have but, I just don't like losing money and therefore, I try to protect it and the way I do that is if I like the company and I think it's a good little company, I’ll buy more on the way down and if you are a stockbroker, most stockbrokers do not like to recommend stocks that are going down, because psychologically that customers doesn't like and if they paid some despite the stock instead $30 a share and then it goes down to 25, they don't call that customer up and say hey you ought to buy more at 25 and then it goes down to 20. So, quite often the broker will not tell you to buy more stock although it's psychologically is good but for many people who are not in the field, they get very nervous it goes for 30 to20 a lot the third of your money. So, if it goes back up to the baby 30 again they may call the customers say the stocks went down a lot but, it's back where it was so baby you should sell it. I don't really like the idea of selling stock pitch just goes back to where I pay for it quite often, stocks all on the way down and that's why I buy them they're having problems but then I like to have I really like to try to get 50 percent profit if I can. The necklace all of that is you buy a stock at 30, and then it goes up to 50, I probably sell it if it's long-term. That's not going to go to $200 a share I've seen that happen. So, you have to be a little, willing to make mistakes but, I don't really like losing money, and that's one of the reasons that I tend not to like that.

So, the stuff goes down how can you tell it's not a value trap? How do you, how you tell that it's not may not recover and they never recover? Maybe something things that will make a start I guess the long-term losing proposition, so how can you protect I guess, how can you tell if it's a value trap or normal I guess surprise the client has come back again?

I tend to like stocks at the selling below book value. I also like stocks at the selling added and with very little debs. Debts get a lot of people in trouble all you have to see is these ATM machines for people rather than a huge amount of debt they can’t pay it, they go bankrupt. It's just that I've been very concerned about borrowing money and I think that's one of the things that people forget, that creates a lot of problems, and therefore you try to avoid that as much as you can and if you buy a company and you look at the balance sheet you and the other thing you should do besides looking with value line is getting another manual report, read the report see what the balance sheet shows see where that what is the history of the company and you might find that it's they're having problems and the reason they are having problems are built what they say they have a product that is not very good which case you probably wouldn't own it. But I do find that if you get a stock that's selling below considerably below book value and it has a good history over the last 20 years. It gives you a signal out of confidence in it particularly if the debt is more and if the management itself owns a fair amount.

But what about the margin of safety? How it came about, how it is evolved over time, what margin of safety Ben Graham was using, and whether you still use what he was using or you have changed I guess you've used and if you have adapted to the times?

I think the margin of safety is if your book value is considerably higher than the market price, you get a margin of safety there that guarantee that you'll be right but, I just bees that you've got something that if it gets low enough somebody they want to buy the company so, if the management itself has an interest in making a company of success so, it isn't if you're fighting the management the management wants to be a success too so, you're in the same field but for somereason they wanted some trouble, their product maybe it's one of the unfortunate things when you get a state like the as best as it get, turned out as best as is bad and then they get sued and their companies get into a lot of trouble so, you try not to get into a company where, it has, shall we say you have the problems in and that may be true of the drug industry to where the people are being sued because they have a product which doesn't work.

My question is, have you ever made a mistake because of your emotions? Ben Graham obviously talks a lot about controlling emotions when investing. I'm wondering if at any point in the past, you've made a mistake because of a poor emotional decision. And if so, maybe you could just share that with us and if not maybe you could just explain to us, you know how you control your emotions when investing and you know, what's the best way for somebody to do that.

Well number one, I try to and Graham I think bait the point too. I try not to get emotional about stocks. I don't get emotional, one of the reasons I don't really talk to management is management's have a way of presenting the facts way they want you to see them and I'm not a terribly good judge of people. Warren Buffett really is a walk of a man in that respect he's very good about deciding who is good and who is not, I like the that's why he likes me but I just think that what you try to do is to keep your emotions out of investing and you try to look at the thing logically not the way you want to have it. I think the thing is becoming electric cause it'd be a great idea but they don't seem to have made them in such a way that Jews don't need gasoline. Someday somebody is going to resent it and then it's going to be a big hit but I don't feel comfortable buying, say an automobile company because at some future time somebody's going to invent something that'll make it better. I'd rather buy these things the way they are rather than the way you think they may be at a later date.

So, basically instead of being you know making speculative decisions you like to you know invest in the sort of known in the sort of companies that are known that are proven that of a proven track record and sort of that.

I think that's true. I try not to be involved emotionally. Warren Buffett told me an interesting story a while back, and he tried to come from control his emotions, and he did it by testing things. The American Broadcasting Company which is still around but is ABC now it was anyhow, he told a broker to stop the selling is thirty dollars this year. It’s not exactly that, but it's about that, and one said to a broker, I'd like to buy a hundred thousand shares but I want to pay 29 and if I can't buy the stock at twenty-nine next day it's going to be 28. So, sure enough, the next day the guy calls up one took me the story and he says okay one get my hundred thousand change at 29 now today I'm buying it at 28. I probably would have done this I don't think I had as much control of my emotions as Warren did. Warren said, he brought that stock at $26 a share now that's controlling your emotions about how important it is and what price you're willing to pay. I do find that putting in stock to buy at a price and then that's it and don't have to watch the tickets go let's down a pointer to half a point. You have a price you want it out and it may even pay you to have one of the places where you put a little bit at a fixed price and they can't produce it so you may be going away and you'd like to buy the stock but you get a lot to follow it. So, you're given this Gretl canceled which I don't know if you know with that term being CTC but you give a broker you want to buy a thousand shares of a good stock tour canceled period. Now again if they pay the broke the company pays a dividend, they automatically reduce the price by the amount of the dividend unless you tell the broker don't do that, do not reduce the price of its dividend display. I don't know if that helps you. Yes that definitely does thank you very much.

I'd like to know would you rather buy outstanding companies at fair prices or fair companies at outstanding prices.

That's a good question and I don't think I'd like to buy good companies at what I think they're worth. I really like I have no black problem buying a good company but I wanted it in the discount. I'm looking for to make a profit and I dont want to lose money and if you can at times once in a while people get very nervous and you can buy a good company at a fair price, I don't really like I can't generalize because each company is different but if you want to make a profit, you really want to buy a stock at a price that you think it'll go up to a 50%. Now, it may take several years for that stock to go up and then you just have to be patient now one day this goes back to the 1951 you want around and so forth but the fellow came to me and he said, you know they the company that live interested in that I can't remember the name of it, it was that a company that and you analyzed other companies and he said this particular company said that they said there's a method therewhere they can a copying machines and at the Battelle Institute in New York it's in New York State has said this company has great possibilities start by selling if it was selling at about 20 and his head nips go through the depression it was listed on the exchange was a small company and I went into Mr. Graham and Isaid you know this company's got a new product you know a copying machine and he's well you know Walter we don't really buy stock like that. Well of course it was Xerox did read up or great deal and I only consolation I had was that it went from 20 we resorted going to 50 so it would have been out of it and the fact that it went up to a thousand and two thousand they have two splits. I wouldn't have bought it I bought it because historically they seemed to be an interesting stock but it but he was right that it really you didn't know that this particular product was going to be such a success. The only thing you could say with the Patel Institute said
that it was good. So, what you try to do, I invest is not to lose money and to do that usually want to buy stock set up having problems and most companies where they have problems get some help it doesn't get all the directors up set, the president's upset why is our company doing badly and that's one reason I like companies which have no debt because then you don't have the worry about paying it off and then you want to look and see what it quite often the stock market acts emotionally. People act emotionally. The bad news you know bad news is a causes trouble so what you're trying to do is you try not to get involved with the emotions of buying and selling stocks and if you're managing money for other people you've got a responsibility and therefore you don't want to so what we did we never told of limited practice because we were partnership we never told him what we owned because we felt that, that would be treatable if we told the world what we own then people would try to buy the same stock and you would have competition. So, I told this to a fellow who's interested in investing with us I said you know he said what's going to stop you from going to Brazil taking our money agent I have no desire to go to Brazil but if you feel nervous about it don't invest with us you know that people have certain emotions and they wanted to not lose money and as I say we didn't tell people what we owned and one guy came and he said you know, I can't stand it not knowing what we owned it was an old man's I said, well we own some Bank were bonds of the country vania railroad. Which actually turns out very well later and he said I can't be in your partnership knowing that it makes me too obsessed so we would sue. So, if people act emotionally and if you go with their own but they know what you want and then you're going to go oh I don't like that stock then they call you in the phone and then they say well why did you own it? I don't want to hear people complaining. They were they trusted them with bond for that money and that's what a lot of the hedge funds do they don't disclose what they own.

Could you comment on now or maybe give us three key personality traits that you think are essential to being a successful value investor?

I think a personality trait I would think would be to become, that be too emotional about what you did do it intellectually. I think if you get emotionally involved in a stock it affects your judgment and Ben Graham also had that characteristic and he didn't like to talk to companies he felt that they would bake they would affect the how we felt. Different people have their different abilities if you have a kind of a logical part and you meet a guy who's running a company and you're talking to him and you like them you may feel that you can emotionally buy the stock because you feel comfortable with them and I wouldn't be good enough at it so, I would say I don't only would buy a stock and I think they think is cheap and that the people who we were a couple in Canada I think called Hollinger Mr. black was a crook and that he had a big name and wealthy man and people bought his securities and they lost a lot of money and I don't think I would have gotten involved with him because I don't think you buy a stock unless it's very cheap then you look at the man and I think it's also helpful to get the annual reports of companies. Read the annual report, see if it fits in with what you think and look at me the songs over the years and if you if you see a company that's the quest and if you did a quest because having trouble earning money people love to make money and if the company is having a problem that you know may not want to own that stock, on the other hand, it may be a problem or temporary problem is not a permanent one and I do think people act emotionally and people who advise them also don't like to have problems so they tend to stay away from these companies which maybe good buys but again you try to keep your emotions in control and you and you look at the facts you see where the judge and a different people can do things differently I don't happen to like the people who go in and they say well this stock is cheap gonna buy it liquidated and closed it off and they make themselves money. I couldn't do that, you know again you have you four different personalities and I like company to be a success and I've any stock that I sold over the years have grown up a lot after I sold them. You know somewhat I sold them and I don't say oh my god I could have made so much more money and I didn't. Forget it! Your book settlement and you go on to something else. So I think emotions of a lot to do with success.

The Forbes article written on you says you've lived through seventeen recessions and I was wondering if we're going into a recession if you feel that the next recession is any different from the previous one.

I have not tried to get involved with what gonna happened in business. I've tried to stay away from that let me I'd say your guess as good as Brian I don't know people have a recession that'll be I do think that the politicians don't like to have a
recession because it's not too good for them and they try to do things to help but, I find that I like to buy stocks on the base of what they're worth and not trying to figure out what's gonna happen in business. It saves me a lot of grief.

Do you find that a recession is a better time to buy a stock, to find a cheap stock?

You may have opportunities and buy the stock while unfeeling years if the stock is cheap I wouldn't worry too much they didn’t have debts they had a nice record but for some reason or other the public is emotional it may give you a great opportunity to buy stocks and you may take advantage of that but again I found that duck trying to guess what the market is going to do or what - or what's going to happen in the future. I think it's really better if you must buy their companies that you have a good value and then maybe you have to wait a little bit longer but it solves a lot of problems for me. Don't try to figure out what 's going to happen in that in that in this securities market or in the economic situation. Now in 1932, 1929, we had the big vendors crash but you could have seen that before you could have seen in 1926 the stock market was getting a high of in 30 so you had this big break but you wouldn't have been buying stocks in 1928 because this was the stock bunk was too high. So the fact that suddenly had collapsed you had heard a lot of people but if you if you read Ben Graham's book and you see that he's not terribly and emotional about what he what he does and when he lectured he did something I thought was very unusual he talked about stocks which are undervalued. Well he thought there was the value and he'd like to compare stocks he took Coca-Cola and Colgate Palmolive and then why because they appeared to save on the list open a financial page and then he compared Coca-Cola does now a Coca-Cola was basically a product company and Colgate Palmolive Vantage of toothbrushes and so forth and I notice they're still both of them but I thought if he used that as a good example and he compared them and so forth but I justlike to buy individual stocks I've got, that was a great way to go but I do think it said it's interesting to compare different companies and this is if you quit in the same field it mightbe interesting one of the company may be much better than the others and if you compare it to liquor companies or to companies that we're doing so much the same thing you might find one is selling at a higher price than the other you might decide you want to buy the one selling at the lower price. Remember this I don't like to lose money.

To ask you whether you feel over the recent years that the market has become more efficient and good values are harder to find because management turnsover so much more often now?

I think that's a good question that I think they wouldn't think or the efficient market in which all stock sold where they should sell out and I think that there aren't in that period that over steady period there are differences and your job as an analyst is to see why one stock is selling above another and if one of it I think I like to only companies where they're having problems in that industry and then you have an opportunity there may be good companies and some that are not so good but if there's an industry which is having a problem look at the companies in it and you may find a real good buy there. I think today because there are so many security analysts, you get a lot more competition than you used to but, I leave it I don't think value analysts are really happy about buying stocks that are going down and sometimes that's the best way to be used to do that we buy stocks on the way down and sell them on the way up. And the only problem is I think it's much more difficult to know where to sell than when to buy and they're dealing with other people's money and that gives you a responsibility and I must say I did I never associated with some of the people who did illegal things and that may have been luck but it also is that these people were interested in taking advantage of others but, if you're dealing with people and some of them you feel or a little, I would say dot a circle but you know they had some question with them don't get involved. It's so much easier you know they say if you resent then the truth would it when you don't have to remember is what's happened because you didn't do anything wrong. And I think there are people to WallStreet and I looked if want to take advantage of you. So, you try to be ethical and if you tell the truth you don't have to remember. I don't know if that's a good advice. I like it.

Mr. Schloss, we were wondering what your personal view is on diversification between industries as well as between sort of stocks and bonds what do you feel about diversifications?

That’s an interesting thing about industries. I really don't have an opinion about that I'll would say this, I'm going to stay away from the computer industry because I don't understand it I'm too old for it and I know there's a great future in it but I just don't know how to look at it so, I just stay away so I'm not involved in computer stocks that doesn't mean you're bad and if you know your computer business you may know one stock is better value than others but it's a fear that's changing constantly and I kind of like companies, I don't know Campbell Soup for example I don't say you should buy Campbell Soup I don’t even know who followed it, I'm just saying it's a staple has been around a long time and I think I'm more comfortable with that kind of a company then going into new industries but, again it depends on the person I don't know what was the other question.

Between stocks and bonds are you would you be a hundred percent stock or do you sort of mix between the two?

Well there is a problem that they had over the years they tend to be inflationary factor in there that the reason for it is that people want things government wants things and they get a debt and then take this a certain amount of inflation so, that owning a bond is less it's a very high interest baby but, you'll never make a lot of money you get a nice income and I don't know what Canada, if the taxes are very high on dividend income. But I feel more comfortable owning stocks because I think there is growth in America and I think the growth in Canada will go I must say I'm not really familiar with Canada but I think it's a great country and therefore, give opportunities for people to grow. I don't read a much about Canada, you know more about, you’re a Canadian, you know more about Canada than I do. I just think that growth is very an important thing and that if your taxes are too high you kind of hurt people from growing.

I like stocks better because the inflationary factor with bonds at the end of the time you get the both you do is get your money back and you get interest on your money. But you can you find very few people who became millionaires by only bonds. They may inherit it but they don't make it. But in stocks you can make it you can if you happen to hit the right area, you can be very successful and I think that for young people like you, I would think that you will focus on stocks rather than bonds. Bonds are for old people. That’s my theory. Thank you very much.

Could you please discuss your experience raising capital for your personal fund in the 50s as ayoung fund manager and any seriously mistakes or ideas that you would change or things you did do differently?

I'm not a very aggressive man about by going around. I'll tell you a story about Warren Buffett which I thought sort a cute. One after he left grab Newman when Mr. Graham decided to retire he went and grabbed new and decided to liquidate he went across the street to see one of the people who live there very nice guy and his wife and they had four children I think and wanted I think I can help you with your investments and that his wife said, oh you can how can you give money to the young kind he's 20 years old he's got suntan and so they didn't. Well the man's name was donkey oh and he went to doubt and he ended up as president of Coca-Cola and his wife who I be when we sometimes have these meetings they'll how she's always thinks about that because he was young and he wanted them have invest. She didn't think that was a good idea so you really when you go into business for yourself you really probably should work for somebody else first to get the experience of the way it is and then if you have somebody or your family as money they buy give it to you and then you get your feet work you have some experience in miss Lee, now I was lucky in one respect people had a terrible experience at the 1932 Depression and they never didn't forget it for many years and I remember this man saying, yeah you could have money and he said how can you start a fund don't you know the Dow Jones it went up the fleet was high with creating one and the Dow Jones now is - 400 and how can you start your business? Now he said, well somebody's offered to put some money in it but the timing with their but people have long memories and so would you want to do if you want to have people or clients you first of all, I think have to look at the values and then if you're somebody in your family has some money maybe they would let you manage it for a while and you get a feel for understanding what you've got. So, it's very difficult to start a fund and I think particularly when you don't want to lose people you don't want to lose money for people. So, if you're right mathematics and you like the idea of investing, I think it can do it just did you have to control your emotions.

Back to me again, what is the biggest mistake and novice investment. I kind of forget my mistakes I must admit. I'd have to think about my biggest mistake I believe off hand don't know I think you can say well the mistakes were different that you put more money and on a Stock and going down. We didn't lose money very often and that's why I kind of wiped it out of my mind. We didn't some time buy a lot of stock because we because I was little nervous about putting too much money in stock so we never put a great too much money we had a I wrote over 100 stocks most of the time and that way we had a big diversification I'm just I'm trying to remember what, well I'll give you an example of one and I don't even remember the name anymore. I bought this stock and it was selling around two dollars a share and I held it quite some time and it was a company that manufactured them tough for the army and the man who owned it pulled about 80% of the company and he offered to sell and take all the stock at about seven dollars a share that time it had a working capital of ten and I didn't have busted it but I had about $100,000 worth of the stock and I objected I went there was a lawyer who said look I can't handle this if you I will charge you a fee because I want to stop it, so I put it in court and he complained about the way if the tender offer was made and he won in the court in the New York State. So, then they'd been appealed to the next higher court in New York State Court of Appeals I think it's cool and anyhow he won by a vote of three to one. And now they had said who owned the stock Mr. Berlin I remember his name and he said, a friend of mine who is an insurance man said you know you're going to be sued for harassment pop this man mean while I had about $100,000 of the stock at a suit of harassment because he lost this I said it didn't worth my while I just given. So, I bet with a man and I took the original price of seven and of course at that time the Reagan administration came in the feds went way up and I'm sure he was dead very well but emotionally I found getting involved in legal action was I didn't like it. I found there are people that don't mind it but I found that it was unpleasant experience.

I never really focused on my mistakes or for that matter when the profits if I sold the stock and it went up a lot more after I sold it out of my mind I think what I try to do is to avoid the mistake of getting involved with people who would not particularly ethical. As there was a man named, the band's name he came out of Canada actually and he sold a company called Soy Oil and he had he would not supposed to do it without registering with the SEC so Soy Oil while he was caught of debt and he was sent to prison with beta billions of dollars out of it and he got out of prison he study had all this money and entertain people. Now that gentlemen whatever his name was he bet it he made a lot of money out of the stock market but it's not somebody that I want to associate with. You try to stay with good people. But I can't tell you what my biggest mistake was.

How you find the investment environment in Asia and maybe China in particular undergoing in industrial revolution right now?

I have definite feelings about it and I did spend some time and try, I do not buy foreign companies and that did not include Canada I have been a little bit in Canada but, basically I want to be protected and I feel that mostcountries of the world do not have an SEC it's not easy to judge them I think certain companies countries of insiders know more about what's going on it can buy the stock and I stayed a tentative way away I've got to by United States company because I understand them. I don't understand foreign companies and China is one of them I don't understand and I feel very uncomfortable owning a company and this was true with a goodexample would be a Brazil with the band there just took over the oil company of Chevron or one of the Eroica you wanted it so he took it and I feel that China is in that category if they if you get if you get stock at it and then all of a sudden the Chinese government says well we're going to pay you what we want to pay you and goodbye and I feel comfortable owning stock where I feel I have some protection. So, buy tend not to get involved with European companies where I don't understand them particularly the value report is in German or French or something so I can buy American companies that just mean I'm right it's just that I feel comfortable because I understand the situation and I don't understand another country. Thank you very much for your time today.

You touched earlier on the example of Xerox in its early days and the difficulty of knowing when to sell a successful investment I think you noted that you find it easier to decide when to buy and in some instances have sold out a very good investments too early, could you talk to us a little bit about with a value play that has been successful investment? How you know when to sell and whether you tend to sell a stock in its entirety or sell it in small components along the way? So, basically how do you know when to sell?

It’s a good question, I think if I would say I don't know when to sell. I don't, I think basically when the stock gets to be vulnerable in that if you pay a stock it paid $50 a share for the stock and it's over $100 a share I probably sell it because I bet a hundred percent profit and I don't want to worry about it and I but we did it them do but where I worked and I lost with some of the scale, you wish to sell it on one price, I'd sell some it may be 85 depending how long I held it I usually held a stock for about three years we didn't sell it just because you bought it did it sell it so that so that you had a time you got a few reports you read about them and you see what company has been doing and when you get a profit I've been our light profits but I don't have any formula to say well if the stock goes up to $50, you automatically sell it, you look and see it at the mean time but because remember the stock is a down they downside to it too, so the stock gets up high enough, stay high enough about a vulnerability you bought a stock at 50 it goes on it but you say I'm not going to sell it then it goes down to 50 you feel kind of stupid and you didn't take advantage of it so, that I tend to sell it on the way up and that is a problem is when do you sell a stock? And I have here made a comment which I think might be interesting to you. Well Ben Graham wrote of it is in his third edition of security analysis which came out in 1951, you can get at the library and in the page 536, he discussed the difference between price and value and on page 726, he says, special situations and he discusses them and I used that as an example I talked up with Columbia once convey University and I told him about McDonald's. McDonald's had come down a lot was selling at $14 a shade you know the restaurant chain was selling it at about 14 and they'd been out from about 35 and you know their ways of crop problems with these a change that things could happen, so I took and I said well I think the selling at 14 now and I use Graham's formula and his formulas are weeded to you because I thought it was interesting he says, let G be the expected gain and points in the event of success, that L be the expected lowest on points of the event of failure and let C be the expected chance of success expressed as a percentage that would be the expected time of holding and keeping a current price of the security this is an algebraic formula and you could make your own judgment with the beauty about this particular one you could you can use anything as you wanted to but, your but the idea was what is the formula and what you do is you use the IQ in this case I thought I think McDonald’s is worth 20to sellyour 14 so you're going to make if you buy it at 14 and then selling it at 22, you've made eight points and that what is the chance of success so I use that and I still it's 75% chance of success that recorded 22 and then I you multiply that times 100% minus C which is the B the expected chance of success expressed as a percentage and it comes out at 600 that a 75% would be 600 minus 50 and then you divide that by 40multiple and the denominator was 14 and you say it'll take two years to work so you ended up with a program of five hundred and fifty for the numerator 28 14 times 2 is 2 years is 28 and it comes out of 19.6% as a return per year so you make a 19.6% of the return per year the beauty of this thing was you make up your own minds. You take a stock you estimate what you think it'sworth and then you multiply it out and use that formula and if you get that addition of the third edition of Graham the security analysis which came out of 1951 and the reason I mentioned this is because then was working on this book and he turned to me they said Walter, I've got a lot of things the appendix you let me know if there's anything in there that I should put in and I've picked this particular page which I thought was interesting because you can make up your own mind what you think the company is worth and then see whether how wrong it would take to do it is just a judgement fact but it's a great experience.

I just want to very quickly, in terms of asset allocation you have noted a fondness level with asset allocation you have said that you like stocks over bonds generally how much would you allocate to an individual stock what isthe maximum percentage of a portfolio in your experiences that you would allocate a little bit?

It attends a little bit on how wealthy or how much you want to put into a stock if you only have a few stocks you could I use diversified I had100 stocks and that way you didn't have one stock that had too much, I would say if it's really a good thing you really liked it very much you buy for 20% it one stock though I don't think I'd put more than 20%. So, just figure you've got a million dollars and how you're going to spare you're going to invest it you like something you put $200,000 and that's a lot of money but, if you put in $500,000 you listed the half of your net worth so, you have to limit how much money you want to put into it and if you're managing other people's money you don't want to have them nervous about it so you may put it less on that you put 10% in it. So, again it depends on how strong how optimistic you are about your judgment and another thing I think would be fair to say if you feel that the Society for example when we had this the text is taken with the period where there were these people were buying in tech stocks way up under it was dangerous and I read a book by a Mr. Perkins and he talked about the bubble you can propagate in the library and he talked about the bubble of this thing and I think you know if I make sense sothat I was actually shorted a few stocks which I normally don't because I find shorting stocks is upsetting for me I don't like to do it because you're risking your capital but I thought that the freaking book is worth looking at and certainly I would say Benjamin Graham's and I like that third edition it came out 1951 before you were born but it's probably not in printed anymore but you can get it at the library. I'm sure we did you find it interesting.

When you are looking at a company do you rely only on historical financials and the annual report or do you do a lot of outside research?

I like to buy stock selling below book value. It gives me a certain amount of protection. I also like stocks that don't have much debt that gives me a certain amount of protection then you look at the company itself well the company may not be agreat company but if it's got a lot of book value and you end the managed well and you look back at 20 years you'll see now this article I wrote in Forbes which you might get hold of I used about 6stocks I gave it examples of the stocks I backed a vendor of what they were okay. You know and you can disagree with them but at least I put them down and so if you can get hold of it forms February 11th issue and as I say there's an article there about me. So, it may help you see where life comes from. I don't know where I'm going but I do I came from.

I wanted to just ask you a question about more along the industry lines that you enjoy. You mentioned in the past that you like to avoid industries that you're not comfortable with but I was wondering how you become comfortable with a particular industry that you might have some interest then.

I'm not quite sure I got the question but, I'll try to answer tell me if I'm mistaken. I kind of like companies that add value facts your goods basically I think Ireally do buy an airline stock though I haven't but I don't know enough about the airlines and you know the airlines is an area which that had fabulous growth but, it's the stockholders never did very well with it. So, getting a growth stock it's not always helpful, then if you can't if it doesn't come out so that you can make some money out of it so, I tried to buy companies which had simple capitalization Zedstocks and they had debt and you've got very little bit and then you look back over the last 20 years you see what the company has done then and then get an annual report. One of the things I really don't want to do is get in the company that's got a, the management I would say is crooked but I've just say that it's not ethical. You try to stay away from people that then out can baby to take advantage of you and it's your money or your money with your managing you've gota responsibility and then when you have a responsibility you have to act responsibly and I like I like the only buying a stock which is protected on the downside and you usually that usually is a start with the outlook is not good then again that you have to look at it but I would use it I'd use Value Line as an example so you can get a picture of where the stock was ten years ago, where the book value is with the debt structure is, let's thank for the annual point of view interested because there are an awful lot of security analysts out there now and I take a lot of one by the computer and the computer doesn't think it just gives you what you want to hear it's there but I like the idea of people being at the end of the thing rather than just numbers. I don't know if that helps you at all. The point is you don't want this money you don't want to lose money and you have a client's and responsibility and he was very important and then with a very philosophical man he writes I think the intelligent vessel is a great book and Warren Buffett said the greatest book he ever read, that he wrote intelligently and unemotionally and I think those are good qualities to have in investments it may not be good in some other field but if you lose moneyit's a very obscenity to you and your client so you're trying to protect yourself and one way to do it is to buy it buy stocks which are depressed and then you want to be sure they're not going to go broke they want to beat it justice baby the industry's having troubles and then you have to weigh that against the opportunities.

Hello, in Canada we have a lot of public companies that are family-owned so, what do you think about special voting classes of shares?

When I first started working there were people who had remember easy washing machine was an example they had an A and a B stock to be a stock with the voting stock and the B stock was the same except they had no votes and those companies have gradually disappeared they're not many family stocks allow most of the people it seems to me have sold over the years have sold their businesses. I don't know exactly where you know if your family having a good business at some point they want to leave it to their family and generally I think it's probably better that they sell it because I think that a destiny has got a very bright you know, grandchildren and so forth will takeover. I'm always struck by the fact that the Rockefellers who love me better pinning intelligent smart people, I don't think they bought any shares of Berkshire Hathaway either way now that you would think that they would because this is they bonito on the income but it just shows that Warren is a very brilliant guy because the problem is that if you wanted income you didn't get me from him. You all you've got is a capital gain but if you needed income as you have to wait 20 years they cash in on it so that a growth stocks are good for wealthy people I think that's true but I like the idea of a big able to sell your club stock now people who own a business waiting for the next generation to take it over and I don't know enough about Canada to know what the tax situations are whether it pays for the family to keep the business orders but or not because I don't know the inheritance qualities but you know you'd have to know the tax laws too. But I didn't think families over the years and benefited by keeping the business going I think they turn it over to someone else maybe.

We're almost out of time I want to ask you the last question, I which I normally ask to every speaker we have and this is, what is the most important thing in investing and in life that you have learned over the past 50 or so years?

Well, I think honesty is the best thing you can have it just solved a lot of problems and just you have ethics, and you have a problem and that loss comes from the family I think basically. I don't know if I'm here to your question, but it is this big it could. Just tell them to tell the truth you don't have to remember. Well, thank you very much. I'd like to thank you for this valuable and informative interaction with my students. The value investing guest speakers says is a critical part of my course as beyond the numbers my students need to understand the character, the personality, and a temperament for value investor's and internalize the character development I'm trying to instill in them. So I really appreciate your helping me do this in the process create a memorable experience for me in my value investing students. On behalf of all of us, I will be sending you a small gift, a token of our appreciation as a memento of this event or thank you very much for a good evening. Well, I’m glad, thank very much. I don't do this very often but I think it's probably helpful it keeps me younger. Good night. Thank you.