Sixteen Investing Lessons From Walter Schloss by Vishal Khandelwal, Safal Niveshak
What do you call an investor who earned 16% per annum on average over a 47 year period – that’s a 1,070-bagger – and is not called Warren Buffett?
What if I told you that this investor…
- Did not care about corporate earnings
- Rarely spoke to managements and analysts
- Did not watch the stock market during the day
- Never owned a computer, and
- Did not even go to college
…you would not say anything but just ask me to reveal his name fast, so as to re-confirm whether such a Super Investor has ever existed in the investment circles.
Vanguard’s move into PE may change the landscape forever
Private equity has been growing in popularity in recent years as more and more big-name funds and institutional investors dive in. Now even indexing giant Vanguard is out to take a piece of the PE pie. During a panel at the Morningstar Investment Conference this year, Fran Kinniry of Vanguard, John Rekenthaler of Morningstar and Read More
Well, before I tell you this man’s name, you must read what Buffett had to say about him…
…He doesn’t worry about whether it it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do — and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on him. That’s one of his strengths; no one has much influence on him.
Now, if you haven’t already read below to find out who I am talking about, let me now disclose the name of this man, whom Buffett termed a Super Investor in his famous essay, The Superinvestors of Graham-And-Doddsville.
The Name is Schloss…Walter Schloss
“Walter who?” you may wonder if you have not read much about the world’s best-ever investors.
Walter Schloss was an outlier among outliers, and yet you’ve probably never heard of him. Even I didn’t hear about him until a few years back, while I was in the process of discovering about value investing.
Walter Schloss graduated high school in 1934 during the Great Depression and got a job as a “runner” at a small brokerage firm. As a runner, his job was to run and deliver securities and paperwork by hand to various brokers on Wall Street.
The next year, in a stroke of luck, when he asked his senior for a better profile at the brokerage, he was asked to read a book called Security Analysis by Ben Graham.
After Schloss read Security Analysis, he wanted more, so he convinced his employer to pay for him to attend Graham’s classes. Subsequently, he started working during the daytime while studying at Ben Graham’s classes at night.
Schloss became an ardent follower of Graham, and even helped him write part of The Intelligent Investor. Anyways, this was when World War II broke out and Walter Schloss enlisted in the army for four years.
He however stayed in contact with Graham, which paid off when he got an offer to work for Graham’s partnership upon returning from the war in 1946…under the man who had once rejected Warren Buffett for a job.
So, if you wish to become a successful value investor yourself (who doesn’t?), and wonder which MBA to do or which brokerage to start your career with, you can take a leaf from Schloss’ books.
As he showed, you don’t need a prestigious degree or a great pedigree to start your work towards becoming a sensible, successful value investor.
Of course, Schloss had his stars extremely well-aligned in terms of getting to work alongside Graham and Buffett, but then remember that he started as just a ‘paperboy’ without a college degree, before working his way through investing stardom.
As a matter of fact, Walter Schloss left Graham-Newman in 1955 and, with US$ 100,000 from a few investors, began buying stocks on his own.
But Where is Walter Schloss Hiding?
You may wonder why there’s not much ever written about Schloss, despite the fact that his investment track record almost compares to Buffett’s and Graham’s?
Perhaps the reason is that Schloss’ investment philosophy was so simple that there isn’t much to say about it.
Schloss, as his friends including Buffett reveal, hated stress and tried to avoid it by keeping things simple.
“Investing should be fun and challenging, not stressful and worrying,” he once said.
His son Edwin, who worked for him for many years, said this in a memoir after Walter Schloss died in 2012 at the age of 95…
A lot of money managers today worry about quarterly comparisons in earnings. They’re up biting their fingernails until 5 in the morning. My dad never worried about quarterly comparisons. He slept well.
Investing Lessons from Walter Schloss
Keeping things simple and keeping stress away while investing are two of the several big lessons that Schloss has to teach us investors.
When it comes to analyzing stocks/businesses, a lot of people get stressed trying to perfect their analyses, and thus work extremely hard to seek a lot of information, most of which is useless.
But as Walter Schloss’ life and experience teaches, unless complexity can improve the explanation of something, it is better to proceed toward simpler theories.
While fund managers and other stock experts were breaking their heads with complex financial models and theories, Schloss stuck with the simple application of value investing that had been around for decades…at least since the time Graham was teaching. He multiplied his original capital 1,070 times over 47 years while handsomely beating the S&P 500 by simply comparing price to value.
Warren Buffett wrote this in his 1986 letter to shareholders…
When Walter and Edwin (his son) were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.”
So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.
Another big lesson Walter Schloss taught was the importance of paying right prices for stocks. He perfectly mastered Graham’s teaching that you must buy stocks like you buy groceries (you want them cheap), not the way you buy perfumes (expensive is better).
He also laid importance on buying good businesses when their stock prices fell from where he bought them the first time.
As he said in one of the very few conference speeches he gave…
…you have to have a stomach and be willing to take an unrealized loss. Don’t sell it but be willing to buy more when it goes down, which is contrary, really, to what people do in this business.
Schloss also stressed about the importance of independent thinking. When asked at the same conference that given the market sometimes knows more than the investors, how can one justify whether buying a falling stock would be a right decision or not, Walter Schloss replied…
You have to use your judgment and have the guts to follow it through and the fact that the market doesn’t like it doesn’t mean you are wrong. But, again, everybody has to make their own judgments on this. And that’s what makes the stock market very interesting because they don’t tell you what’s going to happen later.
Staying true to your own self and knowing our strengths and weaknesses was also what Schloss was great at.
He told this to students at a lecture in Columbia Business School in 1993…
Ben Graham didn’t visit managements because he thought the figures told the story. Peter Lynch visited literally thousands of companies and did a superb job in his picking. I never felt that we could do this kind of work and would either have to quit after a few years or I’d be dead.
I didn’t like the alternatives and therefore, went with a more passive approach to investing which may not be as profitable but if practised long enough would allow the compounding to offset the fellow who was running around visiting managements.
I also liked the idea of owning a number of stocks. Warren Buffett is happy with owning a few stocks and he is right if he’s Warren but when you aren’t, you have to do it the way that’s comfortable for you and I like to sleep nights.
Revisiting Walter Schloss’ Legacy
Schloss stuck to a strict set of rules when he was making his investment decisions, and invested purely on balance sheet analysis and valuation metrics that he knew and understood. Also, as I mentioned earlier, he never visited the company managements and if he couldn’t understand something, he would just stay away.
As a matter of fact, both these factors – not meeting managements and avoiding things I don’t understand – have also worked very well for me in my personal capacity as an investor.
Anyways, Walter Schloss’ developed his investment wisdom through his closeness to Graham and Buffett and decades of practicing what really worked in the stock market.
But as a readymade guide for us, he put together a list of 16 timeless principles for becoming a better investor. These principles were published by Schloss on a one-page note in March 1994 titled – Factors needed to make money in the stock market.
Click here to download the original note, or click on the image below.
Here is a summary of Walter Schloss’ investment approach as he practiced over 47 long years…
Source: The American Association of Individual Investors; * ‘Campbell Soup Companies’ meant those with a long history and that Schloss considered stable and well known
Overall, Schloss screened for companies ideally trading at discounts to book value, with no or low debt, and managements that owned enough company stock to make them want to do the right thing by shareholders.
If he liked what he saw, he bought a little and called the company for financial statements. He read these documents, paying special attention to footnotes.
One question he tried to answer from the numbers was: Was the management honest (meaning not overly greedy)?
All this paid Schloss and his investors very well, especially because he stayed true to this philosophy for a long-long time.
Before I close, here is Buffett again on what Walter Schloss was all about, as he wrote in his 1986 letter…
Tens of thousands of students (who were taught Efficient Market Theory) were therefore sent out into life believing that on every day the price of every stock was “right” (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat.
Maybe it was a good thing for his investors that Walter didn’t go to college.
While it might be difficult to practice Walter Schloss’ approach (especially of buying things very cheap) in the current times of most quality businesses lacking margin of safety, there still are many lessons that we can learn from this master of deep value approach to investing.
Walter Schloss was truly a Super Investor, who deserved a greater limelight than he received.
But then, thanks to being in the shadows, he was and still must be sleeping peacefully.