THE WALTER SCHLOSS APPROACH TO VALUE INVESTING

Walter Schloss (August 28, 1916 – February 19, 2012) was one of the most successful value investors to have ever played the game.

From 1956 to 1984, his partnership produced a compound annual return of over 21%. He continued to manage his fund until 2000, eventually earning 15.3% per annum for over four and a half decades!

Many investors have never heard of him, but we can all learn a lot from Walter Schloss.

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So who was he?

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WALTER SCHLOSS: A SUPERINVESTOR OF GRAHAM-AND-DODDSVILLE

Walter Schloss proves that you don’t need fancy diplomas, a genius IQ, or numerous letters before or after your name to be successful in the stock market – you need only have passion for your work and discipline over your own emotions.

Schloss never had a formal education. When he was 18, he started working as a runner on Wall Street. He then attended investment courses taught by Ben Graham at the New York Stock Exchange Institute, and eventually worked for Graham in the Graham-Newman Partnership.

In 1955, he left Graham’s company and set up his own investment firm, which he ran for nearly 50 years.

Walter Schloss was one of the 9 “superinvestors” that Warren Buffett wrote about in his legendary “The Superinvestors of Graham-and-Doddsville” article (a list that included Charlie Munger and Warren Buffett himself).

Schloss’s return of over 15% per annum for nearly 50 years solidifies him as one of the most consistently successful investors ever (see the chart below).

Guru Investment Returns

Source: ValueWalk

 

THE WALTER SCHLOSS APPROACH TO VALUE INVESTING

So how did Walter Schloss pick stocks? The table below best summarizes his approach to value investing:

Walter Schloss Approach to Value Investing

Source: AAII

 

Walter Schloss had the following to say about his investment philosophy (courtesy of Old School Value):

When it comes to investing, my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night.

I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors.

You have to invest the way that’s comfortable for you.

Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

I think investing is an art, and we tried to be as logical and unemotional as possible. Because we understood that investors are usually affected by the market, we could take advantage of the market by being rational. As [Benjamin] Graham said, ‘The market is there to serve you, not to guide you!’

I like Ben’s analogy that one should buy stocks the way you buy groceries not the way you buy perfume.

The ability to think clearly in the investment field without the emotions that are attached to it is not an easy undertaking. Fear and greed tend to affect one’s judgment.

The concepts described above by Walter Schloss can also be found in Ben Graham’s “The Intelligent Investor” or in many quotes by Warren Buffett. But Schloss was definitely a purer disciple of Graham’s actual investment strategy than Warren is, evidenced by the following Walter Schloss quotes:

Don’t buy on tips or for a quick move. Let the professionals do that, if they can.

Remember that a share of stock represents a part of a business and is not just a piece of paper.

Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

Listen to suggestion from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back.

Most look at earnings and earnings potential, well I can’t get into that game.

I used the same investment approach I used at Graham-Newman finding net-net stocks. It was all about capital preservation because I had to serve in the best interests of my investors. Many of them were not wealthy, and they needed me to generate returns that would allow them to cover their living expenses.

I try to protect myself from permanent loss of capital by investing in stocks that are depressed.

When you buy a depressed company it’s not going to go up right after you buy it, believe me.

I like to buy companies with very little debt so it has a margin of safety.

I like to buy basic businesses not high flyers that sell at huge multiples.

I’m not very good at judging people. So I found that it was much better to look at the figures rather than people.

We don’t own stocks that we’d never sell. I guess we are a kind of store that buys goods for inventory (stocks) and we’d like to sell them at a profit within 4 years if possible.

Remember the word compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 years, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

You never really know a stock until you own it.

SUMMARY

Walter Schloss was undoubtedly one of the great value investors of all time, and truly a “superinvestor”. And while finding 100 stocks that fit his exact investment criteria might be a difficult task in today’s market, his thoughts on knowing your own strengths and weaknesses (just as well as your stocks’ strengths and weaknesses) and understanding and controlling your emotions will always be timeless lessons.

What do YOU think of Walter Schloss’s investment strategy of finding deeply discounted stocks and selling them once they reach their intrinsic value, versus Warren’s strategy of buying inexpensive yet “wonderful” businesses and holding them forever? Which one do you follow? Which one’s better? I’d love to hear your thoughts in the comments below!

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…