Just How Did Walter Schloss Achieve A 21.3% CAGR From 1956 To 1984

Just How Did Walter Schloss Achieve A 21.3% CAGR From 1956 To 1984

Walter Schloss was one of Buffett’s Superinvestors of Graham-and-Doddsville. He had an incredible track record of returns over his investing career, achieving a 21.3% CAGR over the period of 28 and a quarter years from 1956 to Q1 1984. And, he did it while keeping his own expenses to a minimum.

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In Buffett’s 1994 shareholder letter he wrote about Schloss: “Please note that Walter’s total office expense is about $11,000 as compared to net income of $19 million. Meanwhile, Walter continues to outperform managers who work in temples filled with paintings, staff and computers.”

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One of my favorite articles on Schloss that describes his investing strategy was a 1973 Forbes article which illustrated how he consistently identified undervalued companies. One of his best picks was Boston & Providence Railroad. Schloss started buying B&P in the early 60’s for $96 per share, and bought it all the way up to $240. Penn Central wanted B&P’s real estate, but it could only get it if the shareholders were paid off. Eventually, a portion of B&P’s real estate was sold for $110 a share to the Penn Central Railroad, another portion of property was sold for $277 per share and there was still some Rhode Island property to be sold off. Schloss and his partners owned over 1,800 shares of B&P at that time. Their check was for $500,000.

Here’s an excerpt from the Forbes article:

Walter Schloss : How I Choose Value Investments In Stocks

Making Money Out of Junk

Walter Schloss, 57, is kind of a junk collector among stock market players. He is not much interested in earnings growth or in management or in other things that concern most analysts. He’s only interested in cheap stocks.

Now, as any reader of Benjamin Graham knows—and Walter Schloss is both a former student and ex-employee of Graham—a cheap stock is not necessarily low priced. That is, a $5 stock may not be cheap. And a $50 stock need not be dear. To these people, cheap means cheap in relation to a company’s assets or its value as a going business.

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Schloss went into money management on his own after Ben Graham retired in 1955. In his early days in business, Schloss used to look for what he calls “working capital stocks.” That is, situations where the market price per share was less than working capital per share—after deducting all debt and preferred stock. You got all of the physical plant and equipment for nothing. You couldn’t get cheaper stocks than this.

“Back in the 1930s and 1940s there were lots of stocks, like Easy Washing Machine and Diamond T Motor, that used to sell below working capital value,” he explains. “You used to be able to tell when the market was too high by the fact that the working capital stocks disappeared. “But for the last 15 years or so there haven’t been any working capital stocks.

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On the other hand, when stocks of fairly good companies sell at one-third of book value, you can have some really interesting situations.” Book value? we asked. Aren’t earnings what count? “I really have nothing against earnings,” he retorted, “except that in the first place earnings have a way of changing. Second, your earnings projections may be right, but people’s idea of the multiple has changed. So I find it more comfortable and satisfying to look at book value.

“But there are two things about book values. I think they are understated on today’s figures. Republic Steel, for example, has a book value of $65 a share. I don’t think you could replace it at $130 a share. No one is going into the steel business in the U.S. today except the Japanese with a scrap plant. Or take cement. A new company can’t go into the business unless somebody comes up with a revolutionary new process.

“At such a time these companies and industries get into disrepute and nobody wants them, partly because they need a lot of capital investment and partly because they don’t make much money. Since the market is aimed for earnings, who wants a company that doesn’t earn much?

“So,” Schloss went on, “if you buy companies that are depressed because people don’t like them for various reasons, and things turn a little in your favor, you get a good deal of leverage. “Look at Marquette Cement. It used to sell in the 50s; it has a book value of $28 a share, this year it sold at 6, about a fourth of book value. Everyone says cement is going to be in big demand for construction. The industry isn’t building any more plants because it is uneconomic.

You can read the original article here.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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