Walter Schloss: What Kind Of Stocks Do We Look At For Investment

In 1993 Walter Schloss gave a great presentation called – Upper Level Seminar In Value Investing, at the Columbia Business School. Schloss’ notes for the presentation included a number of timeless investing lessons including the kinds of stocks he looks at for investment, how to scale into an investment, and how to manage a stock portfolio.

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Here is an excerpt from the presentation:

What kind of stocks do we look at for investments?

We look for stocks that are depressed.

Why are they depressed?

Are they selling below book value?

Is good will in book value?

What has been the high low over the past 10 years?

Have they any cash flow?

Have they any net income?

How have they done over the past 10 years?

What is their debt level?

What kind of an industry are they in?

What are their profit margins?

How are their competitors doing?

Is the company doing poorly compared to its competitors?

We get their annual report, proxies, Valueline and quarterlies. What appears to be the risk on the downside vs. the upside potential? How much stock do the insiders own?

Based on the above factors and perhaps a few other items, if the figures look satisfactory, we will take an initial position. We will watch the action of the stock and decide how much more we may want. It will depend a good deal on price. Generally, we are happy with a 5% holding but we can go up to 10—12% if we really like it a lot.

Since we own some 60—75 stocks, we have small holdings in a number of securities. One reason for this is that while selling a stock, it goes down so that we end of holdings some of its shares. Sometimes when buying a stock it goes up and we don’t want to follow it up so we stop buying it.

On the whole we are allergic to bonds.

Today, what has happened? Everyone is now looking for franchises. The key, in my opinion, to successful investing is to relate value to price today. Instead of present value many investment managers are relating future value to present price. Since I can’t do that, I will let others do it and stick to what has worked for us.

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Article by Johnny Hopkins, The Acquirer's Multiple



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The Acquirer's Multiple
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.”