“I’m not very good at judging people. So I found that it was much better to look at the figures rather than people. I didn’t go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we didn’t really talk about it, because we were small. And I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They’d listen to you. I think it’s really easier to use numbers when you’re small.” — Walter Schloss
Walter Schloss: Background & bio
Walter Schloss is not nearly as well known as other investors such as Warren Buffett but Schloss has gained a reputation as one of the best value investors ever.
Like Buffett, Schloss was a direct student of Benjamin Graham, and is one of the “Super Investors” mentioned by Warren Buffett in his famous essay, The Super Investors of Graham-And-Doddsville (required reading for all ValueWalk readers — it is free and can be found on the link above).
Schloss was born in 1916 and passed away during 2012 at the age of 95. Schloss never went to college and at 18 years old, he worked as a runner for on Wall Street at Carl M. Loeb & Co. One day, a partner of the company, Armand Erpf, recommended that Schloss read “Security Analysis” by Graham and David Dodd, which had been published a year earlier. The firm then paid for Schloss to take two courses with Graham.
Schloss eventually went to work for the Graham-Newton Partnership and during 1955 Schloss launched his own value fund.
He ran the fund until 2000. He also spent four years during his long career serving in the U.S. army fighting in WWII.
Schloss was known for being very frugal. His total office expense was an estimated $11,000 while his partnership generated a net profit of $19,000,000.
Schloss stopped actively managing other people’s money in 2003. He then became a treasurer for the Freedom House, a non-profit group devoted to furthering democracy and human rights.
Buffett called Schloss a “superinvestor” in a 1984 speech at Columbia Business School and Buffett saluted Schloss as “one of the good guys of Wall Street” in his 2006 letter to Berkshire Hathaway shareholders.
Upon Schloss’ death, Buffett, who was a close friend for more than 60 years released the following statement: “He had an extraordinary investment record, but even more important, he set an example for integrity in investment management. Walter never made a dime off of his investors unless they themselves made significant money. He charged no fixed fee at all and merely shared in their profits. His fiduciary sense was every bit the equal of his investment skills.”
From 1955 to 2002, by Schloss’ estimate, his investments returned 16% per annum on average after fees, compared with 10% for the S&P 500 over the period.
He took no fees unless the fund achieved a certain hurdle rate. Once the fund hit a certain Hurdle rate Schloss took 25% of the profit. Schloss’s fund was set up very similar to Buffett’s original partnership.
Below is a chart of returns from Schloss’ fund (unfortunately it only goes up until 1984 and does not cover 1984-2000).
The chart below shows the performance of the Schloss partnership upto 2000, compared to the S&P Industrial Index.
While not much has been written about Walter Schloss’ investment philosophy, here are some facts that have stood out in writings about him.
Schloss stayed devoted to Graham’s “pure” style of value investing and did not evolve into more of a qualitative investor like Buffett.
Schloss bought many companies that Buffett would have described as “cigar-butt” companies. Similar to Graham, Schloss sought to acquire as many companies trading at a 1/3 net working capital as possible.
Schloss relied mostly on the Value Line Investment Survey for finding attractive stocks.
Some value characteristics Schloss used:
- Companies with real assets with little or no debt, providing a margin of safety in case the company liquidates.
- 20% or more discount to book value. He calculated book value based of cash, fixed assets, and other tangibles.
- A good dividend yield.
- Managements that own a lot of stock.
- Honest management that does not overpay itself.
- Do not be afraid to hold cash.
- Buying after a dividend cut. Investors usually overreact to dividend cuts which provides a golden opportunity to invest.
From the book “Value Investing: From Graham to Buffett and Beyond”:
“...The Schlosses would rather trust their own analysis and their longstanding commitment to buying cheap stocks...This approach...leads them to focus almost exclusively on the published financial statements that public firms must produce each quarter. They start by looking at the balance sheet. Can they buy the company for less than the value of the assets, net of all debt? If so, the stock is a candidate for purchase...”
According to Schloss himself:
“...Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down...And that’s really the history of Ben Graham...”
Still, even though Schloss was a value investor at heart, he had a talent for making money in different ways. According to Fortune Magazine, Schloss shorted Yahoo and Amazon before the dot-com crash which made him massive amounts of money.
According to Buffett:
“...[Schloss took] no real risk, defined as permanent loss of capital [and invested] in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success...”
Here’s an excerpt from a great Forbes article detailing Schloss’ investment process:
“...Schloss screens for companies ideally trading at discounts to book value, with no or low debt, and managements that own enough company stock to make them want to do the right thing by shareholders. If he likes what he sees, he buys a little and calls the company for financial statements and proxies. He reads these documents, paying special attention to footnotes. One question he tries to answer from the numbers: Is management honest (meaning not overly greedy)? That matters to him more than smarts. The folks running Hollinger International were smart but greedy–not good for investors…”
“...Schloss doesn’t profess to understand a company’s operations intimately and almost never talks to management. He doesn’t think much about timing–am I buying at the low? selling at the high?–or momentum. He doesn’t think about the economy. Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange’s closing bell…”
Warren Buffett on Walter Schloss
Here’s an excerpt from Buffett’s essay, “The Super Investors of Graham-And-Doddsville.”
“He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.
In introducing me to (Schloss) Warren had also, to my mind, described himself. “He never forgets that he is handling other people’s money, and this reinforces his normal strong aversion to loss.” He has total integrity and a realistic picture of himself. Money is real to him and stocks are real — and from this flows an attraction to the “margin of safety” principle.
Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner.And that’s all he does. 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. And 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 Walter. That’s one of his strengths; no one has much influence on him.”
Buffett in his 2006 Berkshire Hathaway Annual Letter had more to say about Schloss. Below is the excerpt:
Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager
Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It’s safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.
I first publicly discussed Walter’s remarkable record in 1984. At that time “efficient market theory” (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.
And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter’s performance and what it meant for the school’s cherished theory.
Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.
Tens of thousands of students 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 over performing, 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.
A quote from Buffett, origin unknown:
“...He knows how to identify securities that sell at considerably less than their value to a private owner: And that’s all he does. 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 Walter. That is one of his strengths; no one has much influence on him...”
Walter Schloss: Quotes
“You never really know a stock until you own it.”
“I worked for Benjamin Graham for 9 1/2 years, and Ben said he was going to retire and move to California,” “I had to get another job, so one of the people who was a stockholder of Graham Newman came to me and said, ‘Walter, if you start a fund, I will put some money in it.’ We ended up with $100,000. The structure was that I would not get paid unless we realized gains. The kind of stocks I bought were not growth stocks. Graham was really value-oriented. In those days he would buy stocks that were selling below working capital. There were less of them, but they were still around.”
- Value Investing: From Graham to Buffett and Beyond By Bruce Greenwald
- The Memoirs of Walter J. Schloss: A Personal and Family History Walter Schloss
- A Modern Approach to Graham and Dodd Investing (Wiley Finance) By Thomas P. Au
Walter Schloss: Articles
- The Superinvestors of Graham and Doddsville by Warren Buffett
- 16 Investing Rules from Walter Schloss
- Walter Schloss – OID Interview
- Factors to Make Money in Stocks (1994)
- Criteria for Liquidations Where Money is Held by Company
- Seminar in Value Investing (1993)
- Benjamin Graham and Security Analysis: A Reminiscence (1999)
- “Profiles in Investing: Walter and Edwin Schloss”
- “Sixty-Five Years on Wall Street”
- Columbia Business School Upper Level Seminar in Value Investing”
- “Factors Needed to Make Money in the Stock Market”
- “The Right Stuff – Why Walter Schloss is Such A Great Investor”
- INVESTING YES, YOU CAN BEAT THE MARKET WITH VALUE
- Depression Survivors Weigh In
- At 91, the man Warren Buffett famously dubbed a “superinvestor” is still picking unloved stocks.