With a laid-back approach that personified patience, Walter Schloss was a maverick in the fast trading world of Wall Street. In fact, it is safe to say that Schloss was a living and breathing refutation of all that symbolized the world of finance.
He was low keyed and sought to impress no one. In a 1994 letter to shareholders, Warren Buffett penned these words: "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.”
He almost never spoke to company management being of the opinion that he was not good at evaluating management character and was not good at interpreting what they were saying. However, he did look favourably upon insider ownership and preferred management owning stock in the company.
He did not use the internet and it is believed that he did not use a computer either. Instead, he got his stock prices from the morning newspaper and his data from printed copies of Value Line, the stock information service.
He rarely, if ever, spoke to sell-side analysts. In fact, Buffett commented once that no one had much influence on Schloss. He found it more fruitful to pore endlessly over annual reports. He looked intensively at numbers and preferred stocks with a track record of more than 10 years so he could analyse its long financial history.
And, he never went to college. He began to work on Wall Street soon after high school as a runner and served in the U.S. army during WWII. (A runner was a man/boy who delivered securities by hand to the various brokers).
Yet he earned the reputation of being one of the greatest investors ever. Buffett referred to him as a “superinvestor” and “one of the good guys of Wall Street”. For 45 years from 1955 through 2000, his investment partnership delivered an annualised return of 15.3%, against the S&P Industrial Average of 11.5%. Every dollar an investor entrusted with Schloss at the start of 1956 had grown to $662 by the end of 2000, including all charges for management. A dollar invested in the S&P Index would have been worth $118. (Source: Hurricane Capital). From 1955 to 2002 (when he retired), his investments returned 16% annually after fees, compared with 10% for the index. All by a singular devotion to value-oriented investing principles.
Three decades ago, in an interview with Barron's National Business and Financial Weekly, and later in 1993 at a lecture in Columbia Business School, he spoke of a few principles that guide his investing.
* One of the tricks of the business is to keep your losses down. Then, if you have a few good breaks, the compounding works well for you.
* I’m not very good in timing. People come to me and say, “What do you think the market’s going to do?” And I always say, “I’ve got no idea.”
* I try to stay away from the emotions of the market. The market is a very emotional place that appeals to fear and greed.
* If you buy value—and you may buy it too soon, as undoubtedly I do – then if it goes lower; you buy more. You have to have confidence in what you are doing. You have to have patience too.
* It is important to look at your strengths and weaknesses. If you don’t like to lose money and it affects your judgment, don’t buy stocks that can go down a great deal. I find it very difficult to buy a stock that has gone up after we start buying it.
* I buy value as expressed in the differential between its price and what I think its worth. I look for stocks that are depressed and ask these questions.
- 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 this company doing poorly compared to its competitors?
- What appears to be the risk on the downside vs. the upside potential?
- How much stock do the insiders own?
In an interview with Forbes in 2008 he spoke of a company that typifies his method - trading at discounts to book value with low or no debt. Wheelmaker Superior Industries International obtained three-quarters of sales from ailing General Motors and Ford. Earnings had been falling for five years. Schloss saw that the stock was trading at 80% of book value, a 3% dividend yield, no debt. “Most people say, ‘What is it going to earn next year?’ I focus on assets. If you don’t have a lot of debt, it’s worth something.”
One of his best investments was in Boston & Providence Railroad. Schloss started buying B&P’s guaranteed stock in the early 60s for $96 per share, buying all the way up to $240. Penn Central wanted B&P’s real estate, but it could get it only 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 $5,00,000, and this was way back in the 70s. (Source)
Next:
Factors needed to make money in the stock market
In 1994, he penned down a note which is reproduced below.
Factors needed to make money in the stock market
1) Price is the most important factor to use in relation to value.
2) Try to establish the value of the company. Remember than a share of stock represents a part of a business and is not just a piece of paper.
3) Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity.
4) Be patient. Stocks don’t go up immediately.
5) Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
6) Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.
7) Have the courage of your convictions once you have made a decision.
8) Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.
9) Don’t be in too much of a hurry to sell.
(He bought Lehman Brothers below book shortly after it went public in 1994 and made 75% on it in a few months. Unfortunately for him, the stock went on to triple in price. Ditto with cement company Southdown. He bought it at $12½ and sold it at $28-30 within 2 years. It soon climbed to $70.)
If the stock reaches a price that you think is a fair one, then you can sell. But often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and PE ratios high? Is the stock market historically high? Are people very optimistic?
10) When buying a stock, I find it very helpful to buy near the low of the past few years. A stock may go as high as $125 and then decline to $60 and you think it is attractive. But if 3 years ago the stock sold at $20, it shows that there is some vulnerability in it.
11) Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
12) Listen to suggestions of people you respect. This does not mean you have to accept them.
13) 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.
14) Remember compounding. If you can make 12% in a year and reinvest the money back, you will double your money in 6 years.
15) Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
16) Be careful of leverage. It can go against you.