Walter Schloss (1916-2012) is maybe not so well-known investor as some other household names like Warren Buffet, George Soros or John Templeton. Among the value investors and especially deep value investors he is a true legend. Schloss’ career for almost half a century and the results are however exceptional. Despite putting up one of the all time great track records there are still many investors who have not heard or read much about Walter Schloss.
What kind of investor Walter Schloss really was? He was a disciple of “Father of Value Investing” Benjamin Graham, and also worked at the Graham’s firm as an analyst before setting up his own investment company in 1955, when Graham retired. Schloss was a lonely wolf and he never had a group of assistants or analysts. Only his son, Edwin Schloss, joined the investment company at the end of the 1960s and worked as a partner until they closed their company in 2002. During the nearly 50-year period, Schloss’s investments yielded an average annual return of 21% (16% net income to his investors after expenses). This was a clear better return compared to the S&P 500 index, which gave about 10% average annual return over the same period. Famous for being frugal, he worked out of the same small one room office without computer or internet for the entire duration of his career.
Walter Schloss was a pure classical deep value investor. You can summary his investing style following: buy cheap stocks, diversify adequately (but not excessively) and be patient. The only way really to know a security is to own it. From Ben Graham, he learned a quantitative method of acquiring stocks below their net current asset value (short-term assets minus all liabilities). There were a lot of net-net stocks after the Great Depression in the 1930’s and still in the 1940s and 1950s. When these stocks were harder to find, Schloss searched companies based on book value (P/B below 1) and low P/E ratio. He invested in companies that were heavily losing their market price. Schloss’ favorites were 52-week lows – a list of the companies that hit 52-week low in prices. The portfolio of Schloss’ investment company was widely diversified – sometimes up to more than 100 stocks. Still, most of the time 20 largest investments accounted for about 60% of the portfolio, and sometimes he could concentrate up to 15% or more of his fund on a single stock that he really liked.
Walter Schloss also preferred to avoid stress. He never focused too much on market news and general economic data because they always worried investors. He worked from 9.00 am to 4.30 pm. During the day Schloss looked through Value Line for cheap stocks and read annual reports. His quantitative and passive style of investing has enabled him to live without stress, sleep well at night and enjoy life. And probable also allowed Schloss to invest professionally as old as he did.
It’s not impossible to replicate Schloss’ investing style, if you have right temperament and patience. Schloss was a simple man that sticks to his strategy regardless of the noise around him. Even Warren Buffett praise Schloss’ personality: “He has total integrity and a realistic picture of himself. I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.”
What can an investor of today learn from Walter Schloss?
- Investing needs to be assessed over the long-term
Investing and evaluating its results is a long-term process. Stock pickers has the opportunity to win the market by acting long-term based and disciplined. No investment method works all the time, and even the most successful investors experience losses.
Many financial publications and articles publish the results of mutual and hedge funds for one or for three years, sometimes rarely over the period of five years. Unfortunately, such short-term results have more entertainment than real significance. It is often the case, that the winners of last year are this year’s losers.
Unfortunately, previous tells very much about the providers of investment products. Fashion products are developed from assembly line and they are offered to investors with the help of aggressive marketing. if the product does not succeed immediately, it is either terminated or merged into another product of the same financial management company.
The same is often the case with portfolio managers. Just when an investor has gained a confidential relationship with the portfolio manager, he will switch to another company after a better pay. Even if the name of the product remains the same, there is no guarantee that it will continue to be managed in accordance with the same investment principles. Also faceless asset management is increasing. Investment groups and computers take care of the process. Quick earned fees are more important than the long-term results.
- Portfolio manager has to serve in the best interests of his investors
For Walter Schloss, investors and their assets were always the most important thing. Most of Schloss’ customers were ordinary people with relatively small investment assets. They really needed their money and the good care of their investments was essential to the future of these people. Therefore, protecting from permanent loss of capital was the starting point. It was realized by investing in so cheap stocks that the margin of safety was high and the large drop in the value of the investment was the most unlikely. Over the long-term career of Schloss and his son Edwin, their portfolio had only seven years in which it lost money. Something about investors trust told that before closing their investment company several of their clients were already in the third generation.
Walter and Edwin Schloss as portfolio managers received fees only for profits to clients. No general management fees were collected. This may seem unbelievable today. Currently, you pay typically a management fee, performance fees and possible initial costs when you invest and redemption costs when you withdraw your money. These expenses are sure, but returns are hardly guaranteed. Fortunately, Schloss was not the only one in its kind. When Warren Buffett founded his first investment partnership, he worked the same way. Today Monish Pabrai and Guy Spier have followed the same tradition.
- Know Thyself
It is examined that there are many different ways to succeed as an investor. Even using only one key ratio, such as P/E, P/B, EV/EBIT -ratio or high dividend yield, can be a proven way to win the market. Generally, the weak point is the investor himself. Investors cannot stay in the chosen strategy. No investment method works in every situation, every day and every year. When experiencing difficult or enthusiastic times, feelings go easily beyond analytical reasoning and the investor is tempted to follow market noise and the latest hot trends.
Walter Schloss thought, that the most important thing was know thyself – your strengths and your weaknesses. Based of those, you must be able to build the strategy which investor can follow during both bear and bull market – and to sleep well every night. Remember that a share of stock represents a part of business and so you need to understand its financials before making a judgment. For Schloss it was purchasing heavily undervalued stocks with sufficient diversification. He himself said: “If a business is worth a dollar and you can buy it for 40 cents, something good may happen to you.”
Walter Schloss himself attempted to explain investing as follows: “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!”
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