Screening
· Pick unloved stocks - finding value among the lows
· Focus on assets rather than earnings
Buying
· Most concerned with whether he was buying at a discount
· Buy near the low of past few years
· Buy on a scale
Selling
· Sell on a scale up
· Is the stock at its historical high B/V? Is the stock market P/E at historical high?
Portfolio Construction
· Owned diversified portfolio
· Patient
· 30% in cash during 2008 peak
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An extraordinary investment record
According to Bloomberg, Walter Schloss estimated that his investments from 1955 to 2002 (when he retired), over a period of 48 years, returned 16% p.a. on average after fees, compared to 10% p.a. for S&P[1].
In a 1984 article “The Superinvestors of Graham-and-Doddsville”, Warren Buffett calls Walter Schloss one of the superinvestors. Walter Schloss’s investment record was published in the article and it showed that over a 28 1/4 years period (1995 to 1984) WJS Limited Partners returned 16.1% p.a. and WJS Partnership returned 21.3% p.a[2]. During the period, the fund has at least over 100 positions and the AUM in 1984 was estimated at US$45 million.
How did he do it?
Despite his extraordinary investment record, there is very little written about him. However, there are a few useful insights that one can gather from Walter Schloss’ comments and other people’s view about him.
First, he was an asset investor. In a 2008 Forbes article[3], Walter Schloss said:
"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."
Second, he focused on margin of safety. Warrant Buffet said this of Walter: Schloss:
“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.”
Finally, he epitomized minimalist investing. In the book Supermoney (1972), Adam Smith wrote this:
“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.”
Considering the slew of stories regarding insider trading by current superstar fund manager, you will appreciate Walter Schloss’s outperformance even more.
In 1994, Walter Schloss distilled his approach in a one-pager summary titled 16 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 that 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. (Capital and surplus for the common stock)."
4. "Have patience. 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. 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 P-E ratios high. If the stock market is historically high. Are people very optimistic etc?"
10. "When buying a stock, I find it 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 attractive. 3 years before the stock sold at 20 which 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 how much more about a company if one buys earnings."
12. "Listens to suggestions from people you respect. This doesn't mean you have to accept them. Remember it's your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back."
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 the word compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money."
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."
In a 2008 Forbes interview, Walter Schloss shared a few companies on his watch list, revealing how his investment rules were implemented and the consistency of his style. These companies were chosen based on:
· Discount to book value
· Dividend yield
· Little or no debt
· Managements that own enough stock to make them want to do the right thing for shareholders
That would be the last few glimpses into the superinvestor of our time. Walter Schloss was 91 when he gave that interview and he passed away in 2012 at the age of 95.
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