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)
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Factors needed to make money in the stock market
