This is part ten of a multi-part series on Walter Schloss, legendary value investor. To ensure you do not miss the rest of the series, sign up for our free newsletter. Parts one to nine can be found at the respective links below.
- Part one: Introduction To The Master Of Deep Value
- Part two: Discipline and Consistency
- Part three: The Magic Of Compounding
- Part four: 16 Factors Needed to Make Money in the Market
- Part five: Making Money Out of Junk
- Part six: The Right Stuff
- Part seven: Learning From The Master
- Part eight: Graham-Newman
- Part nine: The First Ten Years
Walter Schloss – Part ten: Value Investing Today
Is value investing, in its traditional form, is still relevant in today’s market? This is a question many market commentators have asked over the years, although there’s no straight answer to this question. Granted, today’s market is unrecognizable compared to the market Benjamin Graham had to contend with when he first set out but value investors have also adapted to the market environment.
Walter Schloss started his investing career as a deep-value, net-nets investor. Many other legendary value investors also starting investing using this strategy and most of these investors were disciples of Graham. Buffett, Tom Knapp and Ed Anderson, Bill Ruane, Charlie Munger etc…
Still, over time the strategies of all of Graham’s disciples have changed.
For example, for the last three decades or so of Walter Schloss’ career, he started to take into account not only the value of the company’s assets but also the value of the brand, something Graham never did. (Buffett and Munger both made this change as well.)
From part six of this series:
“Ben didn’t look for franchise value or managements. He felt that management showed up in the price of stock. If management was good the stock sold at a higher P-E because its management was better.” — Walter Schloss
However, Walter Schloss’ own opinion had changed by March 6 1989, when he gave an interview with the Outstanding Investor Digest:
“Walter Schloss: When Philip Morris bought General Foods for 4 times its book, it seemed like a high price. But, in retrospect, it seems like a pretty good deal, at least compared to Kraft. Everything’s relative.
OID: Of course, compared to Kraft, almost anything would seem like a good deal.
Walter Schloss: I remember we owned stock in Schenley back in 1960 or so when it was selling below working capital. I went to talk to their treasurer. At that time, their stock was selling at $20 and they had $33 of working capital, including a huge inventory. I was asking how good their inventory was. In the course of our conversation, he said, “We’ve spent $100 per share on advertising.” That advertising was on the books for nothing. And that’s also true for Kraft. You have Philadelphia Cream Cheese and Miracle Whip. You couldn’t replace those for almost any price. They’ve got a niche. If somebody said, “Gee, I want to be in the businesses that Kraft is in now,” it’d be a very difficult thing to do. So even if book is only $20 and Philip Morris paid $106 a share for it, their book value and assets are only part of it. The rest is in the goodwill, the name – the franchise, if you will, as Warren Buffett would describe it…People just weren’t willing to pay those prices for great franchises in the past.”
This is not the only example Schloss gave. In part six of this series, I looked at Walter Schloss’ thesis for building a position in oil giant Texaco. The company was in trouble, falling earnings, a $10 billion legal battle and unpaid taxes had all pushed the group into bankruptcy. But Walter Schlossunderstood that a company of Texaco’s size could not disappear overnight and over the long-term the group’s fortunes would turn around. It would almost impossible for a new company to build itself up to Texaco’s size. Schloss was of course right.
And as mentioned above, Walter Schloss was not the only Graham disciple to change his value criteria from a deep-value, net nets style, towards a quality slant. It seems that most well-known value investors made this change during the last thirty to forty years, a point Charles Brandes makes in his book, Brandes on Value: The Independent Investor.
Brandes goes on to give Microsoft as a great example of a value-quality investment. Until 2014 Microsoft was out of favor, the company was being overtaken by up-and-coming peers and was considered by many to be past its prime. Nevertheless, for the astute value investor, the company’s high return on capital, strong cash balance and leading market position in many different tech spaces all equated to long-term success, with a reduced level of risk.
Seth Klarman too, now looks for quality as well as value. Klarman has made clear before that the Graham-Dodd way of thinking is still relevant in today’s market, although investors need to take into account the different market environment. In other words, Klarman now seeks out undervalued quality.
Other traditional deep-value investors who have now changed the approach include Buffett, The Sequoia Fund, Tweedy, Browne, (previously run by students of Graham), Charlie Munger and others, have all adapted to a quality-value approach. Market leading brands, a margin of safety, well run businesses, high returns on capital and room for growth are all traits that have become synonymous with value investing over the past few decades.
However, while value investing has changed, from a deep-value approach to a quality-at-a-reasonable price orientation, the teachings of Graham-and-Dodd are still as relevant today as they have been in the past. In the words of Seth Klarman:
“… The world is different now than it was in the era of Graham and Dodd. The business climate is more volatile now…When I think of Graham Dodd, however, it’s not just in terms of investing but also in terms of thinking about investing. In my mind, their work helps create a template for how to approach markets, how to think about volatility in markets as being in your favor rather than as a problem, and how to think about bargains and where they come from…The work of Graham and Dodd has really helped us think about the sourcing of opportunity as a major part of what we do—identifying where we are likely to find bargains…”
More market volatility gives modern day value investors a chance to buy undervalued, quality companies with less risk of loss of capital. All in all, value investing is still alive and well today. The strategy has changed with the market and will continue to be relevant for a long time to come.
The post Walter Schloss – Part Ten: Value Investing Today appeared first on ValueWalk.
Sign up for our free newsletter