From The Archives: Walter Schloss’ Criteria For Company Liquidations

Walter Schloss was undoubtedly one of Benjamin Graham’s best students. Schloss practiced deep value investing right up unit his death in 2012, achieving an average return of around 16% per annum using Benjamin Graham’s cigar-butt strategy.

And this performance has made Walter Schloss a figurehead of the deep value landscape. He was a lifelong friend of Warren Buffett and Schloss featured in Buffett’s essay ‘The Superinvestors of Graham-and-Doddsville’.

Walter Schloss – Remains relevant

Even today, Walter Schloss’ deep value philosophy remains relevant. His common sense approach to investing provides a road map for long-term success, which can easily be replicated by any investor.

As part of his common sense approach to investing, to help minimize the risk of making mistakes and streamline the investment process, Walter Schloss used checklists to ensure that potential investments met his deep value criteria.

Below is one such checklist used for investing in liquidation situations.

The list is titled ‘Criteria For Liquidations Where Money Is Held By Company’ and copy of the original document can be found below. This note was first written by Schloss during May 1952.

Criteria For Liquidations Where Money Is Held By Company

1. Percent of profit should be minimum 15-20% per annum based on estimate of time and payments to be made.
2. Should be a few points spread between market and estimated work-out despite percentage gain.
3. If in litigation — issue should be earning some money during the period or at least not losing (much) money
4. Prospect of loss on investment should appear remote. Use Graham’s formula on special situations.
5. Issue should be first in line for payment — not junior security

COMMENT:   Preferable to buy liquidations before initial payout as most of the money received back and low remaining cost then increases percent return.

WARNING:     Liquidations not as profitable as formerly due primarily to competition of specialists in the field.

With the above criteria in mind I reviewed our present holdings and it appeared based on our figures and reports that Wealdon Corporation still seems attractive.

We presently own $28,500 or 1500 shares in Graham-Newman and $68,000 or 3596 shares in Newman & Graham

Our Average Cost	Present Market	Estimated Work-out	Time	Annual % Profit
19	18 7/8	23	1 yr.	21%

[Note on page: Graham formula. 80% chance of success at 23 within 1yr]

It would appear likely that a larger payment estimated $15-$20 a share will be paid within a year. To satisfy ourselves that the management is thinking along these lines, I would suggest that Lawrence Kessel go to Baltimore and talk with J.B. Warton.Jr. the Treasurer, who is the active officer. If this appears inadvisable, then a telephone call to him is suggested.

If the additional information we secure is satisfactory, I believe we should increase our holdings in Graham-Newman Corporation to $50,000 and Newman & Graham to $100,000.

Walter J. Schloss

Walter Schloss

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