From The Archives: Walter Schloss Why We Invest the Way We Do

Walter Schloss was one of Benjamin Graham’s most successful students. From 1955 through 2002, Schloss returned 16% per annum, according to his own figures, successfully using Benjamin Graham’s net-nets strategy to outperform the market for five decades.

Walter Schloss didn’t give many interviews over his career, but he did write a number of memos and letters to various publications over the years.

Walter Schloss’ lectures were also recorded, and below are a number of excerpts from Schloss’ lecture titled “Why We Invest the Way We Do”. Schloss delivered this lecture on May 16 1996 at the Behavioral Economic Forum at the Harvard Faculty Club in Cambridge, Massachusetts.

Below are some excerpts from the text followed by the full lecture notes.

Walter Schloss: Why We Invest the Way We Do

Investing isn’t a science:

“…I hope that this lecture will moderately improve my standing in the investment community. In any case, I’m approaching this meeting on behavioral economic with some trepidation. I don’t think investing has is a science. I rather look at is as part art and part science with some boundaries. My son, Edwin, and I don’t consider our approach a behavioral science, it’s just bargain hunting and since a number of value investors have gotten into the field, it has become harder to find bargains.

We want to buy value. We buy a lot of securities. We know a lot of people who don’t like our kind of diversification but we can’t help that…”

Hunting for bargains with minimal stress:

“We are bargain hunters in the stock market…As Ben Graham said, we buy stocks like groceries not like perfume, or as they say, “a stock well bought is half sold”. One reason why we don’t disclose our holdings is that we don’t want competition. If the stock goes lower, which is quite possible, we’ll want to buy more.

We don’t want to lose money, although, we do from time to time. We have found that if we are somewhat contrarian, we seem to do better than if we purchases companies that are doing well today. When we buy depressed stocks, we seem to reduce our stress. Some people seem to thrive on stress, but we fell in the long run it is bad for them. I note that Peter Lynch of Fidelity Magellan Fund did brilliantly, but after 10 years or so, he retired because it became too difficult to keep up the pace. I’ve been managing our fund for 40 years and Edwin has been with me for 23 years, and we aren’t stressed out yet and we hope we never will be.”

Management trust:

“We are basically passive investors. We expect corporations to treat us fairly, which, unfortunately, doesn’t always happen…

When we buy into a company that has problems, we find it difficult talking to management as they tend to be opportunistic. Very rarely will an officer say, “We are doing badly, the outlook is poor and we are very pessimistic about our future.”

Reduced risk:

“There is a saying that the less risk you take the better you sleep. Someone may say, “Why not buy short term treasuries?”. There is no risk, but little gain. If we are managing other people’s money we have to take some risk…

We want to buy cheap stocks based on a small premium over book value, usually a depressed market price, a record that goes back at least 20 years, even though the company may be somewhat different then than now, and one that doesn’t have much debt. We don’t like a lot of debt and we don’t think most value investors care for it either. Price is the key factor in the purchase of a stock compared to what we think the company is worth.”