Walter Schloss: Lessons From The Past

Walter Schloss is one of the founding fathers of value investing as we know it today.

While he’s not as well known as Benjamin Graham, Walter Schloss is still an extremely influential figure in the world of value investing. If Benjamin Graham is the most important man in the history of value investing, Schloss is almost certainly the second most important.

Walter Schloss: Patience is a virtue

Schloss' patience and ability to uncover value is legendary; even the great Warren Buffett falls behind Schloss when it comes to deep value investing. Indeed, in the late '60s/70s around the same time that he shut his initial partnerships, Warren Buffett sold all of his remaining deep value positions to Walter Schloss after becoming frustrated with their performance. As Peter Cundill, yet another successful deep value investor, explains in this video:

"The Schloss’ are really pure cigar-butt net-nets investors and Buffett was finally becoming so angry with becoming a net net, cigar butt investor, that he called Walter up and said ‘bid me, and I’ll just take what you bid me for these cigar butts.’ And Walter, as I am, is very good at being patient, I ‘ve got some insights from the Schloss’ that I hadn’t had before.”

Unfortunately, Walter Schloss passed away during 2012, but there are still plenty of resources out there which outline his investment style and philosophy. One such resource is an archive interview from 1985 published in Barron's magazine. In the interview, Schloss discusses his investment strategy, along with the positions he was holding for his partners at the time.

Walter Schloss: Barron's archive

Walter Schloss was taught his trade by Benjamin Graham, who didn't like to lose money. Schloss adopted the same approach:

"One of the tricks of this business is, keep your losses down and then, if you have a few good breaks, the compounding works well for you."

As the Barron's interviewer then goes on to point out, another trick of the trade is figuring out which stocks aren't going to get cheaper, although this wasn't something Schloss was ever worried about:

"I'm not very good on timing. In fact, I've stayed away from it. I think it makes life much easier -- people come to me and say, 'Well what do you think the market's going to do?' And I always say, 'I've got no idea; your guess is as good as mine.'"

Schloss then goes on to note that everyone is trying to time the market, but very few succeed. However, buying value requires a different approach:

"If you buy value--and you may buy it too soon, as undoubtedly I do--then it goes lower; you buy more. You have to have confidence in what you're doing."

As the Barron's interviewer points out, this approach requires courage. Most investors avoid averaging down, trying to escape the trap of throwing good money after bad. Schloss' response to this observation was, "You have to have patience in this field."

And Schloss wasn't interested in the day-to-day movements of the market. He tells Barron's that there's no ticker-tape machine in his office, and he spends most of the day reading the papers, trying to stay away from the "emotions of the market."

"Graham made the point in his book where he said, 'You you buy stocks like you buy groceries, not the way you buy perfume.' You're looking for value."

"The market is a very emotional place that appeals to fear and greed...all these unpleasant characteristics that people have. Making judgements is very difficult. Knowing when to sell -- making a decision to sell is the most difficult thing we do."

Schloss goes on to give an example of how the market misvalues companies. The business in question was Stauffer Chemical, which was suffering from cyclical pressures. Schloss looked at the business and saw that yes, the company had problems, but it also had an excellent record of navigating cyclical markets. Schloss started buying around $19, and Stauffer soon received a buyout offer of $28:

"Now, was the stock worth $21, or was it worth $28?"

"The market was saying it was only worth $21, because their earnings weren't that good. It paid a good dividend but it was obviously worth more than that...Stauffer was really a good company, and in a few years, it would have worked out satisfactorily. It happened to work out quicker, that's all."

You can read Walter Schloss' 1985 interview with Barron's here.

The post Walter Schloss: Lessons From The Past appeared first on ValueWalk.

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