Walter Schloss is one of the more underappreciated value investors of the last century. Virtually unknown outside of value circles, Schloss was once an employee of Benjamin Graham and has been highly praised by one of the greatest investors of all time, Warren Buffett.
THE WALTER SCHLOSS APPROACH TO VALUE INVESTING
It’s always interesting to read about Schloss and his style of investing. Indeed, Schloss was a traditional value investor and followed the investing method set out by Benjamin Graham right up until his death. Even into his early 90s, Schloss was still looking for bargains. In 2008, five years after he stopped managing money for clients, he gave an interview to Forbes magazine describing his simple method for picking equities, a method that achieved a 16% total return after fees during the five decades he was managing money.
Below is a summary of the interview, you can read the whole interview here.
Walter Schloss interview
Even in 2008, when computers were well on their way to taking over Wall Street, Schloss shunned technology. His favourite method of screening for stocks was scanning the paper or Value Line sheets for opportunities and then digging deeper when something caught his attention.
Schloss also lived with a Depression-era mentality. His office running costs were and still are some of the lowest that Wall Street has ever seen. He ran the business with no research assistants and no secretary just him and his son, pouring over Value Line charts and tables. Schloss was also known to remove uncancelled stamps from envelopes for reuse, which seems unnecessary for a man who ran a multi-million dollar fund and took 25% of profits as compensation.
Walter Schloss: Lessons From The Past
Schloss was still finding plenty of bargains on the market at the time of the Forbes interview, given six months before the market started to roll over in 2008. One such company was the wheel maker Superior Industries International, which got three-quarters of its sales from General Motors and Ford. Five years of falling earnings had taken their toll on the stock price and the time of the interview Superior was trading at 8% book, offered a 3% dividend yield and had no debt. Commenting on company Schloss said, “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.”
Get The Full Walter Schloss Series in PDF
Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.
That quote sums up the Schloss approach in a nutshell; companies trading at discounts to book value, with little or no debt, run by managements that own enough stock to make them want to do the right thing by shareholders. If these three simple criteria were met, Schloss would call up the company asked for financial statements and proxies, read through the documents (paying particular attention to footnotes and management compensation) and then make a decision.
Walter Schloss changing strategy
Over the years, Walter Schloss' investment style changed and adapted with the market. While this “Superinvestor” started off buying net-nets or equities trading below working capital, by the 1980s, inventory and receivables had become less important, and Schloss had to adapt his strategy to stocks trading below book value. However, with this change in strategy came a change in market conditions. According to Forbes, Schloss often found himself buying while stocks still had a long way to fall and selling too early. He bought Lehman Brothers below book shortly after it went public in 1994 and made 75% of it in a few months. Then Lehman went on to triple in price.
Schloss cleaned up in 2000 and 2001. He shorted both Yahoo and Amazon before the market collapsed achieving a return for investors of 28% in 2000, compared to the S&P 500’s return of -9% and 21% in 2001 compared to the S&P 500’s return of -12%.
Rare Walter Schloss Video Q&A Session
At the beginning of 2008, as the market sat 15% below its peak, Schloss was wary and had 30% of his personal assets in cash. Why was he so concerned about the outlook for the market? To quote Forbes, "There're too many people with money running around who have read Graham,” in other words, Schloss believe that there were too many people chasing too few bargains.
And the final few paragraphs of Schloss’s interview with Forbes give a real insight into his investing style. In this part of the interview, Forbes asks Schloss to go over a few investments that were on his watch list. One was CNA Financial, which was trading at 10% less than book at the time with little debt and 89% of the voting stock owned by Loews Corp., controlled by the billionaire Tisch family. "I can't say people will get rich on it, but I would rather be safe than sorry," he says. "If it falls more, I won’t worry about it. Let the Tisches worry about it."
From The Archives: Walter Schloss Why We Invest the Way We Do
Another pick was Bassett Furniture, battered by a lousy housing market the stock was trading at 40% book value and offered an $.80 share dividend payout for a yield of 7%. When looking at the stock, Schloss commented that book value has been continually falling for years and the dividend may be under threat. His call: Consider buying when the company cuts its dividend. Then Bassett will be even cheaper, and it eventually will recover.
The post Walter Schloss 2008 Interview [From The Archives] appeared first on ValueWalk.
