Walter Schloss: 1916 – 2012

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#1
http://www.gurufocus.com/news/162766/wal...1916--2012-
February 20, 2012

Walter Schloss died over the weekend. He was 95 years old.

Schloss was one of the greatest investors of the 20th century. He beat the S&P 500 by 6 percentage points a year over 47 years. And was included as one of Warren Buffett’s “Superinvestors of Graham and Doddsville” in Buffett’s 1984 speech at Columbia.

Walter Schloss – like Warren Buffett – was a student of Ben Graham. However, Schloss took a more arithmetical approach to investing. Schloss remained more quantitative than Warren Buffett. He was never quite comfortable with the Phil Fisher’s scuttlebutt approach. In this way, Schloss stuck closer to Ben Graham’s teachings than Warren Buffett did.

Schloss’s almost 50 year record was similar to Ben Graham’s record in common stocks. Like Graham-Newman – where Schloss worked in the 1950s – Schloss Associates often held nearly 100 stocks at a time. Schloss’s technique and results were similar to what Graham-Newman achieved in their “private owner bargains” category.

This seems to have been Schloss Associates’ focus.

For most of Ben Graham’s career, “private owner bargains” meant one thing: net-nets.

Net-Nets

A net current asset value bargain – or net-net – is a stock selling for less than the value of its current assets (cash, receivables, and inventory) minus all liabilities.

Basically, it’s a stock selling for less than its liquidation value.

Net-nets were common during the 1930s and early 1940s.They started to become less common in the late 1940s and early 1950s when Walter Schloss worked for Ben Graham’s hedge fund: Graham-Newman. This scarcity of net-nets was one of the reasons Ben Graham closed down his fund in the mid-1950s.

Buffett and Schloss

Warren Buffett and Walter Schloss were both out of a job when Graham-Newman decided to shut its doors. It took the fund a while to wind down (Graham tended to own illiquid stocks). And, in that time, both Schloss and Buffett started funds of their own. Schloss’s career as a money manager began in 1955. Making Schloss’s investment career almost perfectly contemporary with Warren Buffett’s career.

For roughly the first ten years of both men’s careers net-nets remained the best way to make money in the stock market. That changed in the “Go-Go” years of the 1960s. But net-nets – and cheap stocks of every stripe – flooded the U.S. market again in the early 1970s. That’s when Walter’s son, Edwin, joined the firm.

Stocks Schloss Owned

A list of stocks Schloss sent to Warren Buffett in 2007 shows that Schloss didn’t always stick to net-nets and book value bargains. Some stocks with very low P/E ratios but few tangible assets show up on a list of stocks Schloss owned. There are also some more “Buffett” like buys on the list of stocks Schloss bought such as:

· American Express
· GEICO
· Berkshire Hathaway

But most of the stocks Schloss owned had nothing in common with Warren Buffett’s portfolio except for cheapness.

Low Turnover

Schloss once estimated that his portfolio turnover was about 20% to 25%. This is perhaps a bit lower than Ben Graham’s turnover. Graham’s turnover was often around 30%.

An analysis of Graham-Newman’s turnover and Schloss Associates turnover would probably show the difference in turnover was due to Schloss engaging in less arbitrage and related hedges than Graham did. These complex and volatility reducing techniques were a favorite of Ben Graham’s. But they did nothing to improve Graham-Newman’s long-term record. In the long-run, Graham’s returns came from being long extraordinarily cheap stocks – especially net-nets. The same was true of Schloss’s performance.

Schloss said that it usually owned a stock for 4 years. He tended to be too early. Almost always losing some money – on paper – before he started making money.

It’s interesting to note that if Schloss owned as many positions as Graham – roughly 100 stocks at a time – and held them for four years, Schloss only needed to find two new buys a month. Considering that Schloss spent all his time holed up in his office reading financial reports – finding one new stock every 2 weeks seems like a perfectly leisurely pace compared to today’s fund managers.

Obscure Stocks

If you take a look at that list of stocks Schloss sent to Warren Buffett in 2007 – you’ll find more than a few names you don’t recognize. Warren Buffett noted this in his 2006 letter to shareholders:

“Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success…There is simply no possibility that what Walter achieved over 47 years was due to chance.”

Underrated Investor

In that same letter, Buffett also mentions that Schloss didn’t go to business school – or college.

In Alice Schroeder’s biography of Warren Buffett she talks about Schloss not being taken as seriously as a future Graham-Newman partner as Warren Buffett was. It should be noted that – although in his recollections, Buffett usually downplays this as a real possibility – Ben Graham was obviously interested in having Warren Buffett succeed him at Graham-Newman. In fact, when limited partners asked who they should put their money with, Graham mentioned there was someone in Omaha. Apparently, Schloss was not viewed the same way.

Remarkable Record

Regardless of how he was seen, Schloss’s results over the next 47 years were remarkable. As good as Ben Graham’s. And certainly as good as the best modern hedge fund manager. Though, of course, there aren’t directly comparable investors to Schloss. Almost no fund managers have stayed in the game for more than 4 decades.

Even among those who had much shorter careers – beating the S&P 500 by 6 percentage points a year is an impressive record. By combining this 6 percent annual outperformance with 47 years of longevity, Walter Schloss earned himself a place in the investment hall of fame.

A $1,000 investment made with Schloss in 1955 would be worth over $1 million in 2002. We are talking about turning every one dollar in 1955 into one thousand dollars by 2002.

And, yes, all of these figures are after fees.

Lasting Lesson

What can we learn from Walter Schloss?

The Ben Graham way works. Buying a hundred stocks at less than their value to a private owner is a recipe for success.

You don’t need to talk to management, listen to analysts, forecast the macro-economy, or even be especially selective in the stocks you choose.

All you need to do is buy stocks that are clearly selling for less than their conservatively estimated value to a private owner – and then hang on.

Portrait of a Superinvestor

Schloss appears – under a pseudonym – in Adam Smith’s Supermoney:

“He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that's about it.

In introducing me to (Schloss) Warren had also, to my mind, described himself. ‘He never forgets that he is handling other people's money, and this reinforces his normal strong aversion to loss.’ He has total integrity and a realistic picture of himself. Money is real to him and stocks are real – and from this flows an attraction to the ‘margin of safety’ principle.”

Warren Buffett on Walter Schloss

This is what Warren Buffett said of Walter Schloss in his 2006 letter to shareholders:

“Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin…Walter and Edwin never came within a mile of inside information. Indeed, they used ‘outside’ information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham.”

And, finally, this is what Warren Buffett said of Walter Schloss in 1984:

“…He knows how to identify securities that sell at considerably less than their value to a private owner… He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do – and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him.”

That’s probably the most important lesson we can learn from Walter Schloss.


About the author:
Geoff Gannon - formerly of Gannon On Investing - likes to answer questions from you. If you have an investing question you want answered, please email him at geoff@gannononinvesting.com.
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#2
1000x in 47 years = 15.83% pa

Meaning double every 5 years.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#3
1000x in 47 years = 15.83% pa (after fee)
Meaning double every 5 years.

Walter Schloss, unlike Buffett, faced fund redemption from investors.
So, technically speaking, his return was not worse than Buffett.

But, Buffett's investment fund was much larger than him in any period.
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#4
I read somewhere that schloss return money back to investors to keep fund size to a certain level.

Maybe he thinks it is relatively easier to manage smaller fund. Probably easier life.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#5
One of the gurus to value investors. I knew him from the book, The Value Investors by Ronald Chan.

RIP
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#6
got Walter Schloss interview here.

http://www.bengrahaminvesting.ca/Resourc...rviews.htm
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
Reply
#7
Respect.

How to become like him? Smile
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#8
Walter Schloss shared 16 factors which he felt were needed in order to make money in the stockmarket.

"1. Price is the most important factor to use in relation to value.

2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).

4. Have patience. Stocks don't go up immediately.

5. Don't buy on tips or for a quick move. Let the professionals do that, if they can. Don't sell on bad news.

6. Don't be afraid to be a loner but be sure that you are correct in your judgement. You can't be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.

7. Have the courage of your convictions once you have made a decision.

8. Have a philosophy of investment and try to follow it. The above is a way that I've found successful.

9. Don't be in too much of a hurry to sell. If the stock market reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people sell it and button up your profit. Beore selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high. If the stock market is historically high? Are people very optimistic etc?

10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years ago before the stock sold at 20 which shows that there is some vulnerability in it.

11. Try to buy assets at a discount than to buy earnings. Earnings change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

12. Listen to suggestions from people you respect. This doesn't mean you have to accept them. Remember it's your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back.

13. Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

14. Remember the work compounding. For example, if you can make 12% a year and reinvest the moneyback, you will double your money in 6 years, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

15. Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16. Be careful of leverage. It can go against you."

A good reference / reminder for me in my investing journey so far.
Easier to read than to implement.
A stock well bought is half sold - Ben Graham
Price is the most important factor to use in relation to value - Walter Schloss
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#9
(04-11-2013, 02:24 PM)brattzz Wrote: Respect.

How to become like him? Smile

I find the following most inspiring. He proved that it is a level playing field for retail investors.
"He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that's about it."

I find the following most motivating and comforting. I have no problem achieving his first halfBig Grin. Hopefully the second half plays out!
"Almost always losing some money – on paper – before he started making money."
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#10
As prices of small to medium caps keep getting pushed higher and higher, it might be timely to remind oneself of rule number 8.
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