If you've not heard of Walter Schloss, I highly recommend seeking out any material you can find on this legendary value investor.
Walter Schloss was, in many ways, one of the last real deep value investors. As many deep value investors gave up on buying cheap stocks, Schloss persevered.
It is said that when Warren Buffett (Trades, Portfolio) decided to close his investment partnerships in the late 1960s, Schloss was the first person he called to sell off many of his deep value holdings - the ones he could not find a buyer for in the market.
Buying at 52-week lows
Schloss liked to comb through lists of the worst-performing stocks on the market by looking at the ones that were hitting 52-week lows.
He would then buy a basket (around 100) of those stocks trading at a deep discount to tangible book value. Graham used a very similar approach, the logic being that while some companies would not survive, others would generate such attractive returns that it would more than make up for the losses.
This strategy worked exceptionally well for Schloss. According to his own figures, when he stopped managing money for clients in 2003, he had earned a 16% total return after fees for five decades versus 10% for the S&P 500.
In 2008, Schloss gave one of his last ever interviews. In the interview with Forbes Magazine, the value investor outlined the strategy he was using to pick bargains in the financial crisis. Investors who are interested in bargain hunting in the current market environment might find his approach helpful.
Schloss interview
One company Schloss was keen on at the time was Superior Industries International (SUP, Financial). This auto company supplier achieved around three-quarters of its sales from General Motors (GM, Financial) and Ford (F, Financial) at the time, and, as a result, was struggling. At the time of the interview in January 2008, the stock was trading hands for around $17 for a price-book ratio of 0.8.
Commenting on the stock, Schloss said to the interviewer, "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."
That was the core of his investment strategy: finding cheap companies that had strong balance sheets. With no debt, these businesses had the flexibility and potential to turn around, rewarding investors in the process.
Superior Industries, unfortunately, didn't work out too well as an investment over the next ten years. After rising to nearly $30 in September 2019, it has since plunged in value and is now changing hands for around $1. Still, selling the stock at book value would have yielded a profit.
Other companies Schloss highlighted for the article also produced a positive return. Bassett Furniture (BSET, Financial) was changing hands for around $10 per year at the end of January 2018. It was dealing at 60% of book value. Schloss recommended investors buy the stock "if the dividend is cut." It was, and by February 2009, the stock had dropped to just $1. However, by June 2017, it had risen to $38.
Schloss also recommended buying CNA Financial (CNA, Financial) at 0.9 times book and Tecumseh Products at 0.6 times book. CNA stock was around $32 in January 2008. It hit a high of $54 in January 2018. Commenting on the company in the 2008 Forbes interview, Schloss said:
"I can't say people will get rich on it, but I would rather be safe than sorry... If it falls more, I won't worry about it. Let the Tisches worry about it."
In the current market environment, Schloss's strategy could come into its own. Buying cheap stocks with strong balance sheets will never go out of fashion. His returns show just how lucrative the approach can be when pursued in times of crisis.
Disclosure: The author owns no share mentioned.
Read more here:
- Finding Value Stocks After Recent Market Declines
- Howard Marks: Be Conscious of the Cyclical Nature of Things
- Finding Value in the Current Market
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