"Have patience. Stocks don't go up immediately": Walter Schloss (1916-2012)

Walter J. Schloss (1916-2012), a renowned value investors, a disciple of Grand Panjandrum of value, Benjamin Graham, and a pal of Warren Buffett died on Feb. 19, 2012 at the age of 95 (another common characteristics of value investors – they live longer). A lot can be said about him. Let's just begin with his stellar performance. Schloss only lost money 7 out of his 47 years running a partnership. His worse loss was -12.8% in 1990. Until closing his shop in 2003, his average includes a 16% total return after fees during five decades versus a 10% for the S&P 500, a rare feat by any standard.


Walter Schloss did not attend any of the Ivy League B-Schools (probably that has saved him from mis-educating himself, or at least Charlie Munger will agree with me here). He started out as a Wall Street runner in the 1930s for brokerage Carl M. Loeb & Co. During the evenings, Schloss attended value investing courses taught by Benjamin Graham. After his military services, he joined Graham-Newman Corp. in 1946. He worked there for almost nine and half years before he started his own firm, Walter J. Schloss and Associates, in 1955 with $100,000 from 19 former clients.


Warren Buffett has mentioned 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 …”


In his 1984 article, “The Superinvestor of Graham-and-Doddsville,” Warren has opened the article with the description of stellar performances of Walter Schloss:


“He never forgets that he is handling other people’s money and this reinforces him 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.”


I rather emphasize more on a later comment by Warren: “I don’t seem to have much influence on Walter. That’s one of his strengths; no one has much influence on him.” That reminds the need of independent thinking in investment as opposed to group thinking. Warren said, "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Columbia Business School Prof. Bruce Greenwald, et al. in their 2001 book “Value Investing: From Graham to Buffett and Beyond,” wrote: “The Schlosses would rather trust their own analysis and their longstanding commitment to buying cheap stocks.”


When Bernard Condon of Forbes Magazine asked Schloss in an interview whether he considers himself a superinvestor, he demurs: "Well, I don't like to lose money."


The following is a list of 16 timeless factors for making money in the stock market, adapted from a 1994 document of Walter & Edwin Schloss Associates LP:

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 judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down 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 reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before 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? Is the stock market 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. Three years before the stock sold at $20, which shows that there is some vulnerability in it.
11. Try to buy assets at a discount rather than trying to buy earnings. Earning can 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 judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
14. Remember the work of compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in six 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 stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
16. Be careful of leverage. It can go against you.

Walter Schloss would be remembered in the investment community for his investment philosophy, particularly his independent thinking and remarkable performance. No doubt, Walter Schloss has earned himself a place in the investment hall of fame.


Mohammad Siddiquee is a PhD'Finance Candidate at the University of New Brunswick, Fredericton, Canada and runs a value investing research website at http://www.patienceinvesting.com.