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Invest Like Legendary investor Walter Schloss

September 06, 2013 | About:
Back in 2008, legendary investor Walter Schloss gave an interview and Q&A session with students at the Ben Graham Centre for Value Investing at the University of Western Ontario.

The video is easily available around the web, but few people have actually viewed it. In fact, very few investors outside of the tight-knit deep value community have ever heard of the man. This, in spite of the fact that he has an extraordinary track record (averaging 16 percent net of fees and 25 percent of profits) for five decades.

If you add back the fees, he averaged 20 percent a year gross for 50 years, one of the most remarkable records in the history of markets.

In the interview, Schloss talks about how he picked stocks and managed portfolios. He didn't use computers or fancy algorithms. If he could find cheap stocks, he bought them without too much thought about diversification, correlations or the chart pattern. If they went down and the business value hadn't changed, he bought more.

For most of his career, he relied on Value Line and the S&P stock guide as his source of data and information. He did not talk to managers or know every in-depth detail of the operations of the company. If it was cheap, he bought; and that worked very well for a very long time.

During the video interview, Schloss hits three points several times:

  • First and most important is that he focused on book value, not earnings
  • He didn't like to lose money, so he avoided companies with too much debt
  • He preferred to buy stocks that are trading at not just new lows, but new four or five year lows
These three principles are at the heart of his investing approach and he used them to uncover the type of stock that powered his impressive track record for longer than many investors today have been alive.

It is a fairly simple task for investors to replicate his stock search methods. In this age of technology and the internet, is a fairly easy to task to look for stock that trade below book value, have low debt to equity ratios and trade at five year lows.

When you run this screen right now using a 30 percent debt to equity ratio as the upper threshold, you will find that there are only three names on the list. The market has been going up for some time now without so much as a 10 percent pullback, and there are simply not a lot of bargain issues to be found. The three names are, however, worth investigation and consideration by long term asset based value investors.

Alpha and Omega Semiconductors (AOSL) makes of power semiconductor products. Alpha and Omega's portfolio of products target high-volume applications, including portable computers, flat panel TVs, LED lighting, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment.

The stock fits the Schloss criteria, trading at just 66 percent of book value, very little debt and within a few percentage points of a five year low in price. The company has a portfolio of 242 patents that are not included in the book value calculation and may add extra value to the company over time.

Semiconductor markets have been weak for several years now, but will pick up as the global economy recover and this stock could have enormous upside from today's depressed levels.

Tower Insurance Group (TWGP) Tower Group International, Ltd., through its subsidiaries, underwrites insurance and reinsurance products in Bermuda, the United States and London markets.

A lot has gone wrong for this company lately as they have had to postpone the release if second quarter financials, cancel the planned acquisition of a reinsurance company and had their rating placed under review with negative implications by the AM Best rating agency. The usual flurries of shareholder and class action suits have been filed and this could be a messy stock for some time.

The shares currently trade at just 70 percent of tangible book value and are at a five year low but caution is called for on the part of most investors.

Systemax (SYX) sells personal computers, computer components and supplies, consumer electronics and industrial products through websites, retail stores, relationship marketers and direct mail catalogs in North America and Europe. Business has been soft as the computer and electronics markets continue to be very weak.

The company has been closing some retail stores in North America and taking other steps to reduce costs. They are seeing growth from the Industrial products division that sells such things as educational tools, training materials, scientific supplies and office decor. The stock trades for a little less than 80 percent of tangible book value and right around the value of its net current assets. The company has minimal debt and should be able to successfully survive until improvements in core consumer markets allow them to thrive again.

Walter Schloss made an enormous amount of money for his investors for a very long period of time. He accomplished this by owning stocks that traded for less than asset value, had little debt and traded down to multi-year lows. Although pickings are pretty sling there are still a few opportunities to find the type of investments that built one of the best track records in stock market history.

About the author:

Tim Melvin
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.com, Benzinga.com as well as several print publication including Active Trader and the Wall Street Digest.

Visit Tim Melvin's Website


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