5 Lessons From Walter Schloss

A master of deep value, Schloss is regarded as one of the best value investors ever

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Sep 16, 2016
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Walter Schloss was one of the world’s greatest value investors. It could even be said that Schloss achieved a better track record of deep value investing than his teacher, mentor and godfather of value investing, Benjamin Graham.

Walter Schloss’ career managing money lasted from 1955 to 2002 and by his estimate, his investments returned 16% per annum (after fees) compared to a return of 10% per annum for the S&P 500 over the same period.

Schloss was a traditional deep value investor, a style he followed his entire life. Stocks only interested Schloss if they were trading at a 52-week low and a deep discount to book value. He placed a significant amount of focus on a company’s management. If Schloss believed a company’s management was behind the stock price decline (by making poor investment decisions) he would avoid the stock.

Just as Graham advised, Schloss always had a well-diversified portfolio of deep value equities with up to 100 stocks. Each stock never accounted for more than 20% of his overall portfolio. Each holding was weighted in Schloss’ portfolio according to its perceived value.

When it came to selling, Schloss would wait for the stock to rise by 50% before jumping out. This simple rule was implemented to keep his emotions out of the picture.

All in all, Schloss was a disciplined investor and committed to deep-value for his entire investing career. Today’s value investors can learn a lot from Schloss’ writings, here are five key traits and tips about his deep-value strategy.

Play to Your Strengths and Do What You Feel Comfortable With.

“...Peter Lynch visited literally thousands of companies and did a superb job in his picking. I never felt that we could do this kind of work...therefore, went with a more passive approach to investing which may not be as profitable but if practised long enough would allow the compounding to offset the fellow who was running around visiting managements...I also liked the idea of owning a number of stocks. Warren Buffett (Trades, Portfolio) is happy with owning a few stocks and he is right if he’s Warren but when you aren’t, you have to do it the way that’s comfortable for you and I like to sleep nights…”

Don’t be in a Hurry to Sell, Let Your Winners Run.

“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. If the stock market historically high. Are people very optimistic etc?" --Source

Diversify, Diversify, Diversify

“Take Lowenstein. This year it sold at $16 a share, paid a 90-cent dividend...It had a book value of $43. Or National Detroit Corp., which owns the National Bank of Detroit. It has a book value of close to $60 a share and sold at $41 this year. It’s a good company, maybe better than some of the ones I have.”

“The thing about my companies is that they are all depressed, they all have problems and there’s no guarantee that any one will be a winner. But if you buy 15 or 20 of them…” --Making Money Out of Junk

Don’t be Afraid to be a Contrarian.

“Would you rather own a 71/2% bond that guarantees you 71/2% until it matures, or a stock that yields 5% and, with a break could end up selling at $35 instead of $14?...Historically, many companies that have had terrible times have come back, or many of them do. A decline doesn't mean it's the end…”

“...Republic Steel for example, has a book value of $65 per share. I don’t think you could replace it at $130 per share. No one is going into the steel business in the U.S. today except the Japanese with a scrap plant. Or take cement. A new company can’t go into business unless someone comes up with a revolutionary new process...these companies and industries get into disrepute and nobody wants them, partly because they don’t make much money...if you buy companies that are depressed because people don’t like them...things turn a little in your favor, you get a good deal of leverage.” --Making Money Out of Junk

The First Decade as an Investor Is the Hardest.

“OID: As I mentioned to you in a prior conversation, Templeton's worst ten years investment-wise were his first ten years. And you told me that the same was true for you.

Walter Schloss: Yes, that's right. I think the first ten years you get kind of acquainted with what you're doing.” -- Interview with the Outstanding Investor Digest

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