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Rupert Hargreaves
Rupert Hargreaves
Articles (556)  | Author's Website |

Invest Like Walter Schloss to Avoid Suffering From Market Drawdowns

Walter Schloss was one of the greatest value investors of all time and his style is timeless.

February 09, 2018

“I’m not very good at judging people. So I found that it was much better to look at the figures rather than people. I didn’t go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we didn’t really talk about it, because we were small. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They’d listen to you. I think it’s really easier to use numbers when you’re small.” — Walter Schloss

Walter Schloss is one of the greatest value investors to have ever lived. It could even be said that he has a more significant value profile the Warren Buffett (Trades, Portfolio) himself.

Schloss worked with Benjamin Graham and went on to start his own value investment fund, which he managed until his death in 2012 at age of 95. Throughout his entire career, Schloss only brought deep value, unlike Warren Buffett (Trades, Portfolio) who abandoned the strategy in the 1960s and 1970s. In fact, there is evidence that Warren Buffett (Trades, Portfolio) decided to sell all of his value portfolios to Schloss when he decided he no longer wanted to be in the business.

There's no denying this value investor was not only one of the best value investors of all time, but he had a unique experience dealing with market peaks and troughs. From 1955 to 2002, by Schloss’ estimate, his investments returned 16% per annum on average after fees, compared with 10% for the S&P 500 over the period.

As market volatility returns, I can think of no better investor to study as a template for how to act in the current environment than Schloss. In one of the last interviews before his death, given in 2008, Schloss talked about picking stocks in the midst of a market meltdown. It is this interview I'm going to pull some quotes from for this article.

Old fashioned tactics

In 2008, Schloss was already a multi-millionaire, and he could quite easily afford to employ money managers to work on his behalf. He could also afford a computer, but he continued to rely on newspapers and the Value Line publication. "Well, look at that," he says during the interview while scanning a newspaper " a list of worst-performing stocks."

In today's world, where you can access any company's financial information at the click of a button, this approach might seem alien to many investors but it worked for Schloss for decades. You could argue that this method is out of date and today wouldn't generate returns. But how true is this? Poorly performing stocks are still poorly performing stocks.

Schloss was not only just a great investor but he was also incredibly cost-conscious, a trait that probably helped him with his value investing. It has been reported that he often reused envelopes in his office despite the fact that his fund was making millions of dollars in profit every year and expenses were kept to a bare minimum. In the 2008 interview, he remarks that his copies of Value Line come from his son because "Why should I pay?" This gives us a great insight into what the man was like. Value investing, and investing in general, is all about trying to minimize losses. The best investors don't lose money. Keeping costs to a minimum and not spending any more than you need to there's a somewhat similar approach. Warren Buffett (Trades, Portfolio) is well known for his modest lifestyle and reluctance to pay for anything he does not need. Another of Schloss' interesting traits was that he only considered a company's financials and rarely met with management and did not try to understand operations intimately:

"Schloss screens for companies ideally trading at discounts to book value, with no or low debt, and managements that own enough company stock to make them want to do the right thing by shareholders. If he likes what he sees, he buys a little and calls the company for financial statements and proxies. He reads these documents, paying special attention to footnotes. One question he tries to answer from the numbers: Is management honest (meaning not overly greedy)? That matters to him more than smarts. The folks running Hollinger International were smart but greedy--not good for investors."

I think today that most investors can learn a lot from this approach. Avoiding excessive spending and invest only in those companies that can look after your capital is key if you want to be a successful investor. What's more, so many investors nowadays don't read company reports, instead of relying on consolidated financial information available online. You can tell so much more about a business by spending time to read through all the financial documentation. Following this process also enables you to build a great picture of a company, one that will help you hold the company's stock if it drops 50% or more. If you have more confidence in your research, and understanding of the stock you hold, you are less likely to capitulate and sell out at an unfavorable time.

Unfortunately, today most investors just can't be bothered to do this. It would pay to invest more like Schloss.

Disclosure: The author owns no stock mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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