When it comes to deep-value investing, Benjamin Graham is king, but Walter Schloss is a close second.
Schloss, unlike Graham, practiced value investing until his death in 2012. He took the principles of Graham and expanded on them, developing his own deep-value strategy that continued to work throughout his career-- unlike Graham, who left the profession because he believed investing had become too hard.
Schloss also took over where Graham left off teaching value investing. Over the years, he carried on Graham's legacy, building out deep value for the modern world. He was very successful in doing so.
In March 1994, Schloss published a checklist of factors needed to make money in the stock market. This list is a distilled completion of the investing lessons Schloss had learned throughout his career. Even though the list is now more than two decades old, it is still highly relevant today.
Factors to make money in the stock market
Schloss's factors are a collection of 16 simple points about how to invest. They are short, sweet and get the point across. While some are related to value, the majority defines how an investor should react in the market, and how investors should look at stocks.
So, without further ado, here is the list:
- Price is the most important factor to use in relation to value.
- 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.
- Use book value as a starting point to try and establish the value of the enterprise. Be sure debt does not equal 100% of the equity. (Capital and surplus for the common stock).
- Have patience. Stocks don't go up immediately.
- Don't buy on tips or for a quick move. Let the professionals do that if they can. Don't sell on bad news.
- 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 weaknesses in your thinking. Buy on a scale and sell on a scale.
- Have the courage of your convictions once you have made a decision.
- Have a philosophy of investment and try to follow it.
- 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 re-evaluate 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 price-earnings ratios high? Is the stock market historically high? Are people very optimistic?
- When buying a stock, I find it helpful to buy near the low of the past several 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 there is some vulnerability in it.
- Try to buy assets at a discount, then buy earnings. Earnings can change dramatically in a short time. Usually, assets change slowly. One has to know much more about a company if one buys earnings.
- Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember, it’s your money. 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.
- 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.
- 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.
- Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
- Be careful of leverage. It can go against you.
