Walter Schloss was one of the greatest value investors of the last century.Â
Some years before his death in 2012, he recorded a video conversation with students of Canada's Ivey Business School. Recently uploaded to YouTube, the talk covered many different topics. Schloss shared his insights on almost every part of investing, with a specific focus on deep value investing. He also touched on subjects such as the importance of macroeconomic analysis in value investing. He said he believed macro analysis has no place in value investing. Here's how he responded to a question on the subject:
"I have not tried to get involved from what's going to happen in business [the global economy]. I try to stay away from that. Your guess is as good as mine. I don't know if we are going to have a recession ... I like to buy stocks on the basis of what they are worth and not trying to figure out what's going to happen in business ... It saves me a lot of grief ..."
This sounds similar to another highly regarded value investor, Seth Klarman (Trades, Portfolio), who also advocates ignoring macroeconomic forecasts.
Students went on to ask him to explain the biggest investing mistake he has ever made. Schloss answered:
"Think you can have different mistakes, such as putting more money on a stock that is going down ... We didn't lose money very often, which is why I kind of pushed it out of my mind. We didn't sometimes buy a lot of stocks. I own 100 stocks most of the time. That way we have a big diversification."
So by and large, by being broadly diversified, Schloss avoided taking any significant losses in his portfolio throughout his career. But he went on to say that while he may have been able to sidestep the pain caused by losing money, other mistakes proved to be more emotionally disruptive:
"I don't even remember the name of this company anymore. We bought this stock, and it was trading for around $2 per share, and I held it for quite some time. It was a company that manufactured stuff for the army. The man who owned it and around 80% of the company, and he offered to buy the whole company for around $7 per share. At the time it had working capital of around $10 [per share]. I owned around $100,000 of the stock, and I objected to it. There was a lawyer who said, 'I don't want this going through, so I'll help you with this.' He won in the court in New York State, so they went to the next highest court. He won by a vote of 3 to 1 ... Emotionally, I found getting involved in legal action very unpleasant."
Avoid legal action and stick to vanilla investing seems to be Schloss' advice here. He went on to say that, whatever you do in life, you should try to avoid becoming involved with people who are not very ethical:
"I think what I try to do is avoid making the mistake of getting involved with people who are not very ethical ... There was a company called Troy Oil, and the CEO was not allowed to register the company without registering with the SEC ... he was caught and sent to prison. This man made a lot of money, but I do not want to associate with him. You have to associate with good people."
The last piece of crucial advice from Schloss in his talk was not to lose money. Echoing Benjamin Graham's advice to avoid losses at all costs, Schloss said that investors should prioritize loss reduction and seek to invest "intelligently and unemotionally," weighing the best opportunities against each other:
"The point is, you don't want to lose money, and you have clients and responsibility, and Benjamin Graham was a very important philosophical man. I think 'The Intelligent Investor' was a great book. Warren Buffett (Trades, Portfolio) thinks it is the greatest book you will ever read. Benjamin Graham wrote intelligently and unemotionally, and those are good qualities to have in investments."
He then said that the advantage of having this mindset is it enables you to deal with losses better and continue investing, without letting emotion get in the way of your investment decisions. The best way to protect against the risk of loss is to invest only in "stocks which are depressed."
"They may not be good in other fields, but if you lose money it is very upsetting to you and your client, so you're trying to protect yourself. One way to do it is to buy stocks which are depressed, and then you want to be sure they're not going to go broke. They want to be there ...The industry is fine, and then you have to weigh that against other opportunities."
Disclosure: The author owns no share mentioned.
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