Walter Schloss was arguably one of the best value investors of the last century. He pursued a deep-value strategy throughout his career and even offered to buy Warren Buffett (Trades, Portfolio)'s portfolio of net-nets stocks when the Oracle of Omaha decided to get out of the money management business in the 1960s.
If you're interested in value investing and haven't read up on Schloss and his approach to the market, then I highly recommend doing so. Schloss was, without a doubt, one of Benjamin Graham's best pupils.
Learning from the master
In 1996, at the behavioral economics forum at the Harvard Faculty Club, Schloss gave a speech titled "Why We Invest the Way We Do," which outlined the benefits of value investing compared to any other investment strategy:
"We are bargain hunters in the stock market instead of the retail trade or similar areas. As Ben Graham said, we buy stocks like groceries not like perfume, or as they say, 'a stock well bought is half sold.'"
Schloss then went on to describe his primary goal in investing. Above all else, he wanted to avoid losing money, and the best way of doing that is to be contrarian:
"When we buy depressed stocks, we seem to reduce our stress. Some people seem to thrive on stress, but we feel in the long run it is bad for them."
Schloss then told the story of Wall Street legend Peter Lynch, who earned billions for his investors by investing in growth stocks. His approach, however, was extraordinarily time-consuming and required the investment manager to run all over the country finding the hottest companies.
After 10 years, he quit the business. "I've been managing our fund for 40 years," Schloss went on to say. "We aren't stressed out yet, and we hope we never will be."Â
Fit his personality
The investor went on to explain that the reason why he chose value in the first place is that it fits his personality. Following the depression in the 1930s, Schloss decided he wanted to make sure he could always make money and provide for his family. The best way to do this was to limit risk and protect the downside:
"Edwin [his son] and I look for ways to protect us on the downside and, if we are lucky, something good may happen. We are basically passive investors. We expect corporations to treat us fairly, which, unfortunately, doesn't always happen."
To this end, Schloss always avoided talking to management as he believed that they would try to mislead stockholders. In the 1996 speech, he said:
"When we buy into a company that has problems, we find it difficult talking to management as they tend to be optimistic. Very rarely will an officer say, 'We are doing badly, the outlook is poor, and we are very pessimistic about our future.'"
As a result, Schloss tried to avoid managers, putting his trust in the numbers instead.
He summed up his investment strategy as follows:
"We want to buy cheap stocks based on a small premium over book value, usually a depressed market price, a record that goes back at least 20 years, even though the company may be somewhat different then than now, now and one that doesn't have much debt. We don't like a lot of debt, and we think most value investors don't care for it either. Price is the key factor in the purchase of a stock compared to what we think the company is worth."
Schloss' investment strategy wasn't complex. Rather, as he explained in the lecture, it was straightforward and easy to follow. That's why he was able to keep compounding his capital for more than four decades. Compounding is, after all, all that matters if you are trying to create wealth over the long term.
Read more here:
- What Passive Investing Does Not Teach You
- 4 Cheap Value Stocks Trading Below Book Value With Net Cash
- Some Thoughts on Investing Red Flags
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