Walter Schloss was arguably one of the most successful value investors of the last century. After working under Benjamin Graham when he finished school, Schloss set up his own shop in the 1950s and continued to follow a value-focused investment strategy until his death 60 years later.
According to his figures, the investment partnership returned 15.3% throughout the four and a half decades Schloss managed money for outside investors, compared to just 10% for the S&P 500.
Buying cheap stocks
Schloss followed a simple investment strategy. He wanted to buy good quality stocks at bargain-basement prices, the same method Graham used when he was running the Graham-Newman Corp.
Schloss had a set of 10 rules he liked to follow when investing. Today, these rules make a lot of sense. They were based on his desire to limit losses and achieve the best returns possible by investing in deeply undervalued businesses.
The first of the 15 rules was, "Price is the most important factor to use in relation to value."
Something investors overlook all too often. As Warren Buffett (Trades, Portfolio) once said, "Price is what you pay; value is what you get." After studying under Graham for many years, Schloss understood the most crucial skill for value investors is to pay the right price for a stock, and not overpay. That's why he put it at the top of his list.
The second factor was "Try to establish the value of a company. Remember that a share of a stock represents a part of a business and is not just a piece of paper." Once again, this advice is based on Graham's teachings. Even though he often had nearly 100 stocks in his portfolio at any one time, Schloss always paid close attention to the companies he owned and their underlying fundamental value.
Working from the balance sheet
Schloss always started valuing a business by looking at its balance sheet, and that's what rule number three details.
Schloss believed:
"Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for common stock)."
Valuing a business based on its balance sheet alone might seem like a fairly simplistic approach, but if you start here, you can quickly establish the financial position of a business. If it has lots of debt or other liabilities, you can rule the stock out before you get too emotionally involved with the business model.
Schloss was never interested in meeting company management because he believed they would always try to mislead shareholders with the most optimistic viewpoint. His returns suggest this strategy was correct.
The guru's fourth factor for making money in the market was:
"Have patience. Stocks don't go up immediately."
And the fifth was:
"Don't buy on tips or for a quick move. Let the professionals do that if they can. Don't sell on bad news."
Conclusion
These are only the first five rules on Schloss's list. Even when taken in isolation, these rules give us great insight into the way he approached investing.
I would go so far as to say that any investor would do well to learn these five criteria and stick to them throughout their investment career. They don't tell you exactly how to make money, but they do present the framework for a mindset every investor should have. Focus on the fundamentals, avoid companies with a lot of debt, be patient and concentrate on value, not price.
Any investor who applies these principles will, in my opinion, do well. There is also a lot of overlap between what Schloss said in his factors to make money in the market list and Warren Buffett (Trades, Portfolio)'s way of approaching the market -- maybe it is because they had the same teacher.
Read more here:
- Learning From Value Investing Legend Walter Schloss
- What Passive Investing Does Not Teach You
- 4 Cheap Value Stocks Trading Below Book Value With Net Cash
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
