Walter Schloss was one of the best and most dedicated value investors of all time. He studied under Benjamin Graham before setting out on his own.
When managing his own fund, he followed Graham’s principles and went on to compound investors' capital at 15.3% during his four-and-a-half decades managing outside money.
Around the turn of the century, Jim Grant interviewed Walter Schloss at the Grant’s Conference. The session covered a broad range of topics but focused mainly on Schloss’s work with Graham and his views on how to be a successful value investor.
One of the most interesting parts of the interview was Schloss’s take on Warren Buffett (Trades, Portfolio)’s decision to acquire Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
Schloss on Buffett’s mistake
As the story goes, Buffett initially bought Berkshire as a value investment. When management offered to buy his shares at an attractive price, Buffett agreed only to find that when the offer came out, it was slightly below what had been promised.
Buffett was short-changed by an eighth of a point, but he wasn’t going to let Berkshire’s management take advantage. He bought the company and kicked them out. He has since admitted that this was a $200 billion mistake.
After re-telling this story in the Q&A session, Schloss went on to add, “So sometimes if you miss something by an eighth of a point, you might think about that.”
The value investor then compared Buffett’s actions to those of Graham when he was managing money at the Graham--Newman Partnership:
"One of the experiences I had when I worked for Ben was that he had very strict rules. He wasn't going to deviate. I had a fellow came to me from Adams & Peck. I don't know if you've ever heard of Adams & Peck. It was an old line railroad brokerage company. Hetty Green would buy the Pittsburgh, Fort Wayne and Chicago Preferred, guaranteed for 999 years except that Penn Central went bankrupt. Adams & Peck was known as a purchaser of leased line companies. This fellow came to me, a nice guy, and he said, The Battelle Institute has done a study for the Haloid Company," a company in Rochester that had paid a dividend through the Depression, a small company that made photographic paper for, I think, Eastman Kodak. Haloid had the rights to a new process and he wanted us to buy the stock. Haloid sold at between $13 and $17 a share during the Depression and it was selling at $21. This was probably about 1947, '48 or something like that. I thought it was kind of interesting. You're paying $4 for this possibility of a copying machine which could do this. Battelle thought it was OK. I went into Graham and said, "you know, you were only paying a $4 premium for a company that has a possibility of a good gain," and he said, “no Walter. It's not our kind of stock." And, of course, it was Xerox.”
Schloss was trying to explain why Buffett made such a big mistake here.
Throughout his career, Buffett has mostly been strict with his investment decisions, but he broke his own rules when buying Berkshire, which seems to be the lesson Schloss is trying to get across.
That’s not to say that Graham never made mistakes either. He almost lost all of his money in the crash of 1929 because he sold his hedges too early and entered the market just at the wrong time.
However, after that, he learned the importance of sticking to a defined investment strategy and not breaking your own rules. As Graham’s student, you could argue that Buffett should have known better. Whatever the case, we can learn a lot from this simple example from a master of value investing.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Charlie Munger on Why Reading Alone Won't Make You a Good Investor
- Warren Buffett Explains Why Berkshire Does Not Give Analysts Special Treatment
- Warren Buffett's Thoughts on Intrinsic Value and Berkshire's Stock Price
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