By Rupert Hargreaves. Originally published at ValueWalk.
Lessons From Benjamin Graham Disciple Walter Schloss
In today’s world of second by second market updates, streaming news and Twitter, it is easy to overlook the decades of financial news coverage that have preceded today. However, if you take time out of your day to look through these archives, you’ll find some invaluable and timeless nuggets of information.
Walter Schloss is one of the more underappreciated value investors of the last century. Virtually unknown outside of value circles, Schloss was once an employee of Benjamin Graham and has been highly praised by one of the greatest investors of all time, Warren Buffett. It is said that when Buffett finally decided to move away from deep value investing, he called up Schloss and offered to sell him his entire value portfolio, which Schloss accepted. So, you could say that Schloss was a more committed value investor than even Warren Buffett.
The Walter Schloss Approach To Value Investing
Schloss was a traditional value investor and followed the investing method set out by Benjamin Graham right up until his death. Even into his early 90s, Schloss was still looking for bargains.
During 2008, five years after he stopped managing money for clients, he gave an interview to Forbes magazine describing his simple method for picking equities, a method that achieved a 16% total return after fees during the five decades he was managing money.
Below is a summary of the interview, you can read the whole interview here.
Walter Schloss interview
Right up until his death, Schloss remained a traditionalist. Just like Buffett, he favored paper company annual reports and daily stock quotes. Even in 2008, when computers were well on their way to taking over Wall Street, Schloss shunned technology. His favorite method of screening for stocks was scanning the paper or Value Line sheets for opportunities and then digging deeper when something caught his attention.
What’s more, unlike the rest of Wall Street Schloss maintained a Depression-era mentality over the course of his career. He ran his business with no research assistants and no secretary. Walter and his son were the only people in the office pouring over Value Line charts and tables. Schloss was also known to remove uncancelled stamps from envelopes for reuse, despite the fact he ran a multi-million dollar fund and took 25% of profits as compensation (this shows just how far this man’s frugality stretched).
Walter Schloss: Lessons From The Past
Given just before the market started to roll over in 2008, Schloss gives us an in depth, exampled description of his investment process in the copy. Even though the markets were trading close to all-time highs for the period, Schloss was still finding plenty of bargains.
One such company was the wheel maker Superior Industries International, which generated three-quarters of its sales from General Motors and Ford. Five years of falling earnings had taken their toll on the stock price and the time of the interview Superior was trading at 80% of book, offered a 3% dividend yield and had no debt. Commenting on company Schloss said, “Most people say, ‘What is it going to earn next year?’ I focus on assets. If you don’t have a lot of debt, it’s worth something.”
Another investment featured is CNA Financial, which was trading at 10% less than book at the time with little debt and 89% of the voting stock was owned by Loews Corp., controlled by the billionaire Tisch family. “I can’t say people will get rich on it, but I would rather be safe than sorry,” he says. “If it falls more, I won’t worry about it. Let the Tisches worry about it.”
From The Archives: Walter Schloss Why We Invest the Way We Do
In addition to Superior and CAN, Schloss liked Bassett Furniture. Battered by a lousy housing market Superior was trading at 40% book value and offered an $0.80 share dividend payout for a yield of 7%. When looking at the stock, Schloss commented that book value has been continually falling for years and the dividend may be under threat. His call: Consider buying when the company cuts its dividend. Then Bassett will be even cheaper, and it eventually will recover.
That quote sums up the Schloss approach in a nutshell; companies trading at discounts to book value, with little or no debt, run by managements that own enough stock to make them want to do the right thing by shareholders. If these three simple criteria were met, Schloss would call up the company asked for financial statements and proxies, read through the documents (paying attention to footnotes and management compensation) and then make a decision.
Walter Schloss changing strategy
Schloss was a traditional value investor, but over the years his investing approach had to change with the market and this is something he readily accepted.
While this “Superinvestor” started off buying net-nets or equities trading below working capital, by the 1980s, inventory and receivables had become less important as the percentage of industrial companies on the market dropped to make way for financials and fast moving consumer goods firms. So, Schloss had to adapt his strategy to stocks trading below book value.
This change in strategy lead to more uncertainty for the former net-nets investor. According to the Forbes interview, when buying on a discount to book alone, Schloss often found himself buying and selling too early. The example he gives in the interview timely considering what happened in the 12 months after the piece was published) Schloss bought Lehman Brothers below book shortly after it went public in 1994 and made 75% of it in a few months. Then Lehman went on to triple in price.
As well as adjusting his valuation strategy with changing market conditions, Schloss also branched out into other trading strategies. He cleaned up in 2000 and 2001 after shorting both Yahoo and Amazon before the market collapsed achieving a return for investors of 28% in 2000, compared to the S&P 500’s return of -9% and 21% in 2001 compared to the S&P 500’s return of -12%.
Rare Walter Schloss Video Q&A Session
At the beginning of 2008, Schloss was wary and had 30% of his personal assets in cash. Why was he so concerned about the outlook for the market? To quote Forbes, “There’re too many people with money running around who have read Graham,” in other words, Schloss believe that there were too many people chasing too few bargains.
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