Walter Schloss_ Bio, Books, Investment Philosophy, Quotes Etc

6/28/2015 Walter Schloss: Bio, Books, Investment Philosophy, Quotes etc

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Im not very good at judging people. So I found that it was much better to look at

the figures rather than people. I didnt go to many meetings unless they were

relatively nearby. I like the idea of company-paid dividends, because I think it makes

management a little more aware of stockholders, but we didnt really talk about it,

because we were small. I think if you were big, if you were a Fidelity, you wanted to

go out and talk to management. Theyd listen to you. I think its really easier to use

numbers when youre small. -- Walter Schloss

Walter Schloss: Background & bio

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Walter Schloss is not nearly as well known as other investors such as Warren Buffett

but Schloss has gained a reputation as one of the best value investors ever.

Like Buffett, Schloss was a direct student of Benjamin Graham, and is one of the

Super Investors mentioned by Warren Buffett in his famous essay, The Super

Investors of Graham-And-Doddsville

(http://www.tilsonfunds.com/superinvestors.html) (required reading for all

ValueWalk readers -- it is free and can be found on the link above).

Schloss was born in 1916 and passed away during 2012 at the age of 95

(http://www.bloomberg.com/news/2012-02-20/walter-schloss-superinvestor-who-

earned-buffett-s-praise-dies-at-95.html). Schloss never went to college and at 18

years old, he worked as a runner for on Wall Street at Carl M. Loeb & Co. One day, a

partner of the company, Armand Erpf, recommended that Schloss read Security

Analysis by Graham and David Dodd, which had been published a year earlier. The

firm then paid for Schloss to take two courses with Graham.

Schloss eventually went to work for the Graham-Newton Partnership and during 1955

Schloss launched his own value fund.

He ran the fund until 2000. He also spent four years during his long career serving in

the U.S. army fighting in WWII.

Schloss was known for being very frugal. His total office expense was an estimated

$11,000 while his partnership generated a net profit of $19,000,000.

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Schloss stopped actively managing other peoples money in 2003. He then became a

treasurer for the Freedom House, a non-profit group devoted to furthering democracy

and human rights.

Buffett called Schloss a superinvestor in a 1984 speech at Columbia Business School

and Buffett saluted Schloss as one of the good guys of Wall Street in his 2006 letter

to Berkshire Hathaway shareholders.

Upon Schloss death, Buffett, who was a close friend for more than 60 years released

the following statement: He had an extraordinary investment record, but even more

important, he set an example for integrity in investment management. Walter never

made a dime off of his investors unless they themselves made significant money. He

charged no fixed fee at all and merely shared in their profits. His fiduciary sense was

every bit the equal of his investment skills.

Walter Schloss: Investment record

From 1955 to 2002, by Schloss estimate, his investments returned 16% per annum on

average after fees, compared with 10% for the S&P 500 over the period.

He took no fees unless the fund achieved a certain hurdle rate. Once the fund hit a

certain Hurdle rate Schloss took 25% of the profit. Schlosss fund was set up very

similar to Buffetts original partnership.

Below is a chart of returns from Schloss fund (unfortunately it only goes up until 1984

and does not cover 1984-2000).



(http://www.valuewalk.com/wp-content/uploads/2010/02/Schloss-

returns.jpg)

The chart below shows the performance of the Schloss partnership upto 2000,

compared to the S&P Industrial Index.

(http://www.valuewalk.com/wp-content/uploads/2010/02/Schloss-v-SP.png)

Walter Schloss: Investment philosophy



While not much has been written about Walter Schloss investment philosophy, here

are some facts that have stood out in writings about him.

Schloss stayed devoted to Grahams pure style of value investing and did not evolve

into more of a qualitative investor like Buffett.

Schloss bought many companies that Buffett would have described as cigar-butt

companies. Similar to Graham, Schloss sought to acquire as many companies trading at

a 1/3 net working capital as possible.

Schloss relied mostly on the Value Line Investment Survey for finding attractive

stocks.

Some value characteristics Schloss used:

Companies with real assets with little or no debt, providing a margin of safety in

case the company liquidates.

20% or more discount to book value. He calculated book value based of cash, fixed

assets, and other tangibles.

A good dividend yield.

Managements that own a lot of stock.

Honest management that does not overpay itself.

Do not be afraid to hold cash.

Buying after a dividend cut. Investors usually overreact to dividend cuts which

provides a golden opportunity to invest.

From the book Value Investing: From Graham to Buffett and Beyond:

...The Schlosses would rather trust their own analysis and their

longstanding commitment to buying cheap stocks...This

approach...leads them to focus almost exclusively on the published

financial statements that public firms must produce each quarter.

They start by looking at the balance sheet. Can they buy the

company for less than the value of the assets, net of all debt? If so,

the stock is a candidate for purchase...

According to Schloss himself:

...Basically we like to buy stocks which we feel are undervalued,

and then we have to have the guts to buy more when they go

down...And thats really the history of Ben Graham...

Still, even though Schloss was a value investor at heart, he had a talent for making

money in different ways. According to Fortune Magazine, Schloss shorted Yahoo and

Amazon before the dot-com crash which made him massive amounts of money.

According to Buffett:

...[Schloss took] no real risk, defined as permanent loss of capital

[and invested] in about 1,000 securities, mostly of a lackluster

type. A few big winners did not account for his success...



Heres an excerpt from a great Forbes article

(http://www.forbes.com/forbes/2008/0211/048.html) detailing Schloss investment

process:

...Schloss screens for companies ideally trading at discounts to

book value, with no or low debt, and managements that own

enough company stock to make them want to do the right thing by

shareholders. If he likes what he sees, he buys a little and calls the

company for financial statements and proxies. He reads these

documents, paying special attention to footnotes. One question he

tries to answer from the numbers: Is management honest

(meaning not overly greedy)? That matters to him more than

smarts. The folks running Hollinger International were smart but

greedynot good for investors

...Schloss doesnt profess to understand a companys operations

intimately and almost never talks to management. He doesnt think

much about timingam I buying at the low? selling at the high?or

momentum. He doesnt think about the economy. Typical work

hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a

half hour after the New York Stock Exchanges closing bell

Warren Buffett on Schloss

Heres an excerpt from Buffetts essay, The Super Investors of Graham-And-

Doddsville (http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-

Doddsville).



He has no connections or access to useful information. Practically

no one in Wall Street knows him and he is not fed any ideas. He

looks up the numbers in the manuals and sends for the annual

reports, and thats about it.

In introducing me to (Schloss) Warren had also, to my mind,

described himself. He never forgets that he is handling other

peoples money, and this reinforces his normal strong aversion to

loss. He has total integrity and a realistic picture of himself. Money

is real to him and stocks are real and from this flows an

attraction to the margin of safety principle.

Walter has diversified enormously, owning well over 100 stocks

currently. He knows how to identify securities that sell at

considerably less than their value to a private owner.And thats all

he does. He doesnt worry about whether it its January, he doesnt

worry about whether its Monday, he doesnt worry about whether

its an election year. He simply says, if a business is worth a dollar

and I can buy it for 40 cents, something good may happen to me.

And he does it over and over and over again. He owns many more

stocks than I do and is far less interested in the underlying

nature of the business; I dont seem to have very much influence on

Walter. Thats one of his strengths; no one has much influence on

him.

Buffett in his 2006 Berkshire Hathaway Annual Letter had more to say about Schloss.

Below is the excerpt:

Let me end this section by telling you about one of the good guys of

Wall Street, my long-time friend Walter Schloss, who last year

turned 90. From 1956 to 2002, Walter managed a remarkably

successful investment partnership, from which he took not a dime

unless his investors made money. My admiration for Walter, it

should be noted, is not based on hindsight. A full fifty years ago,

Walter was my sole recommendation to a St. Louis family who

wanted an honest and able investment manager

Following a strategy that involved no real risk defined as

permanent loss of capital Walter produced results over his 47

partnership years that dramatically surpassed those of the S&P

500. Its particularly noteworthy that he built this record by

investing in about 1,000 securities, mostly of a lackluster type. A

few big winners did not account for his success. Its safe to say that

had millions of investment managers made trades by a) drawing

stock names from a hat; b) purchasing these stocks in comparable

amounts when Walter made a purchase; and then c) selling when

Walter sold his pick, the luckiest of them would not have come

close to equaling his record. There is simply no possibility that

what Walter achieved over 47 years was due to chance.



I first publicly discussed Walters remarkable record in 1984. At

that time efficient market theory (EMT) was the centerpiece of

investment instruction at most major business schools. This theory,

as then most commonly taught, held that the price of any stock at

any moment is not demonstrably mispriced, which means that no

investor can be expected to overperform the stock market

averages using only publicly-available information (though some

will do so by luck). When I talked about Walter 23 years ago, his

record forcefully contradicted this dogma.

And what did members of the academic community do when they

were exposed to this new and important evidence? Unfortunately,

they reacted in all-too-human fashion: Rather than opening their

minds, they closed their eyes. To my knowledge no business school

teaching EMT made any attempt to study Walters performance

and what it meant for the schools cherished theory.

Instead, the faculties of the schools went merrily on their way

presenting EMT as having the certainty of scripture. Typically, a

finance instructor who had the nerve to question EMT had about

as much chance of major promotion as Galileo had of being named

Pope.

Tens of thousands of students were therefore sent out into life

believing that on every day the price of every stock was right (or,

more accurately, not demonstrably wrong) and that attempts to

evaluate businesses that is, stocks were useless. Walter

meanwhile went on over performing, his job made easier by the

misguided instructions that had been given to those young minds.

After all, if you are in the shipping business, its helpful to have all of

your potential competitors be taught that the earth is flat.

Maybe it was a good thing for his investors that Walter didnt go to

college.

A quote from Buffett, origin unknown:

...He knows how to identify securities that sell at considerably less

than their value to a private owner: And thats all he does. He owns

many more stocks than I do and is far less interested in the

underlying nature of the business; I dont seem to have very much

influence on Walter. That is one of his strengths; no one has much

influence on him...

Walter Schloss: Quotes

You never really know a stock until you own it.



I worked for Benjamin Graham for 9 1/2 years, and Ben said he was going to retire

and move to California, I had to get another job, so one of the people who was a

stockholder of Graham Newman came to me and said, Walter, if you start a fund, I

will put some money in it. We ended up with $100,000. The structure was that I

would not get paid unless we realized gains. The kind of stocks I bought were not

growth stocks. Graham was really value-oriented. In those days he would buy

stocks that were selling below working capital. There were less of them, but they

were still around.

Walter Schloss: Books

Value Investing: From Graham to Buffett and Beyond

(http://www.amazon.com/gp/product/B000YIWF4C?ie=UTF8&tag=valueinves08c-

20&linkCode=as2&camp=1789&creative=9325&creativeASIN=B000YIWF4C) By Bruce

Greenwald

The Memoirs of Walter J. Schloss: A Personal and Family History

(http://www.amazon.com/gp/product/B000N490NQ?ie=UTF8&tag=valueinves08c-

20&linkCode=as2&camp=1789&creative=9325&creativeASIN=B000N490NQ) Walter

Schloss

A Modern Approach to Graham and Dodd Investing (Wiley Finance)

(http://www.amazon.com/gp/product/0471584150?ie=UTF8&tag=valueinves08c-

20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0471584150) By Thomas

P. Au

Exclusive ValueWalk Walter Schloss Series

1. Part One: Introduction To The Master Of Deep Value

(http://www.valuewalk.com/2014/12/walter-schloss-part-one-introduction-master-

deep-value/)

2. Part two: Discipline and Consistency (http://www.valuewalk.com/2014/12/walter-

schloss-investing-process/)

3. Part three: The Magic Of Compounding (http://www.valuewalk.com/2015/01/walter-

schloss-investment-style/)

4. Part four: 16 Factors Needed to Make Money in the Market

(http://www.valuewalk.com/2015/01/walter-schloss-16-principles/)

5. Part five: Making Money Out of Junk (http://www.valuewalk.com/2015/01/walter-

schloss-part-five-making-money-junk/)

6. Part six: The Right Stuff (http://www.valuewalk.com/2015/01/walter-schloss-part-six-

right-stuff/)

7. Part seven: Learning From The Master (http://www.valuewalk.com/2015/01/walter-

schloss-investments/)

8. Part eight: Graham-Newman (http://www.valuewalk.com/2015/01/walter-schloss-

graham-newman/)

Walter Schloss: Articles

The Superinvestors of Graham and Doddsville by Warren Buffett

(http://csinvesting.org/wp-content/uploads/2014/10/The-Superinvestors-of-Graham-

and-Doddsville-by-Warren-Buffett.pdf)

Schloss_May_8_2008 (http://csinvesting.org/wp-

content/uploads/2014/10/Schloss_May_8_2008.pdf)

schloss_lecture (http://csinvesting.org/wp-

content/uploads/2014/10/schloss_lecture.pdf)

Profit_Guru_Walter_Schloss_interview (http://csinvesting.org/wp-

content/uploads/2014/10/Profit_Guru_Walter_Schloss_interview.pdf)

graham_reminiscence (http://csinvesting.org/wp-

content/uploads/2014/10/graham_reminiscence.pdf)

14136584-walter-schloss-barrons-19851 (http://csinvesting.org/wp-

content/uploads/2014/10/14136584-walter-schloss-barrons-19851.pdf)

16 Investing Rules from Walter Schloss (http://csinvesting.org/wp-

content/uploads/2014/10/16-Investing-Rules-from-Walter-Schloss.docx)

Walter Schloss OID Interview (http://csinvesting.org/wp-

content/uploads/2014/10/Walter-Schloss-OID-Interview.pdf)



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Factors to Make Money in Stocks (1994)

(http://valuehunter.files.wordpress.com/2009/03/schloss_factors.pdf)

Criteria for Liquidations Where Money is Held by Company

(http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Walter%20Schloss/Criteria%2520for%2520Liquidation%2520-

%2520Schloss.pdf)

Seminar in Value Investing (1993)

(http://valuehunter.files.wordpress.com/2009/03/schloss_lecture.pdf)

Benjamin Graham and Security Analysis: A Reminiscence (1999)

(http://valuehunter.files.wordpress.com/2009/04/graham_reminiscence.pdf)

Profiles in Investing: Walter and Edwin Schloss

(http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Walter%20Schloss/Bottom%20Line%20April%2017%20-

%20Walter%20Schloss.pdf)

Sixty-Five Years on Wall Street

(http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Walter%20Schloss/Schloss-

Sixty-Five-Years.pdf)

Columbia Business School Upper Level Seminar in Value Investing

(http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Walter%20Schloss/Schloss%2520Seminar%2520at%2520CBC.pdf)

Factors Needed to Make Money in the Stock Market

(http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Walter%20Schloss/Factors%2520needed%2520to%2520make%2520money%2520in%2520stocks%2520-

%2520Schloss.pdf)

The Right Stuff Why Walter Schloss is Such A Great Investor

(http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Walter%20Schloss/Walter%20Schloss%20-

%20The%20Right%20Stuff%20-%20Barrons%20-%2002-25-85.pdf)

INVESTING YES, YOU CAN BEAT THE MARKET WITH VALUE

(http://money.cnn.com/magazines/fortune/fortune_archive/1995/04/03/224106/index.htm)

Depression Survivors Weigh In (http://theguruinvestor.com/2009/04/07/a-

superinvestor-and-other-depression-survivors-weigh-in/)

At 91, the man Warren Buffett famously dubbed a superinvestor is still picking

unloved stocks. (http://www.forbes.com/forbes/2008/0211/048.html)

Walter Schloss: Videos

Lecture by Schloss given in 2008

(http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2008/Schloss_2008.htm).

The Best of Value Investing - Part 5 (https://www.youtube.com/watch?v=v-

7e_97icWY&feature=youtu.be)

Walter Schloss_ Bio, Books, Investment Philosophy, Quotes Etc

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