The Life of Walter Schloss

Walter came into international stardom in 1984 when Warren Buffett wrote an article titled “The Superinvestors of Graham and Doddsville” to commemorate the 50th anniversary of Security Analysis, written by the father of value investing—Benjamin Graham and David L. Dodd (hence the title of the article). Buffett highlighted how a motley group of Graham’s disciples used his teachings to beat the markets at their game. On top of that list was Walter Schloss.

Walter had never been to college. But he took a course Benjamin Graham was teaching at the New York Stock Exchange Institute, graduating in 1939.

In 1942, Walter enlisted in the army following the Pearl Harbour attack. This brought Walter’s first brush with India. His unit charged with supplying equipments to the Russians landed here before they left for Iran. A year and a half later he returned to the US where he joined the Pentagon.

After the War, Walter went to work for Graham as a security analyst. In 1955, he started his own investment management firm with $100,000 and 19 investors.

Walter had a few quirks that set him apart. He was his own research team never visited managements. He got his prices from the daily newspapers. His research relied on company reports and The Value Line charts and tables. He His son Edwin joined him in 1973 and this father-son duo set about forming the famous team. He worked in a single room office and well into his nineties would still use his 1934 copy of the Security Analysis.

Post the technology boom in the year 2000, Walter closed shop, returning $130 million to his investors. Even in the post ICE meltdown, Walter’s value oriented firm had delivered a market beating return; up 28 per cent in 2000 and 12 per cent in 2001 compared to the S&P’s 9 per cent and 12 per cent respectively. In his more than 40 year career, Walter averaged 16 per cent total returns annually after fees as against the S&P 500’s 10 per cent.

Walter started picking stocks in a pure Graham technique. He would buy stocks that were selling below their working capital. The underlying idea was that these were safe bets even if they went bankrupt and the extremely low valuations would minimise losses. A number of such stocks were found in the US through the 1930’s and the 50’s. Very few such stocks now exist.

After these working-capital stocks vanished, Walter started looking at companies that were trading at below their book value. But his technique was not as simplistic as picking up all stocks trading below their book value. He would look at how long the company has been in operation, the management’s performance and reputation for honesty going back at least a decade. He would look at the balance sheet. Any company with high proportion of debt would be out of the list. Walter had an absolute abhorrence to debt. In an interview with an Indian magazine a couple of years ago, Walter emphasized “I don’t like debt” more than 20 times in a single sitting.

Walter showed how an unwavering focus on value can produce results that can beat the record of even the best growth fund managers. A Rs 10,000 investment into his fund when he started off would turn into a mouthwatering Rs 80 lakh by the time it closed. But that didn’t mean Walter didn’t take losses. Or that he didn’t have bad years. What set him apart was that he did not lose confidence. Or change his style; he did not know any other. Walter was a quintessential old school value. An inspiration for all of us.