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Buy Value, Diversify, Be Patient

A super investor, anointed thus by none other than the world's greatest investor himself, Warren Buffett, Schloss' life is a fine example of how deep value can survive amidst all the noise of the smart money, the fast money, the quants and the chartists

Warren Buffett, Schloss Buy Value, Diversify, Be Patient

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'.

According to Schloss, the lows of the stock price over the last couple of years give a good idea of where the stock can land in case of a weakness. Conversely, the highs of the past can indicate the level of fall the stock has seen. And it is always better if the management owns a lot of stocks; not to forget that the management's reputation is a deal breaker. Holding period should range between four to five years as depressed stocks can take time to turn around.

Methodical, value-based investor Schloss famously summed up his investment philosophy in one sentence: "We buy cheap stocks." He followed a Graham-style value approach to investing throughout his career and rarely talked to the management, choosing to invest only on the basis of numbers. Specifically, he liked to look at the assets (book value) more than the income statement. He liked to buy stocks at low price- to-book ratios, and when he did look at earnings, he liked low price-to-normalised earnings.

He liked stocks with long (15-20 years) histories and track records and studied how earnings and asset values fluctuated over various cycles.

Schloss never liked losing money and owned his stocks for an average of four years and often owned 60 stocks or more at a time and sometimes as many as 100 because he claimed not to be a good judge of business trends or management capability. So, he needed to take a diversified approach.

Timeless principles
Schloss's starting point was to look for the companies below the book value and with little debt. He would be interested only in companies that engaged in manufacturing of some sort. He was not comfortable with the service industry and would even ignore such successful franchises as McDonald's restaurants. He was interested in companies in basic industries.

Schloss' filter

  1. A stock being below the book value and having little debt are just starting points; Schloss was interested only in companies that engaged in manufacturing of some sort. He was not comfortable with the service industry and would even ignore successful franchises such as McDonald's restaurants. He was interested in companies in basic industries.
  2. Buying assets at a discount is a better deal than buying future earnings, which may or may not turn out as expected. That was Walter's motto. While earnings could change rapidly, asset values change more slowly. This focus on assets led him to buy stocks at or below their book values.
  3. New listings never excited Walter. No, he liked his companies with a track record of 20 or even 30 years. That kind of being around just gives a better picture, more visibility, more understanding and more comfort.
  4. The lesser the debt, the more the margin of safety. Whether it was the effect of the Great Depression which he lived through or of a prudent investing philosophy, Walter avoided companies with debt like a plague.
  5. He looked at the balance sheet and the income statement but never met managements.