Widely read:
Walter J. Schloss was a disciple of the Benjamin Graham. Schloss asserted that the lows of the stock price over the last couple of years give us a good idea of where the stock can land in case of a weakness, and the highs of the past can indicate the level of fall the stock has seen. It is also better if the management owns a lot of the company, though the management's reputation can be a deal breaker. Depressed stocks need about four-five years to turn around. His screener looked for long-standing but undervalued companies with high promoter holdings.
Schloss' filter
For Walter Schloss, a company with little debt and trading below its book value were just starting points. Schloss would be interested only in companies that engaged in manufacturing of some sort. He was not comfortable with service industries and would even ignore successful franchises such as McDonald's. He was interested in companies in basic industries such as power, chemical and metals.
Buying assets at a discount is a better deal than buying future earnings, which may or may not turn out as expected: that was Schloss'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.
New listings would never excite Schloss; he considered companies with a track record of 20 or even 30 years. That kind of being around would give him a better picture, more visibility, more understanding and more comfort.
Schloss believed that the lesser the debt, the more the margin of safety. Whether it was the effect of the Great Depression which he lived through or prudent investing philosophy, Walter avoided companies with debt like a plague.
For his analysis, he looked at the balance sheet and the income statement but he never met companies' managements.
Modified filters for Indian markets
1. Exclude service companies
2. Debt to equity less than 0.50
3. Price to book value less than 1
4. Promoter's holding at least 25%
5. Companies with operations of at least 10 years
6. Average 3-year ROCE more than 12%
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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