How to pick stocks the Walter Schloss way

A student of Benjamin Graham, Walter Schloss started his career as a runner (a junior employee who delivers trade orders to the broker's floor trader for execution) on Wall Street in 1934. He enrolled for Benjamin Graham's classes at the New York Stock Exchange Institute and then worked for him. In 1955, he started his own investment firm WJS Partnership, which practised value investing. According to The Walter Schloss Archive, the partnership returned annualised returns of 15.3 per cent as against 10 per cent for the S&P 500 during 1955-2000.

Schloss' investing philosophy was greatly influenced by Benjamin Graham. Therefore, he focused more on asset value instead of a company's earnings. He preferred to buy stocks available at a discount to their book value. He believed that while the value of assets was steady, buying based on earnings was uncertain and required a lot of information about the company. Apart from preferring companies with little to no debt, he preferred buying stocks near the lows of the past few years. Owing to the high diversification requirements of his philosophy, he held, at times, even 100 stocks in his portfolio. (For more on Schloss' philosophy, click here)

While Schloss' philosophy may not be the most glamorous, it has to be remembered that he was influenced by the experience of the Great Depression and the resultant cheap prices. Therefore, he put great importance on preserving capital. However, given that he outperformed the benchmark using the same philosophy, it shows that such an approach can work wonders even under normal circumstances. The greatest learning from Schloss' approach could be the importance of the margin of safety. One needs to have a strong understanding of asset value in the first place to adjudge the margin of safety. Moreover, the courage to go against the crowd and the ability to manage a large number of stocks are also necessary traits to follow his approach.

Filters
In order to get a list of Walter Schloss-type companies, we have applied the following quantitative filters:

• Exclude service companies
• Debt to equity less than 0.30
• Price to book value less than one
• Promoter's holding at least 25 per cent
• Companies with operations of at least 10 years
• Average 3Y ROCE more than 12 per cent
• Positive cash flow from operations in the last 3 years

To find out the companies that pass these filters, head over to our Walter Schloss Stock Screener page.

Also in the series:

How to pick stocks the Buffett & Munger way

How to pick stocks the Benjamin Graham way

How to pick stocks the Joel Greenblatt way

How to pick stocks the John Neff way

How to pick stocks the John Templeton way

How to pick stocks the Peter Lynch way

How to pick stocks the Philip Fisher way