This is Walter Schloss.
Schloss achieved a 21.3% CAGR in the stock market from 1956 to 1984.
His bargain-hunting strategy is a must-read for investors.
Let's dive in 🧵👇
Schloss ran a capital-light operation
His total office expenses were $11k per year while producing a net income of $19M
Yet "...Walter continues to outperform managers who work in temples filled with paintings, staff and computers"
One of Schloss' best stock picks:
Boston & Providence Railroad - he bought the stock at $60 - $96
Penn Central wanted the real estate and ended up paying $110 for it
Another piece of the RE was sold for $277
Forbes refers to Schloss as a "junk collector"
He doesn't care about talented management teams, growth, or moats.
All Schloss cares about is cheap stocks.
He constantly scanned the market for bargains, like B&P Railroad
He also looked for "working capital stocks"
These stocks were selling for stock prices below their working capital after debt and preferred stock was deducted.
This means you got the physical assets for free - a real bargain.
He was asked why he focuses on book value over earnings:
“I really have nothing against earnings, except that in the first place, earnings have a way of changing. Second, your earnings projections may be right, but people’s idea of the multiple has changed."
Schloss shared how he thinks about book value
Take Republic Steel, the stated book value was $65 at the time, however, to replace RS operation, it would at the least take $130 a share.
No one could enter the steel business without a new revolutionary process.
"At such a time these companies and industries get into disrepute and nobody wants them, partly because they need a lot of capital investment and partly because they don’t make much money. Since the market is aimed at earnings, who wants a company that doesn’t earn much?"
"So, if you buy companies that are depressed because people don’t like them for various reasons, and things turn a little in your favor, you get a good deal of leverage."
Schloss talks about Marquette Cement as an example
The business used to sell for $50 per share.
With a book value of $28.
At one point the stock sold for $6 per share.
Schloss' thesis was that if the market turns around slightly, MC could make $1.5 in earnings and stabilize at $15 per share
Assuming that 50% of the EPS could be paid out in dividends, this was a great deal with $0.75 in dividends on a cost basis of $6 = 12.5%
In addition, the price appreciation from $6 to $15 = +150%
These kinds of bargains were what Walter was looking for
Schloss concluded his Forbes interview by saying
"Finding companies like this isn't hard"
He encourages investors to look at companies trading below their book value to find these bargains
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