Thread by @ValueEducator

Walter Schloss was an American #investor & fund manager. He studied #valueinvesting under Benjamin Graham and was able to generate a 15.3% annualized return over 45 years in the period of 1955-2000.

Let us understand how he did it and his #investmentframework in today’s thread:

Journey of Walter Schloss:

Walter Schloss did not go to college and started his career as a runner on Wall Street in 1934 at the age of 18. During this time, he took investment courses taught by Benjamin Graham at the New York Exchange Institute while being employed at Loeb,

Rhoades and Co. He learnt the value investing technique of Benjamin Graham and eventually worked for Mr Graham in the Graham-Newman Partnership, a firm owned by Mr Graham where he met Warren Buffet.

In 1955, Walter Schloss started his own fund and in 1973. He ran the fund from 1955-2000 and generated returns higher than the overall market in this time period.

Post 2000, they decided to wind up this fund as they could not find many cheap stocks and Walter Schloss himself stopped active money management for his clients at this time.

In 1984, Walter Schloss was named as one of the Super investors of Graham-and-Doddsville in the article by the name ‘The Super investors of Graham-and-Doddsville’ which was published in the issue of Hermes, Columbia Business School’s magazine.

The image below is an excerpt from this article where Warren Buffet has praised the investing style of Walter Schloss:

Investing strategy of Walter Schloss

A. Elements

The elements of the investing framework of Walter Schloss are as follows:

1. A company with a 10 year track record or more
2. No long-term debt
3. A low price-to-book value ratio
4. A stock at or near its 52-week low price

5. High insider ownership

The quote below highlights one of the elements of his investment strategy:

Schloss invested in companies with a track record of more than 10 years. These companies were known as ‘Campbell Soup’ companies. He invested in those companies whose businesses were easy to understand,

he avoided industries he didn’t know much about and avoided stocks of companies other than American companies as he believed the financials of these companies won’t be comparable to American companies due to differences in accounting techniques.

Schloss also avoided companies with debt as he wanted his chosen companies to be financially strong.
Schloss may consider buying near the 52-week low price if he believes that the company will emerge stronger from the situations either in the 2nd or 3rd point as mentioned above.

Walter Schloss preferred companies where the management had a significant stake. He was of the opinion that if management had a significant stake, their interests would be better aligned with the interests of the investors.

He never talked to the management of any of the companies he invested in his lifetime. He believed that the management will present a rosy picture about the company rather than telling the blatant truth which will cloud his judgement.

He therefore relied on his own analysis of the company’s reported financial statements.
B. Portfolio construction

As per the elements of his investing framework, the portfolio of Walter and Edwin Schloss Associates was constructed by considering the following parameters:

1. No more than 20% of portfolio to be held in single stock
2. A well-diversified portfolio of 100 stocks
3. Weighing the stocks in portfolio as per their perceived values, putting less money in positions where there is not much clarity
4. Use of limit orders to purchase stocks.

Walter Schloss just focused on those stocks which had a book value less than their trading price regardless of the quality of the business, quality of the management or any potential growth triggers. He also did not believe in talking with the management.

So to limit his downside, he held a well diversified portfolio with 100 stocks as he believed that the gains will offset the losses eventually. This was quite different from the strategy followed by Warren Buffet and Charlie Munger.

Schloss used to sell a stock if he could realize at least 50% profit from that stock during selling. He used to buy more in a company whose stock prices were falling but the fundamentals were sound.

C. Performance:
Due to the investing framework and portfolio management techniques followed by Walter Schloss, his fund Walter and Edwin Schloss Associates could generate a compounded annual return of 15.3%  over 45 years in the period of 1955-2000

which is higher than the S&P 500 compounded annual return of 11.7% in the same time period. This is summarized in the image below:

If you would like to know more about Walter Schloss and his 16-point checklist to make money in the market, let me know in the comments.

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