Walter Schloss is considered one of the investment greats, a value investor in the same league as the Oracle of Omaha, Warren Buffet. Like Buffett, Walter Schloss was also trained under the legendary Benjamin Graham. For a brief while in the 1950s, Schloss and Buffet even shared the same office.

For sheer uninterrupted performance record, few investors can match Walter Schloss. For 45 years from 1955 to 2000, he managed the investment partnership, Walter J. Schloss Associates and delivered an astounding compound annual return of more than 15 per cent per year compared to a gain of S&P 500 of just over 10 per cent.

And this is what Buffet had to say about Walter Schloss: "He knows how to identify securities that sell at considerably less than their value to a private owner: And that's all he does. He owns many more stocks that I do and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him."

His approach was deep value investing, focusing on securities that were statistically cheap by measures such as price to book value, price to earnings, discounts to working capital, etc. With little more than a few file cabinets, a rolodex, and a desk, he managed to produce a compound annual rate of return that soundly trounced the S&P 500. In fact, Walter Schloss was so successful, that Warren Buffett wrote about him to his partners and mentioned him in the now-famous essay, "The Super Investors of Graham and Doddsville."

1. "One of the things we've done is hold over a hundred companies in our portfolio. Now Warren (Buffet) has said to me that, that is a defence against stupidity. And my argument was, and I made it to Warren, we can't project the earnings of these companies, they are secondary companies, but somewhere along the line some of them will work. Now I cannot tell you which ones, so I buy a hundred of them. Of course, it does not mean you own the same amount of each stock."
2. "I'm not very good at judging people. So I found that it was much better to look at figures rather than people. I didn't go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we did not really talk about it, because we were small. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They would listen to you. I think it is really easy to use numbers when you're small."
3. "Timidity prompted by past failures causes investors to miss the most important bull markets."
4. "We did not get involved in many companies that turned crooked. I know there were a few people that had poor reputations and their stocks were low, and when we did buy some of those we were sorry afterwards because they figured out a way of taking advantage of you, and you were always worried that they'd do something that didn't like."
5. "When companies have problems they often like to have their annual meetings in cities and states where there are not too many stockholders."

It generally pays to keep things simple and no-one understands that better than this octogenarian investor.

‘He has no connections or access to useful information. Practically no-one on Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.’

Next time you’re told you need options, contracts for difference or leverage to ‘enhance’ your returns, just think of octogenarian value investor Walter Schloss. In a 1989 interview with US publication Outstanding Investor Digest, he was asked to summarise his approach. His response? ‘We try to buy stocks cheap’. The result has been a compound annual return in excess of 20% over almost 50 years, placing him among the very greatest investors.

Schloss was a child through the boom years of the 1920s and the ensuing great depression. He saw the extremes of fear and greed first-hand, but—perhaps due to his young age—the era doesn’t seem to have scarred him as much as others. ‘You should remember what took place,’ he says, ‘but you can’t run your investments as if a repeat of 1932 is around the corner.’

Superinvestor school

In 1934, Schloss found a job on Wall Street and enrolled in night courses at the New York Stock Exchange Institute. His lecturers included Benjamin Graham and David Dodd, co-authors of Security Analysis, and it was an association that would play a formative role in his life. Upon being discharged from military service in 1946, he took a job working for Ben Graham’s Graham-Newman partnership, where he spent his time working through Standard & Poor’s manuals looking for underpriced stocks. After a 10-year stint, Schloss left to establish his own partnership, and was joined by his son Edwin in 1973.

Like Graham, the Schlosses reckon that if you buy a share cheap enough, something good is likely to happen. But unlike other Graham disciples, such as Warren Buffett and Tom Knapp, they have maintained a Graham-like fixation on asset values (Graham spent many years simply buying companies for two thirds of their working capital). If there aren’t assets to support a valuation, they won’t buy the stock. In fact, as a hard and fast rule, they won’t pay more than twice book value (the value of all the assets less all the liabilities) for anything. This obsession has, by their own admission, meant the Schlosses have ended up owning some fairly mediocre businesses, but they like the security of having something tangible backing up their purchases. Earnings, they feel, are a whole lot less reliable.

Time in the market

Their portfolio has always been diversified, often containing more than 100 stocks, but if they have a really good idea they may allocate up to 15% of their funds to it. They also try to remain fully invested. Walter says: ‘Most people who have been really successful in the securities markets say the same thing—that they’re not smart enough to get in to the market and out of it. I don’t know anyone who got rich owning high-grade bonds.’ The Schlosses are also fiercely independent, believing that if you truly think you’re right, you should stick to your guns.

But, like many successful people, their results have been as much a function of what they don’t do as what they do. Walter says: ‘It’s important to know what you know and what you don’t know’, and the Schlosses have certainly stuck to his mantra. In addition to not paying for earnings because they aren’t ‘as good at valuing businesses as Warren [Buffett]’, they rarely, if ever, visit management. Walter says: ‘I think I agree with Ben Graham. He didn’t like to speak with management because he thought he would be influenced by what they said.’

In keeping with their simple approach, the Schlosses subleased a small office, shared one phone between them (if it rang more than twice a day there was ‘something going on’) and simply read annual reports. The most common mistake they’ve made has been to be too aggressive initially, so that when the price of a security has continued to decline, it has taken too much capital to lower their average entry price. As for other investors, Walter says: ‘One of the things people are most foolish about is that they think the market price of a stock on a per share basis reflects the total price of the company. They forget that if a company has 100 million shares outstanding, and it sells at 10 cents per share, that it’s selling for $10 million—even though it’s only selling at 10 cents.’ (See our Investor’s College of issue 154/Jun 04 for further explanation of this common investing mistake).

Out of the spotlight

Despite featuring in Warren Buffett’s famous speech, The Superinvestors of Graham-and-Doddsville, delivered at Columbia University and reproduced as an appendix to Ben Graham’s book, The Intelligent Investor, the Schlosses are relatively unknown—and they like it that way. In fact, we’ve had to rely on two 16-year old editions of Outstanding Investor Digest for the quotes in this feature, though we very much doubt that anything has changed.

They are proud of the fact that they sometimes get in to the office late and leave early, ‘sort of like the LIFO method of accounting—last in and first out’. They pick and choose their fund’s investors, preferring those who require their services most. And they feel good about the fact they can make a difference to the lives of 60 or so people. Their fees are on a performance basis only, and if they lose money they actually refund investors a percentage of the annual losses. Try persuading the next fund manager you meet to agree to that.

The Schlosses are another great example of value investing in practice. Their focus on assets is very different from Buffett’s focus on economic moats, but the underlying principle is the same, as it is for all value investors: try to find something selling for less than it’s worth. Then buy it.

Interview

ER: How did you first get started in research?
WS: In the 1930’s my mother had a good friend who was married to a member of the New York Stock Exchange. I
used to visit them and I liked the lifestyle, they had a kind of joie de vivre about the way they lived. He was a specialist on the Exchange, but I didn’t like the speculative nature of the work. I could see instinctively what I liked – I like numbers. So after high school, in 1934, I went to work at Loeb Rhoades, then called Carl M. Loeb & Co. I started working in the cage, doing clerical work, recording trades for customers. A year after I arrived, I went to speak to one of the partners about getting into the statistical department, but he said he couldn’t do it. He suggested I read Ben Graham’s book, Security Analysis, which had just been published and said ‘if you read
that book and know everything in it, you won’t need anything else.’ Ben Graham was a customer of Loeb and was teaching courses at night. So I took two of his courses – I think ’36 and ’39 – at the New York Institute of Finance, which was then called the New York Stock Exchange Institute. I took Graham’s course and I just fell
in love with the approach – it made sense. He liked to take companies listed near each other on the exchange and to compare them. One would represent a value stock and another a growth company. I remember he took Colgate-Palmolive, a value company, and Coca-Cola, a growth company, and compared them. He also compared
Dow chemicals (growth) and Distiller Seagram (value.)
ES: How do you compare two different companies in different industries?
WS: He was using the statistics. He wasn’t using industry analysis. He was using the value of the company. He was looking at relative value to see if the company was relatively cheap to book value.
ES: You’ve always said some people latch on to the value approach, they really fall in love with it and other people
don’t have any affinity for value…
WS: That’s right. They like growth. A lot of people are more interested in a company doing better next year than this year. Now what we do in our business is try to relate the market price of the stock to what we think it is worth. When we buy a stock we don’t try to project what the future is going to be, we’re not able to do that
particularly well. To do it well, you need to know a lot about the company, you need to talk to their competitors, suppliers –we don’t want to do that. We’re a small little office here. So we look at the numbers rather than
run around the country, like Peter Lynch used to do.
ER: What was the first great stock call you ever made?
WS: Well you have to understand that I had no money, but the first stock I remember buying was ten shares of Standard Gas and Electric, $7 preferred stock for $15 a share. I ended up buying and selling the stock a couple of times and made some money, with the stock eventually working out at over $200. The thing about Ben Graham’s approach is that you made money but not a great a deal of money. You would double your money and then get out of the stock. His focus was on doubling your money and that’s it.
ER: Does this philosophy impact your portfolio construction?
WS: One of the things we’ve done – Edwin and I – is hold over a hundred companies in our portfolio. Now Warren
[Buffet] has said to me that, that is a defense against stupidity. And my argument was, and I made it to Warren, we can’t project the earnings of these companies, they’re secondary companies, but somewhere along the line some of them will work. Now I can’t tell you which ones, so I buy a hundred of them. Of course, it doesn’t mean you own the same amount of each stock. If we like a stock we put more money in it; positions we are less sure about we put less in. The important part is to have some money in the stock. If you don’t have any money in
a stock you tend to forget about it. We then buy the stock on the way down and try to sell it on the way up.
ER: You have an unusual fee structure. Tell me about it.
WS: I wanted to put myself on the same side of the table as my investors. Most funds are set up for managers to get 1% of the assets and 20% of the profits. I wanted to be in the same position as my partners. If they didn’t make money I didn’t make money. If they made money I wanted to be part of it. So I got 25% of the realized profits, but that’s it. If the market went down we would have to make up the loss until my partners were whole.
ER: So few investors havebeen able to beat the market for an extended period of time– What’s your secret for controlling the fear and greed that has affected so many investors?
WS: We don’t like to be greedy. I think greed is one of the reasons people stayed in this market when they had
no reason to be in the market. When Edwin said to me in 2001 that he couldn’t find any cheap stocks – and that was a great call – it was a great excuse for us to quit.
ES: I have a list of stocks that could be on our buy list and I find that invariably when it gets down to less than five stocks the market’s too high and when it gets down to two or three it’s a danger signal.

ER: ..and that’s why you decided to get out?
WS: Yes. Stocks are no longer that cheap. If you look at the book value of value stocks, you’ll see a book of
six and the stock is selling at 20, down from 50. Well its still 20, and on a statistical basis it is still not that cheap. You have to realize that there are over 50,000 Chartered Financial Analysts which you didn’t have 35 years ago.
ER: So, what’s next for you?
WS: My wife died about three years ago, after she had been sick for a long time. About sixth months after she
died I went with the Museum of Natural History to South Western France. On the trip were six couples, nine single
women and myself. I met one of the women, we got along nicely and I’ve being seeing her ever since. If all goes well, we will get married.
ES: Right now I have quite a full plate, but I like working with people. I think I may eventually teach. I am also
interested in short story writing and playwriting. I started out in the arts, not in business. In a way I feel like it is my turn to do certain things that I wasn’t able to pursue.
ER: What’s the best piece of business advice you ever received?
WS: Probably when the partner told me about Ben Graham’s book, Security Analysis, and said if I learned
everything in that book I wouldn’t have to do anything else.
ES: From Walter I learned the most important thing is price. You have to be careful not to overpay. It may be a
very good company, but it’s not a good buy if it’s selling at a steep premium.
ER: What would you advise newly minted MBAs?
WS: A number of things. Be honest with yourself. Don’t let your emotions affect your judgment and get an idea of
what you want to get out of life itself. If you really don’t like Wall Street, you shouldn’t go in just because it is a place to make money. You should really like what you’re doing. Also, try to deal with honorable and good people.
ES: I think it is important to build on you strengths and not on your weaknesses. It’s important to have other interests besides work. And finally, it’s good to learn to play bridge.
ER: Gentlemen, it was an honor and a pleasure.

Walter Schloss追忆Benjamin Graham的文章

Benjamin Graham and Security Analysis:
A Reminiscence

Walter J. Schloss

Ben Graham was an original thinker as well as a clear thinker. He had high ethical standards and was modest and unassuming. He was one of a kind. I worked for him for nearly 10 years as a security analyst.

In re-reading the preface to the first edition of Security Analysis, I am impressed all over again with Ben’s views. I quote . . . “[W]e are concerned chiefly with concepts, methods, standards, principles, and above all with logical reasoning. We have stressed theory not for itself alone but for its value in practice. We have tried to avoid prescribing standards which are too stringent to follow or technical methods which are more trouble than they are worth.”

Security Analysis says it all. It is up to analysts and investors to put Ben’s ideas into practice. Back in 1935 while working at Loeb Rhodes (then called Carl M. Loeb & Co.), one of the partners, Armand Erpf, gave a good piece of
advice when I asked him how I could get into the “statistical department.”In those days and perhaps today to some extent, the best way to advance was by bringing in business. If you had a wealthy family or friends, you brought in commissions. Security analysis was in its infancy and who you knew was much more important than what you knew. If you didn’t have connections, it was difficult to get ahead. In any case Mr. Erpf told me that there was a new book called Security Analysis that had just been written by a man called Ben Graham.

“Read the book and when you know everything in it, you won’t have to read anything else.”

I took Ben’s course in Advanced Security Analysis at the New York Stock Exchange Institute (New York Institute of Finance). Ben was a good speaker, enthusiastic and logical. Ben did something that I haven’t seen done often. He would take an undervalued situation at that time, such as the bankrupt bonds of Baldwin Locomotive, and show how much the new securities would be worth based on their projected earning power and assets and relate this to the price of the bonds. Many bright Wall Streeters such as Gus Levy of Goldman Sachs, who later became the top arbitrageur in the country, used to take his course. I often wondered how much money people made on Ben’s ideas
by transforming them into investments.

Ben was very generous with his thoughts and his time, particularly with young people. By offering me a job as his security analyst as I was about to leave the Army at the end of 1945, he changed my life. I know he helped others in our field too. At Ben’s memorial service, Dave Dodd, Ben’s co-author, told how he had got involved in the book.
It seems that Ben was asked to teach a course at Columbia University on investments and he agreed to do it with the stipulation that he would only do so if someone would take notes. Dave Dodd, a young instructor, volunteered and took copious notes at each of Ben’s lectures. Ben, using the notes, then went ahead and wrote Security Analysis. As Dave said, Ben did the work but he insisted that Dave get credit by being co-author.

Professor Dodd went on to become a very successful investor and a director of Graham-Newman Corporation, an investment trust that Ben had founded in 1936 with his partner, Jerome Newman.

The ability to think clearly in the investment field without the emotions that are attached to it, is not an easy undertaking. Fear and greed tend to affect one’s judgment. Because Ben was not really very aggressive about making money, he was less affected by these emotions than were many others.

Ben had been hurt by the Depression, so he wanted to invest in things that would protect him on the downside. The best way to do this was to lay out rules which, if followed, would reduce his chance of loss. A good example of this was the day I happened to be in his office at Graham-Newman when he received a telephone call that they had
bought 50 percent of Government Employees Insurance Co. (now GEICO). He turned to me and said, “Walter, if this purchase doesn’t work out, we can always liquidate it and get our money back.”

The fact that GEICO worked out better than his wildest dreams wasn’t what he was looking for. As the saying goes, a stock well bought is half sold. I think Ben was an expert in that area.

Graham-Newman followed the precepts set down by Ben and the fund prospered. Compared to today’s investment company, it was tiny. Its total net assets on January 31, 1946, were $3,300,000.

Ben’s emphasis was on protecting his expectation of profit with minimum risk. If one wants to get hold of Moody’s Investment Manuals for the 1947–1956 period, it is interesting to see Graham-Newman’s holdings. Many of them were small, practically unknown companies but they were cheap on the numbers. It is instructive to read their annual report for the year ended January 1946. It states that their general investment policies were twofold.
1. To purchase securities at prices less than their intrinsic value as determined by careful analysis with particular emphasis on the purchase of securities at less than their liquidating value.
2. To engage in arbitrage and hedging operations.

 I helped Ben with the third edition of Security Analysis, published in 1951. In the appendix is an article on special situations that first appeared in The Analysts Journal in 1946. In the article, he had worked out an algebraic formula for risk-reward results that could be applied today, 37 years later.

In 1949, The Intelligent Investor was published. This was a book for the layman but it focused on security analysis and gave prestige to the field. Its fourth revised edition is still in print.

One day, I came across a very cheap stock based on its price at the time, Lukens Steel. We bought some but expected to buy more. At this point, Ben went out to lunch with a man who kept telling Ben about one blue chip after another. At the end of the meal he asked Ben if he liked anything and Ben said we were buying some Lukens Steel. I doubt if it took a day before the man went out and bought a great deal of Lukens and pushed the stock out of our buying range. I had the impression after Ben told me the story that he didn’t want to be rude and hadn’t realized how important his comments were.
He tried to keep things simple. He wrote that he didn’t believe security analysts should use more than arithmetic and possibly a little algebra for any investment decision.
Because Ben was a cultured, many-faceted man, he didn’t spend as much time on investments as did others in the field. He liked to try new ideas. In the late 1930s he became involved in promoting his evernormal granary theory and wrote a book on it called Storage and Stability in which some commodities and metals would be used as a backing
for our currency. His ideas made sense and with cotton at six cents a pound and other raw materials at low prices, it was an interesting proposal. He never had the clout to sell it to the Congress, although Bernard Baruch, a friend of his, supported the idea and it could have been a useful way to help the farmers and reduce the threat of inflation.

Of all the things that Ben accomplished in his lifetime, Security Analysis was, to me, his greatest achievement.

Ben Graham was the leader in giving status to security analysts. It was a privilege to know him.