Many of you would know Warren Buffett as a billionaire investor and leading practitioner of value investing. Over the past decade, many have written articles, books, interviews on Buffett’s approach to investing.
Due to Buffett’s overwhelming success and popularity, the work of other value managers becomes relatively unknown beyond the value camp. One investor in particular; a staunch practioner of Graham’s version of defensive value investing and did not evolve into more of a qualitative investor like Buffett.
Worked with Buffett at Graham Newman Partnership as a Securities Analyst, Walter Schloss went on to manage an investment partnership from 1955 to 2002 which returned 16% per annum after fees, beating the 10% annual return generated by the S&P 500 in the same period.
Walter Schloss was one of the “superinvestors” that Buffett talked about in “The Superinvestors of Graham and Doddsville”, a paragraph taken from the essay briefly describes his approach to investing:
“Walter has diversified enormously, owning well over 100 stocks currently. 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 doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over again. He owns many stocks than 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’s one of his strengths; no one has much influence on him.”
Just like Buffett in his early days, Walter Schloss is a classic deep value investor with emphasis on asset backed valuations.
Walter’s strategy was to look for stocks that are trading at low price to book value, low debt levels and high insider ownership. He would also be looking for beaten down stocks that are trading near its 52 weeks lows, trading at low P/E multiples and ideally stocks that have been around for 10 years.
Walter did not depend on information given by others to make investment decisions, he’s greatest strength was the ability to think independently. He would spend a lot of time looking for ‘Cigar Butt’ stocks or companies that are trading at discount to net working capital.
“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.” – The Superinvestors of Graham and Doddsville.
Walter ensures that his portfolio is well diversified up to 100 stocks and a single position in a company never accounted for more than 20% of his portfolio.
Walter believed that investing should be stress free and not worrying, it should be fun and challenging. His advise was to understand one’s strength and weaknesses and develop a simple strategy to suit individual’s tolerance for risk.
Unlike Buffett who once said “Diversification is protection against ignorance”, Walter was a strong proponent for diversifying stocks. He knew that diversification would be more suited to his own personality, he said:
“I always held 50 to 100 at any given time because it would have been very stressful if one particular stock had turned against me. Psychologically, I am just built differently from Warren. I see that there are many people trying to be like Warren, but they should take note that he is not only a good analyst; he is also a good judge of people and businesses. I know my limitations, so I’d rather invest in the way I am most comfortable with.” Source: The Value Investors: Lessons from the World’s Top Fund Managers
Walter Schloss’s approach to investing is certainly a good stepping stone in achieving consistent and sustainable returns. We as retail investors are more like Walter Schloss than Warren Buffett, Walter wasn’t blessed with good business acumen or a good judge of people but he excelled through discipline and patience. Importantly, we should understand our personalities better than anyone else and take advantage of our strengths. We shouldn’t try to be someone who we are not.