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PR Newswire
03-11-2013, 06:13 PM
http://www.gurufocus.com/news/162766/wal...1916--2012-
February 20, 2012
Walter Schloss died over the weekend. He was 95 years old.
Schloss was one of the greatest investors of the 20th century. He beat the S&P 500 by 6 percentage points a year over 47 years. And was included as one of Warren Buffett’s “Superinvestors of Graham and Doddsville” in Buffett’s 1984 speech at Columbia.
Walter Schloss – like Warren Buffett – was a student of Ben Graham. However, Schloss took a more arithmetical approach to investing. Schloss remained more quantitative than Warren Buffett. He was never quite comfortable with the Phil Fisher’s scuttlebutt approach. In this way, Schloss stuck closer to Ben Graham’s teachings than Warren Buffett did.
Schloss’s almost 50 year record was similar to Ben Graham’s record in common stocks. Like Graham-Newman – where Schloss worked in the 1950s – Schloss Associates often held nearly 100 stocks at a time. Schloss’s technique and results were similar to what Graham-Newman achieved in their “private owner bargains” category.
This seems to have been Schloss Associates’ focus.
For most of Ben Graham’s career, “private owner bargains” meant one thing: net-nets.
Net-Nets
A net current asset value bargain – or net-net – is a stock selling for less than the value of its current assets (cash, receivables, and inventory) minus all liabilities.
Basically, it’s a stock selling for less than its liquidation value.
Net-nets were common during the 1930s and early 1940s.They started to become less common in the late 1940s and early 1950s when Walter Schloss worked for Ben Graham’s hedge fund: Graham-Newman. This scarcity of net-nets was one of the reasons Ben Graham closed down his fund in the mid-1950s.
Buffett and Schloss
Warren Buffett and Walter Schloss were both out of a job when Graham-Newman decided to shut its doors. It took the fund a while to wind down (Graham tended to own illiquid stocks). And, in that time, both Schloss and Buffett started funds of their own. Schloss’s career as a money manager began in 1955. Making Schloss’s investment career almost perfectly contemporary with Warren Buffett’s career.
For roughly the first ten years of both men’s careers net-nets remained the best way to make money in the stock market. That changed in the “Go-Go” years of the 1960s. But net-nets – and cheap stocks of every stripe – flooded the U.S. market again in the early 1970s. That’s when Walter’s son, Edwin, joined the firm.
Stocks Schloss Owned
A list of stocks Schloss sent to Warren Buffett in 2007 shows that Schloss didn’t always stick to net-nets and book value bargains. Some stocks with very low P/E ratios but few tangible assets show up on a list of stocks Schloss owned. There are also some more “Buffett” like buys on the list of stocks Schloss bought such as:
· American Express
· GEICO
· Berkshire Hathaway
But most of the stocks Schloss owned had nothing in common with Warren Buffett’s portfolio except for cheapness.
Low Turnover
Schloss once estimated that his portfolio turnover was about 20% to 25%. This is perhaps a bit lower than Ben Graham’s turnover. Graham’s turnover was often around 30%.
An analysis of Graham-Newman’s turnover and Schloss Associates turnover would probably show the difference in turnover was due to Schloss engaging in less arbitrage and related hedges than Graham did. These complex and volatility reducing techniques were a favorite of Ben Graham’s. But they did nothing to improve Graham-Newman’s long-term record. In the long-run, Graham’s returns came from being long extraordinarily cheap stocks – especially net-nets. The same was true of Schloss’s performance.
Schloss said that it usually owned a stock for 4 years. He tended to be too early. Almost always losing some money – on paper – before he started making money.
It’s interesting to note that if Schloss owned as many positions as Graham – roughly 100 stocks at a time – and held them for four years, Schloss only needed to find two new buys a month. Considering that Schloss spent all his time holed up in his office reading financial reports – finding one new stock every 2 weeks seems like a perfectly leisurely pace compared to today’s fund managers.
Obscure Stocks
If you take a look at that list of stocks Schloss sent to Warren Buffett in 2007 – you’ll find more than a few names you don’t recognize. Warren Buffett noted this in his 2006 letter to shareholders:
“Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success…There is simply no possibility that what Walter achieved over 47 years was due to chance.”
Underrated Investor
In that same letter, Buffett also mentions that Schloss didn’t go to business school – or college.
In Alice Schroeder’s biography of Warren Buffett she talks about Schloss not being taken as seriously as a future Graham-Newman partner as Warren Buffett was. It should be noted that – although in his recollections, Buffett usually downplays this as a real possibility – Ben Graham was obviously interested in having Warren Buffett succeed him at Graham-Newman. In fact, when limited partners asked who they should put their money with, Graham mentioned there was someone in Omaha. Apparently, Schloss was not viewed the same way.
Remarkable Record
Regardless of how he was seen, Schloss’s results over the next 47 years were remarkable. As good as Ben Graham’s. And certainly as good as the best modern hedge fund manager. Though, of course, there aren’t directly comparable investors to Schloss. Almost no fund managers have stayed in the game for more than 4 decades.
Even among those who had much shorter careers – beating the S&P 500 by 6 percentage points a year is an impressive record. By combining this 6 percent annual outperformance with 47 years of longevity, Walter Schloss earned himself a place in the investment hall of fame.
A $1,000 investment made with Schloss in 1955 would be worth over $1 million in 2002. We are talking about turning every one dollar in 1955 into one thousand dollars by 2002.
And, yes, all of these figures are after fees.
Lasting Lesson
What can we learn from Walter Schloss?
The Ben Graham way works. Buying a hundred stocks at less than their value to a private owner is a recipe for success.
You don’t need to talk to management, listen to analysts, forecast the macro-economy, or even be especially selective in the stocks you choose.
All you need to do is buy stocks that are clearly selling for less than their conservatively estimated value to a private owner – and then hang on.
Portrait of a Superinvestor
Schloss appears – under a pseudonym – in Adam Smith’s Supermoney:
“He has no connections or access to useful information. Practically no one in 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.
In introducing me to (Schloss) Warren had also, to my mind, described himself. ‘He never forgets that he is handling other people's money, and this reinforces his normal strong aversion to loss.’ He has total integrity and a realistic picture of himself. Money is real to him and stocks are real – and from this flows an attraction to the ‘margin of safety’ principle.”
Warren Buffett on Walter Schloss
This is what Warren Buffett said of Walter Schloss in his 2006 letter to shareholders:
“Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin…Walter and Edwin never came within a mile of inside information. Indeed, they used ‘outside’ information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham.”
And, finally, this is what Warren Buffett said of Walter Schloss in 1984:
“…He knows how to identify securities that sell at considerably less than their value to a private owner… 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 and over again. He owns many more 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.”
That’s probably the most important lesson we can learn from Walter Schloss.
About the author:
Geoff Gannon - formerly of Gannon On Investing - likes to answer questions from you. If you have an investing question you want answered, please email him at geoff@gannononinvesting.com.
February 20, 2012
Walter Schloss died over the weekend. He was 95 years old.
Schloss was one of the greatest investors of the 20th century. He beat the S&P 500 by 6 percentage points a year over 47 years. And was included as one of Warren Buffett’s “Superinvestors of Graham and Doddsville” in Buffett’s 1984 speech at Columbia.
Walter Schloss – like Warren Buffett – was a student of Ben Graham. However, Schloss took a more arithmetical approach to investing. Schloss remained more quantitative than Warren Buffett. He was never quite comfortable with the Phil Fisher’s scuttlebutt approach. In this way, Schloss stuck closer to Ben Graham’s teachings than Warren Buffett did.
Schloss’s almost 50 year record was similar to Ben Graham’s record in common stocks. Like Graham-Newman – where Schloss worked in the 1950s – Schloss Associates often held nearly 100 stocks at a time. Schloss’s technique and results were similar to what Graham-Newman achieved in their “private owner bargains” category.
This seems to have been Schloss Associates’ focus.
For most of Ben Graham’s career, “private owner bargains” meant one thing: net-nets.
Net-Nets
A net current asset value bargain – or net-net – is a stock selling for less than the value of its current assets (cash, receivables, and inventory) minus all liabilities.
Basically, it’s a stock selling for less than its liquidation value.
Net-nets were common during the 1930s and early 1940s.They started to become less common in the late 1940s and early 1950s when Walter Schloss worked for Ben Graham’s hedge fund: Graham-Newman. This scarcity of net-nets was one of the reasons Ben Graham closed down his fund in the mid-1950s.
Buffett and Schloss
Warren Buffett and Walter Schloss were both out of a job when Graham-Newman decided to shut its doors. It took the fund a while to wind down (Graham tended to own illiquid stocks). And, in that time, both Schloss and Buffett started funds of their own. Schloss’s career as a money manager began in 1955. Making Schloss’s investment career almost perfectly contemporary with Warren Buffett’s career.
For roughly the first ten years of both men’s careers net-nets remained the best way to make money in the stock market. That changed in the “Go-Go” years of the 1960s. But net-nets – and cheap stocks of every stripe – flooded the U.S. market again in the early 1970s. That’s when Walter’s son, Edwin, joined the firm.
Stocks Schloss Owned
A list of stocks Schloss sent to Warren Buffett in 2007 shows that Schloss didn’t always stick to net-nets and book value bargains. Some stocks with very low P/E ratios but few tangible assets show up on a list of stocks Schloss owned. There are also some more “Buffett” like buys on the list of stocks Schloss bought such as:
· American Express
· GEICO
· Berkshire Hathaway
But most of the stocks Schloss owned had nothing in common with Warren Buffett’s portfolio except for cheapness.
Low Turnover
Schloss once estimated that his portfolio turnover was about 20% to 25%. This is perhaps a bit lower than Ben Graham’s turnover. Graham’s turnover was often around 30%.
An analysis of Graham-Newman’s turnover and Schloss Associates turnover would probably show the difference in turnover was due to Schloss engaging in less arbitrage and related hedges than Graham did. These complex and volatility reducing techniques were a favorite of Ben Graham’s. But they did nothing to improve Graham-Newman’s long-term record. In the long-run, Graham’s returns came from being long extraordinarily cheap stocks – especially net-nets. The same was true of Schloss’s performance.
Schloss said that it usually owned a stock for 4 years. He tended to be too early. Almost always losing some money – on paper – before he started making money.
It’s interesting to note that if Schloss owned as many positions as Graham – roughly 100 stocks at a time – and held them for four years, Schloss only needed to find two new buys a month. Considering that Schloss spent all his time holed up in his office reading financial reports – finding one new stock every 2 weeks seems like a perfectly leisurely pace compared to today’s fund managers.
Obscure Stocks
If you take a look at that list of stocks Schloss sent to Warren Buffett in 2007 – you’ll find more than a few names you don’t recognize. Warren Buffett noted this in his 2006 letter to shareholders:
“Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success…There is simply no possibility that what Walter achieved over 47 years was due to chance.”
Underrated Investor
In that same letter, Buffett also mentions that Schloss didn’t go to business school – or college.
In Alice Schroeder’s biography of Warren Buffett she talks about Schloss not being taken as seriously as a future Graham-Newman partner as Warren Buffett was. It should be noted that – although in his recollections, Buffett usually downplays this as a real possibility – Ben Graham was obviously interested in having Warren Buffett succeed him at Graham-Newman. In fact, when limited partners asked who they should put their money with, Graham mentioned there was someone in Omaha. Apparently, Schloss was not viewed the same way.
Remarkable Record
Regardless of how he was seen, Schloss’s results over the next 47 years were remarkable. As good as Ben Graham’s. And certainly as good as the best modern hedge fund manager. Though, of course, there aren’t directly comparable investors to Schloss. Almost no fund managers have stayed in the game for more than 4 decades.
Even among those who had much shorter careers – beating the S&P 500 by 6 percentage points a year is an impressive record. By combining this 6 percent annual outperformance with 47 years of longevity, Walter Schloss earned himself a place in the investment hall of fame.
A $1,000 investment made with Schloss in 1955 would be worth over $1 million in 2002. We are talking about turning every one dollar in 1955 into one thousand dollars by 2002.
And, yes, all of these figures are after fees.
Lasting Lesson
What can we learn from Walter Schloss?
The Ben Graham way works. Buying a hundred stocks at less than their value to a private owner is a recipe for success.
You don’t need to talk to management, listen to analysts, forecast the macro-economy, or even be especially selective in the stocks you choose.
All you need to do is buy stocks that are clearly selling for less than their conservatively estimated value to a private owner – and then hang on.
Portrait of a Superinvestor
Schloss appears – under a pseudonym – in Adam Smith’s Supermoney:
“He has no connections or access to useful information. Practically no one in 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.
In introducing me to (Schloss) Warren had also, to my mind, described himself. ‘He never forgets that he is handling other people's money, and this reinforces his normal strong aversion to loss.’ He has total integrity and a realistic picture of himself. Money is real to him and stocks are real – and from this flows an attraction to the ‘margin of safety’ principle.”
Warren Buffett on Walter Schloss
This is what Warren Buffett said of Walter Schloss in his 2006 letter to shareholders:
“Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin…Walter and Edwin never came within a mile of inside information. Indeed, they used ‘outside’ information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham.”
And, finally, this is what Warren Buffett said of Walter Schloss in 1984:
“…He knows how to identify securities that sell at considerably less than their value to a private owner… 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 and over again. He owns many more 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.”
That’s probably the most important lesson we can learn from Walter Schloss.
About the author:
Geoff Gannon - formerly of Gannon On Investing - likes to answer questions from you. If you have an investing question you want answered, please email him at geoff@gannononinvesting.com.
. Hopefully the second half plays out!