Value Investing with Walter Schloss

While not as common a name as Berkshire Hathaway’s Warren E. Buffet, Walter J. Schloss is widely known in the value investing world as a superinvestor for his compounded returns of 15.3% over the course of five decades, versus 10% for the S&P 500.

Born in 1916, Walter Schloss grew up in the Upper West Side of Manhattan. Schloss started working on Wall Street as a runner for brokerage Carl M. Loeb & Co. During the evenings, Schloss attended value investing courses taught by Benjamin Graham. On December 7, 1941, the Japanese attacked Pearl Harbor. Schloss enlisted in the army the day afterwards. Schloss was stationed in Iran as a factor worker.

After the war, Schloss got a position at the Pentagon. In Schloss’ own words: “I got a letter from Ben Graham,” he recollected. “I had sent a postcard from time to time—you know, ‘I’m overseas,’ and so forth. Ben said that his securities analyst was leaving to go work with his father, and would I be interested in working for Ben Graham. And that’s when Ben hired me.” This was 1946.

Schloss wored for Ben Graham at the Graham-Newman Corporation for nine and a half years. There he employed Graham’s heavy emphasis on capital preservation. They invested in small, practically unknown companies along with investments in bankrupt bonds and arbitrage transactions (preferred versus common capital structure arb for instance). Schloss spent most of his time looking at companies selling below working capital.

In 1955, Schloss set up his own investment management partnership calling the firm Walter J. Schloss and Assoicates. He ran the firm out of a “closet sized” office inside Tweedy, Browne’s offices. He worked from 9:30am to 4:30pm and simply grinded it out. His fund charged an incentive fee structure similar to the Warren Buffett Partnership: 25% of profits over a specified hurdle rate.

Walter’s son Edwin joined the partnership in 1973. After many years of successful investing together, Edwin could not find any stocks to purchase and the fund was closed in 2001. According to various reports, during the 1956-2000 period, the fund earned a compounded annual rate of return of 15.3% (20.9% pre-fees). All with value investing the Schloss way.

This is what Warren Buffett said about Schloss in his 2006 Letter to Shareholders:

Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.

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, a graduate of the North Carolina School of the Arts. 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. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.

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. It’s safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.