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Walter Schloss: His rules that beat the market

Walter Schloss and his rules of investing

Anyone cited by Warren Buffett as a super-investor is worth knowing more about. Walter Schloss is one such man.

Walter Schloss was born in 1916. He began working on Wall Street at aged 18, while the stock market was still recovering from the Great Crash.

Schloss took investing classes from Benjamin Graham, who also taught Warren Buffett. He went on to work for Graham’s fund (where he met Buffett) before setting up his own partnership in 1955.

Schloss was an excellent investor:

  • His fund achieved an average compound return of 15.5% a year until he closed it in 2000.
  • The S&P 500 returned 10% a year over the same period.

If you had been able to invest $10,000 in the S&P 500 in 1955, then by 2000 you’d have had:

  • $729,000

Not bad – but $10,000 given to Walter Schloss in 1955 would have grown to:

  • $5,388,000

Nice returns if you can get them!

How Walter Schloss managed money

Most super-successful investors must change their tactics as their funds get larger. Schloss invested for fewer than 100 clients. He was therefore able to invest in small companies and special situations throughout his career.

His investing style was pure Benjamin Graham. In Warren Buffett’s 1984 essay, The Superinvestors of Graham and Doddsville, Buffett wrote:

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 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 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.

By age 80, Schloss hadn’t changed much, according to Buffett’s biography, The Snowball:

Walter Schloss still lived in a tiny apartment and picked stocks the same way he’d always done.

A few chapters on we find Schloss is still playing tennis at 90. That definitely qualifies him for the Great Old Investor club!

The rules of Walter Schloss

If you’d like to follow in the footsteps of Walter Schloss – to try to beat the market rather than ‘merely’ tracking it – then you’ll want to know how he invested.

As a pupil of Benjamin Graham and a fellow traveller of Warren Buffett, Schloss was obviously a value investor. Your first port of call should therefore be Ben Graham’s The Intelligent Investor.

Like all investors who do what’s supposedly impossible and beat the market, Walter Schloss had his own quirks though.

In 1994 he typed them up onto a single sheet of paper. No book, no speaking tour – just 16 bullet point guidelines.

And here they are, near-verbatim. May they help make you rich!

Factors needed to make money in the stock market: Walter Schloss

  1. Price is the most important factor to use in relation to value.
  2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.
  3. Use the book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).
  4. Have patience. Stocks don’t go up immediately.
  5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
  6. Don’t be afraid to be a loner but be sure you are correct in your judgement. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.
  7. Have the courage of your convictions once you have made a decision.
  8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.
  9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock a goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high? Is the stock market historically high? Are people very optimistic etc?
  10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. Three years before the stock sold at 20 which shows there is some vulnerability to it.
  11. Try to buy assets at a discount [rather] than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
  12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back.
  13. Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
  14. Remember the work of compounding. For example, if you can make 12% a year and reinvest the money back you will double your money in six years, taxes excluded. Remember the rule of 72. Your rate of return [divided] into 72 will tell you the number of years to double your money.
  15. Prefer stocks over bonds. Bonds will limit your gains and inflation will limit your purchasing power.
  16. Be careful of leverage. It can go against you.

Sounds simple, doesn’t it?

It’s not!

According to Smart Money, Walter Schloss was still running his own portfolio as of April 2009, aged 95.

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{ 13 comments… add one }
  • 1 RetirementInvestingToday May 4, 2010, 8:30 pm

    Hi TI

    There’s that name again – Benjamin Graham. So often when you hear of a successful investor there is a link to Graham somewhere. I’ve read The Intelligent Investor and while my version includes the commentary by Zweig which is a little distracting it is a great book.

    I really like the 16 factors. I might pin them to the wall
    .-= RetirementInvestingToday on: My Current Low Charge Portfolio – May 2010 =-.

  • 2 The Investor May 4, 2010, 9:26 pm

    @RIT – Indeed. The Buffett essay linked to in this piece is well worth reading if you’ve not before, too. (The Superinvestors…)

    I do sometimes wonder if ‘Graham style value’ was a method that just happened to outperform from 1950 to 2000, say. i.e. Though many different practitioners of it did well, they all effectively were lucky to be playing with the right deck of cards.

    Certainly the world isn’t full of Graham-style-value funds (though lots claiming to be) even though it’s all out there in books. Perhaps the edge has been arbitraged away.

  • 3 UK Value Investor May 4, 2010, 9:28 pm

    Walter’s work is the basis for my own investing approach. In fact I think what I do is 90% Walter, 10% me. And that probably overstates my input. However, I’ve never seen this bullet point list before so thanks for that.

    I hope for my sake you’re wrong about the “it’s not” bit, seeing as I’d like to match his compounding record, impressive as it is.
    .-= UK Value Investor on: April Update – Victoria gets a boost =-.

  • 4 Evan May 5, 2010, 1:13 am

    “Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Sell on bad news.”

    What does the sell on bad news mean? How does that work with #9
    .-= Evan on: Evan By Numbers May 2010 =-.

  • 5 FinEngr May 5, 2010, 2:30 am

    Intelligent Investor should be mandatory reading….
    Think I may need to refresh my memory on the subject.

    Amazing that he’s still managing his own money even at 95!! Also amazing how often we look to the hottest manager, fund, sector, etc – but those which are most successful are the “tried & true”.
    .-= FinEngr on: Does This iPhone Come With or Without Cancer? =-.

  • 6 George May 5, 2010, 2:37 am

    When a company announces that it is lowering its earnings estimate, that is bad news (some study showed that 80% of companies who revise lower will not have recovered after a year).

    When new government regulations or taxes constrain a company, that is bad news. (note that I’m not saying it’s bad for the world, just bad for that company)

    When a small bit of negative news is announced and then followed by another bit of negative news, then that is bad news because it means not all of the cockroaches have been uncovered. (Enron, Washington Mutual, etc.)

  • 7 ermine May 5, 2010, 8:50 am

    Another good article, I must read Benjamin Graham’s book.

    Evan, doesn’t #9 mean don’t be in too much of a hurry to sell when things are rising? That isn’t so incompatible with ‘sell on bad news’ eg BP now, if I’d sold as soon as I heard of the blowout I’d be in a small profit, as opposed to now having sold and eaten a small loss. I took it to mean sell on sudden out of the blue bad news
    .-= ermine on: Kudos to Nat West for not shafting its previous ISA savers this year =-.

  • 8 OldPro May 6, 2010, 2:42 am

    Trading lore is replete with contradictions…such as it’s never wrong to take a profit vs run your winners… or don’t catch a falling knife vs buy on the sound of gunfire… that’s why it’s an art not a science my friends!

  • 9 Andrew Hallam May 18, 2010, 9:33 am

    Monevator,

    I’ve enjoyed reading through your site and I’m adding you to my blogroll. This is a blog with substance, and I really appreciate and enjoy that. Keep up the great work!

    Andrew
    .-= Andrew Hallam on: Vanguard Investments for Canadians – Why Not? =-.

  • 10 The Investor May 18, 2010, 9:30 pm

    @Andrew – Many thanks!

  • 11 Andrew August 8, 2010, 1:35 am

    I think rule #5 is a typo. I have seen the original typed version of these rules and rule #5 says “Don’t sell on bad news.” It is also referenced like this in a number of other sites.

    The one thing that Schloss constantly alludes to is not losing money. I figure he hopes that if he buys at or below book value that a company that announces really bad news can always come back to that value either through a takeover, merger, or just winding up if there are enough hard assets (or even a recovery in profits if you wait long enough). i.e. the bad news is only going to make the stock even cheaper than when he bought it so why woud you sell it. If you sell, then you are realising your loss and won’t have that ability to regain capital. This is my interpretation on it and I agree with Oldpro that there are so many so called rules for investing that many contradict each other.

    Great website by the way.

  • 12 The Investor August 8, 2010, 3:11 am

    Ouch! Fixed now. Thanks Andrew, it certainly was a typo. Glad you like the site.

  • 13 D' Intelligent Investor December 29, 2010, 8:00 am

    Wow ! These rules may sound very simple and basic but its full of truths and knowing these principles and applying them to your investing strategy would not doubt do wonder to your portfolio. Certainly these simple rules are a far cry from the useless junk that most market players try to learn today. (beta etc.)

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