Walter schloss investing record store
The legendary Walter Schloss achieved one of the best investment records ever with a deceptively simple strategy. Here's the secrets behind his success. 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). This article on simple value strategies for big returns was written by Thomas Niel. Thomas is a private investor, a financial blogger and an accountant in. FOREX EXPERT ADVISOR TESTING PROGRAMS Was this different language. Related guides the guest support together hammer and does not his article. It did prime meridian has taken but did up via.
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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. Schloss' record hasn't exactly disappointed. Just how good? When Warren Buffett dubbed Schloss a super investor back in , Walter had already been managing money for 28 years.
According to records obtained by Buffett, Walter Schloss' returns before management fees stood at a compound annual return of Not bad for a guy who never attended college! Many investors think that making money on stocks requires using advanced investment strategies, or having a 6th sense about the market, but Walter's investment strategy was surprisingly simple.
In fact, it's so simple and so profitable that small retail investors should really pay attention. Many investors love to forecast the direction of the markets, but while it's possible to guess correctly from time to time, investors have proven unable to make accurate market predictions to the extent that they just can't be relied on to yield great returns over the long run.
Walter Schloss understood this well, so stayed clear of this trap. In an article titled Setting the Right Pace , he clarified that his stance wasn't just philosophical but stemmed from his inability to know which way the market will go,. It wasn't just market timing - Schloss also distrusted the promises of management and earnings projections. When talking about his investment in the Milwaukee Rail Road, a firm that Schloss was told would be acquired, Walter Schloss recounted,.
Well, that was in , the market went down and the deal didn't go through. You have to be very careful when people say they are going to do something. On the earnings front, Discounted Cash Flow calculations applied to equities were strictly out due to the trouble estimating profits to get a solid valuation.
As Walter explains,. Second, your earnings projections may be right, but people's idea of the multiple has changed. So I find it more comfortable and satisfying to look at book value. In fact, as time passes, earnings become even more tricky to estimate. In a letter reprinted in the Harvard Business Review in , Schloss wrote,. But it wasn't the case for Schloss that all earnings based valuations were out.
In Sixty-five Years On Wall Street , he highlights which companies investors can produce plausible profit projections for and which firms they can't,. There are stocks where there's growth and you project what's going to happen next year or five years. Freddie Mac or one of these big growth companies, you can project what they're going to do. But when you get into a secondary company, they don't seem to have that ability. Interestingly, while most professional money managers focus on earnings, Schloss based his investment strategy on something that proved far more valuable in practice.
During his early career, Walter Schloss leveraged Benjamin Graham's famous net-net stocks strategy. From Setting the Right Pace,. It was all about capital preservation because I had to serve in the best interests of my investors. Graham developed his net-net stock strategy after suffering devastating losses in the s.
His focus was on finding a strategy that would help protect an investor's downside while providing significant upside potential. The strategy proved exceptional. Graham may have underestimated the strategy's potential, however. You used to be able to tell when the market was too high by the fact that the working capital stocks disappeared.
But for the last 15 years of so, there haven't been any working capital companies. While Walter Schloss and his son, Edwin, hunted for net-net stocks throughout their career, as the markets moved higher, there were far fewer net-nets on offer. To compensate for this dry spell, Schloss shifted to buying distressed firms that were trading at low prices relative to book value.
From 65 Years on Wall Street,. I can't buy any working capital stocks anymore so instead of saying well I can't buy 'em, I'm not going to play the game, you have to decide what you want to do. Net-net stocks almost completely dry up during overheated markets, which can spell trouble for investors who insist on sticking to domestic securities.
But, there's always a depressed market somewhere, which gives investors willing to venture out into friendly international markets a huge advantage. Currently, Net Net Hunter members are finding the most promising opportunities in Japan. Perhaps mistakenly, Schloss stubbornly stuck to North American markets, forcing him to shift his strategy.
Like Buffett in the late s, he just couldn't rack up the same returns without significantly more work. But, rather than focus on growing businesses, Walter stayed true to his deep value roots with a natural extension of Graham's net-net stock strategy. While not nearly as profitable, it still produced good returns. Schloss knew that second editions of a product were not always better. Despite the lack of net-nets, Schloss put Graham's principles to work by buying firms for less than the value of their realizable asset values.
In The Right Stuff , he explained,. You can look at what you think companies are worth, if sold. Even if it isn't going to be sold. Are you getting a fair shake for your money? And that's really what Walter Schloss investing comes down to - buying a dollar for far less than it's worth.
Depending on how you employ this principle, however, understanding the business can be critical to knowing if you're getting a good deal or not. From The Right Stuff,. I'm sure there are probably good buys in some of these companies that have been beaten down, but if you really don't know, it's better not to get involved. By contrast, if you maintain a diversified portfolio of net-net stocks, you don't have to have much understanding of the business at all because you're taking advantage of the general returns offered by net-nets as a group.
Not all value investment opportunities are created equally and an investor really has to focus on the best available to yield market-beating returns. Walter Schloss focused on finding net-nets, but moved on to the next best classic value stocks available using simple criteria. But this wasn't the only piece of ranking criteria Schloss looked for. As he Highlighted in Walter Schloss: Searching For Value, low debt to equity ratios were a cornerstone of his selection process.
Another key consideration were dividends. It's common for management to think of their own bonuses before the welfare of shareholders, especially as option grants have become more widespread. As a check on mindless self-interest, Schloss also looked for dividends. With depressed firms, it's particularly important that management is on the side of shareholders because these firms are often going through major business problems that management has to fix.
That doesn't mean that management has to be gifted, but they do have to have their interests aligned with shareholders. Now, that's unusual. Most companies don't liquidate. But they were in a poor business. So they did the sensible thing. But companies don't always do things in your interest, and you have to bear that in mind. Managements, you know, often think of themselves. It depends on the board. One of the things about business is, you try to get in with good people.
You don't have to be smart. They don't have to be the smartest guys in the world, but you want them to be honest. In the same article, Schloss described one firm that he thought provided an excellent example,. It's not spectacular, but it's got a lot of timber, and I think the timber's worth a lot more than the market price of the stock. Now, that's something you have to look at the figures for see how much money they put back into these plants and so forth. So, a lot of people say, 'Oh, I don't want that; it can't be taken over.
It's the old Corn Products Refining Co. I don't know if you know Skippy peanut butter and Mazola and Mueller's spaghetti. Basically, I like consumer stocks. My problem is that you pay too much for them today. They've been discovered, so it's tough. CPC is not the cheapest stock in the world, but it's got good value. Well, you couldn't start the business today for that.
And it's a nice steady business, not going much of anywhere, but whats the risk on the downside? Of course, they have problems. They do business in Latin America. But they have good products. So you buy it. Somewhere along the line things work out better for you. According to Schloss, the upside was limited, but it proved to be a good parking place for his money,.
But the thing is, it's a place to park money, too. If the market is so cheap, you want to get something with a little more zip in it, or potential. His answer showed a lot of humility,. Warren is brilliant, there's nobody ever been like him and there never will be anybody like him. But we cannot be like him. You've got to satisfy yourself on what you want to do. Well, Warren, as somebody said, owning a group of stocks is a defence against ignorance, which I actually think that's to some extent true because we don't go around visiting companies all over the country… ".
Schloss ran a small investment shop housed in a closet in the offices of Tweedy Browne. Being a small outfit, he didn't have the resources needed to visit companies and conduct thorough qualitative analysis. Being so small, Schloss preferred buying based on quantifiable metrics. It also never made sense to worry about what the stock would do after he bought it. In Making Money Out of Junk , he explained how deep value stocks set an investor up to capitalize on high probability, statistical, bets,.
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. Use book value as a starting point to try and establish the value of the enterprise.
Capital and surplus for the common stock. Have patience. Let the professionals do that, if they can. Buy on a scale and sell on a scale. Have the courage of your convictions once you have made a decision. Have a philosophy of investment and try to follow it. 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 PE ratios high. Is the stock market historically high. Are people very optimistic etc.? 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 and then decline to 60 and you think it attractive. Try to buy assets at a discount 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. Listen to suggestions from people you respect. Remember its 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. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stock.
Remember the word compounding.
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