What will Walter Schloss buy today?

AI readers will know that we are stitching up a series of articles on famous investment gurus. While none of them are into Indian stock market, we are applying their philosophy to search stocks within India’s small caps universe. Interestingly, since we have started this series, bullish momentum seems to be back into small caps. What a co-incidence! All investment gurus have theories aligned for long term investment but to our surprise, some of the stocks published under initial articles have gained 20% in short term. Certainly, their investment philosophy works in unique ways.

Coming back to the article series, today we have another legendary investor Walter Schloss on AI post. True to our philosophy, we are keeping the language simple and contents precise. Hope you enjoy it.

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About Walter Schloss

Walter Schloss.jpg

Walter is one of iconic guru featuring in all time great list of Graham & Doddsville compiled by Warren Buffet himself. Despite his success, he was a reserved person and  not many people know about him except people in value investment community. He was born in 1916 and did not had a formal education. At the age of 18, he started off as a runner in Wall Street. Fascinated by stock market, he attended classes taught by Benjamin Graham in New York Stock Exchange Institute. Gus Levy was his classmate who later became partner in Goldman Sachs.

In 1955, his rise to fame was waiting when he started his own fund and delivered annualized returns of 15.4% vs S&P500 return of 10% over a period of 45 years. What stands out is the longevity of beating benchmark returns for more than four decades. This means he multiplied investor’s money by a whopping 605times vs 73times which S&P500 achieved. This performance earns him a place in all time great investors list.

Walter closed his fund in 2000 and completely stopped managing other people’s money in 2003. Later in Feb 2015, he passed away at an age of 95 leaving behind his legacy.

Investment Philosophy

Walter Schloss stand out with his simple and somewhat unique investment philosophy. He had a small one room office in New York, rarely used computers and fancy algorithms. His source of information was S&P’s stock guide and newspapers. Walter was very unique because of the fact that he did not believe in interacting much with corporate management instead relied on numbers and data. He believed that management keeps on changing in 3 or 5 years and they don’t add much value for investment considerations running into decades. Rather he believed that numbers reveal much more than managers since they are based on hard facts and and not on lofty promises generally doled out by corporate managers.

He put a lot of emphasis on book value of the company and its ratio with the stock price (P/BV). He was also called as junk collector since he used to buy stocks which are trading way below their book value. Very often such stocks are considered useless and people don’t pay enough attention to them, often labeling them as junk. He also kept a close eye on stocks that are trading below their working capital. According to him if you can get hands on such stocks, you are getting company’s assets for free. A good bargain. His interest was only on cheap stocks and was not keen on pursuing high growth stocks. Truly, a different approach to investment!

In 1994, after many decades of superlative performance, he penned down 16 investment principles which were cornerstone of his investment success. He wrote it down in a simple report running into two pages, that’s it. Such was his simplicity. These are very simplistic looking principles but very efficient if applied diligently. We are putting them down as it is, with some sentences in bold which we feel are the essence.

  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 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.
  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 that you are correct in your judgment. 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.
  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 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?
  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’s attractive. Three years before the stock sold at 20 which shows that there is some vulnerability in it.
  11. Try to buy assets at a discount rather than buying 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 judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
  14. Remember the word 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 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 reduce your purchasing power.
  16. Be careful of leverage. It can go against you.

We at AI, find his investment philosophy very simple & appealing and some of them are already ingrained in our own investment process (like point 9 & 10).

Stock Watch-List

Based on Walter Schloss’ principles and our own set of filters, we arrive at below set of stocks which pass the criteria at current valuations. Please take a note that this is not an investment advice as analysis is done purely on numbers and not on qualitative aspects.

We have selected stocks with a market capital of above ₹ 100 Cr but less than ₹ 1000 Cr which means that largecaps & midcaps are excluded from this list.

  • Jullundur Motor Agency (Delhi) Ltd. (Market Cap: ₹ 114 Cr)
  • Zandu Reality Ltd. (Market Cap: ₹ 152 Cr)
  • Kakatiya Cement Sugar & Ind. Ltd. (Market Cap: ₹ 205 Cr)
  • Star Paper Mills Ltd. (Market Cap: ₹ 331 Cr)
  • Kothari Products Ltd. (Market Cap: ₹ 343 Cr)
  • Tamilnadu Petroproducts Ltd. (Market Cap: ₹ 345 Cr)
  • Balashore Alloys Ltd. (Market Cap: ₹ 422 Cr)
  • Century Enka Ltd. (Market Cap: ₹ 645 Cr)

In the end, we leave you with this quote from Warren Buffet on Walter Schloss’ approach to investment:

“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 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 is one of his strengths; no one has much influence on him” – Warren Buffett in the 1984 issue of Hermes, Columbia Business School’s magazine.