From value hunter to investing icon: 4 key principles that shaped Walter Schloss (2024)

Walter Schloss gained invaluable experience while working directly with Graham at Graham-Newman Corp. in the 1950s. During this time, he absorbed Graham’s principles of value investing, laying the groundwork for his successful approach.

In 1955, Schloss initiated his investment partnership, initially managing funds for family and friends. Remaining steadfast in his commitment to value investing, he consistently produced impressive returns over the ensuing years.

Over 45 years, Walter J. Schloss Associates achieved an average annual return of 15.3%, surpassing the S&P 500’s 10.5% return. This outstanding performance solidified Schloss’s status as a master of value investing. His inclination to invest in smaller, overlooked companies resulted in several hidden gems in his portfolio. Notable triumphs include the 50-fold return from Blue Chip Stamps and the tenfold growth of Emerson Radio.

Below are some fundamental tenets of Walter Schloss’s investment philosophy:

Concentrate on underpriced stocks

Schloss advocated for acquiring stocks that were trading well below their intrinsic value. He employed various metrics, including the price-to-book ratio, price-to-earnings ratio, and dividend yield, to pinpoint undervalued stocks.

Schloss transcended mere metrics to gain a profound comprehension of a company’s intrinsic value. He scrupulously delved into annual reports, industry publications, and personally visited companies to acquire firsthand insight into their operations and prospects. In his assessment of potential investments, Schloss took into account factors such as management quality, brand strength, competitive advantages, and the broader economic climate. Unafraid to swim against the current, he invested in stocks that were unpopular and overlooked by others. Schloss’s independent analysis enabled him to uncover hidden gems ahead of the crowd.

Exercise patience and maintain discipline

Schloss, as a long-term investor, advocated for the practice of holding onto stocks for extended periods. He displayed no hesitation in waiting for his investments to mature, even if it required enduring phases of market volatility.

Schloss became renowned for dismissing short-term market fluctuations, steadfastly refusing to let daily or quarterly swings sway his investment decisions. He comprehended the potential for emotional mistakes and straying from a solid, long-term strategy when fixating on the market’s daily gyrations.

Throughout his investing career, Schloss confronted multiple market crashes and periods of intense volatility. Yet, his unshakeable confidence in his research and the intrinsic value of his holdings enabled him to remain composed and weather the storms. Recognizing that short-term downturns often presented opportunities for patient investors, he maintained his calm approach.

Through the discipline of holding onto his investments for the long term, Schloss harnessed the power of compounding, where earnings were reinvested and grew exponentially over time. This approach resulted in significantly higher returns compared to frequent trading activities.

Implement portfolio diversification

Schloss adhered to the principle of distributing his investments across a diverse array of stocks to mitigate risk. Typically, he maintained a portfolio comprising 50 to 100 stocks.

Diversification played a crucial role in Walter Schloss’s investment strategy. By maintaining a variety of stocks spanning different sectors and industries, Schloss effectively mitigated the impact of any individual company’s underperformance on his overall portfolio. This method shielded him from scenarios where the weakness of a single investment could adversely affect the entire collection.

The practice of holding a diversified portfolio enabled Schloss to explore a broader range, enhancing the likelihood of discovering hidden gems in overlooked sectors or smaller companies. This diversified approach expanded his access to potential sources of alpha, representing excess returns beyond the market average.

Diversification played a role in helping Schloss navigate emotional biases that could impact investment decisions. With his investments spread across various holdings, he reduced the likelihood of becoming excessively attached to any particular stock, thus mitigating the potential for making irrational choices driven by emotions such as hope or fear.

Maintain emotional composure

Schloss exemplified a composed and rational approach to investing, steering clear of succumbing to his emotions. He steered away from impulsive decisions, remaining steadfast in adhering to his established investment plan.

Schloss acknowledged the significant influence of emotions on investment decisions. He proactively countered emotions such as greed during market highs and fear during downturns, adhering to his carefully crafted investment plan and avoiding impulsive reactions.

He disregarded the emotional manipulation often prevalent in financial news and market commentary. Instead, Schloss prioritized hard data, extensive research, and his analysis to make decisions grounded in information rather than emotional knee-jerk reactions.

Embracing a long-term investment horizon, Schloss distanced himself from daily market fluctuations and emotional rollercoasters. This perspective enabled him to make informed decisions based on fundamentals rather than succumbing to short-term anxieties.

Walter Schloss’s impact reaches well beyond his remarkable individual returns. His legacy is rooted in enduring success and a commitment to disciplined value investing. The principles he espoused, emphasizing long-term and disciplined approaches to value investing, retain their relevance and provide valuable lessons for investors at all levels of experience. Whether you’re a seasoned investor or a novice, delving into Schloss’s approach can furnish valuable guidance.

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Published: 27 Jan 2024, 01:27 PM IST