Walter Schloss is one of my investing heroes. He’s not too well-known, which is a real pity, because he has a tremendous track record. He invested in US stocks for his fund and produced an astonishing annual return of 15.3% for 44 years from 1956 to 2000, far outstripping the US market’s annual gain of 11.5% over the same period.
There’s so much we can learn from Schloss. He never went to college. He was a one-man shop until his son Edwin joined in 1973 – and then they became a two-man shop till the fund was closed in the early 2000s. Schloss typically worked only from 9:30 am to 4:30 pm. Despite running a highly successful investment fund, he led very much a stress-free lifestyle. His office was also simple – it was a closet in a rented corner of a larger office. It seems like there’s no need for a fancy office to do well in investing! Schloss had no use for insider-connections and got his investment ideas mainly by reading the financial statements of companies. He’s a close friend of Warren Buffett, but invested in a completely different way, as we’ll see later.
Unfortunately, it’s impossible for us now to learn directly from Schloss – he sadly passed away in 2012 at the ripe young age of 95. But the internet has given us the good fortune of being able to freely access a wonderful archive of materials on him. Within the archive is a fantastic investing speech Schloss once gave.
Here are three great insights from him in that speech, along with my comments:
On investing in commodity-related stocks
Question: “Are you involved with commodities at all and if so…do you see silver as under-valued?”
Schloss: “You know, I have no opinion about any commodity or where it’s going to go and Asarco [a stock Schloss owned at the time of the speech] is a commodity company in copper. I have no idea if copper can keep going longer.
But I just think that the stock is cheap based upon its price, not necessarily because I know what’s going to happen to the price of the copper any more than silver. I have no opinion on any of those things. It saves me a lot of time.”
I love how Schloss had invested in a copper-related company not because he thought he knew where the price of copper’s heading to, but because he thought the stock was cheap. The difference between the two mindsets is very important for two reasons.
First, the future movement of commodity prices is notoriously hard to pin down. In an article with Fool.com, Morgan Housel shared this fascinating nugget of information (emphasis is mine):
“[Economists Ron Acquits, Lutz Kilian, and Robert Vigfusson] showed that forecasts of the price of oil one year out made by the Energy Information Agency and survey firm Consensus Economics were no more accurate than just assuming whatever oil’s price is today is what it will be next year. Literally, not having any forecast was as accurate as a professional forecast.”
Second, a commodity-related company’s stock may not become a winner even if the price of the associated-commodity rises substantially. Here’s something on the topic that I shared in The Good Investors previously:
“Gold was worth A$620 per ounce at the end of September 2005. The price of gold climbed by 10% per year for nearly 10 years to reach A$1,550 per ounce on 15 September 2015. An index of gold mining stocks in Australia’s market, the S&P / ASX All Ordinaries Gold Index, fell by 4% per year from 3,372 points to 2,245 in the same timeframe.”
A high starting valuation. A weak balance sheet. Poor efficiency in production. Unscrupulous management. These are just some of the obstacles that stand between a positive macro-trend and higher stock prices.
The importance of knowing your own strengths and weaknesses
Question: “Buffett keeps talking about liking a handful of thick bets. It sounds like you don’t do that.”
Schloss: “Oh, no, we can’t. Psychologically I can’t, and Warren as I say, is a brilliant, he’s not only a good analyst, but he’s a very good judge of businesses and he knows, I mean my gosh, he buys a company and the guy’s killing himself working for Warren. I would have thought he’d retire.
But Warren is a very good judge of people and he’s a very good judge of businesses. And what Warren does is fine. It’s just that it’s not our – we just really can’t do it that way and find five businesses that he understands, and most of them are financial businesses, and he’s very good at it. But you’ve got to know your limitations.”
One of the most crucial skills we have to master as investors is knowing the limits of our knowledge and staying clear of the boundaries is. A failure to do so can be disastrous when investing. That’s because we may end up using strategies that are ill-suited to our psyche, and thus potentially result in us commiting stupid mistakes frequently.
Schloss understood this well, and invested in a manner that was well-suited to his own strengths and weaknesses. In his seminal 1984 essay on investing, The Superinvestors of Graham and Doddsville, Buffett shared the following about Schloss (emphasis is his):
“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’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.”
We need to evolve with the ever-changing market
Question: “Has your approach changed significantly?”
Schloss: “Yes, it’s changed because the market’s changed. 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.
And so we’ve decided that we want to buy stocks if we can that are depressed and are some book value and are not too, selling near to their lows instead of their highs and nobody likes them.
Well why don’t they like them? And then you might say there may be reasons why. It may simply be they don’t have any earnings and people love earnings. I mean that’s, you know, the next quarter that’s the big thing and of course we don’t think the net quarter is so important.”
I published an article recently in The Good Investors titled Sometimes, This Time Really Is Different. In the article, I shared that “it’s important for us to acknowledge that conditions in financial markets can change in permanent or near-permanent ways to severely blunt the usefulness of historical experience.”
Schloss was well aware of the need to keep up with the times, and he changed his investing approach when there was a paradigm shift. I think this is a severely underrated reason for his longevity in investing.
But crucially, Schloss also knew what to retain. He continued (1) seeing stocks as partial ownership stakes in businesses, (2) to purchase stocks that were selling for far less than what their underlying businesses were worth, and (3) to be aware of his own limitations.
There are things about investing that are timeless. But markets do change, and so should we.
I highly recommend you to check out Schloss’s speech. It will be well worth your time. Here it is again.
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