Super Investor #20 in our series is Walter Schloss – The Frugal Disciple of Value Investing. Known for his remarkable independence, deep commitment to value investing, and frugal lifestyle, Walter Schloss quietly achieved legendary status in the world of investing. Over nearly five decades, he consistently delivered stellar returns for his investors, all while keeping things simple and avoiding the spotlight.
In this article, we’ll explore who Walter Schloss was, his investment philosophy, and the invaluable lessons individual investors can learn from his approach.
Who is Walter Schloss? The Value Investing Icon You Need to Know
Walter Schloss was a disciple of Benjamin Graham, the father of value investing, and a contemporary of Warren Buffett. Schloss’s investing career was defined by his rigorous adherence to the principles of value investing—specifically, buying stocks trading below their intrinsic value, focusing on financial fundamentals, and maintaining discipline even during turbulent markets.
Schloss didn’t rely on flashy techniques or complex strategies. Instead, he focused on the basics: analyzing balance sheets, identifying companies trading below book value, and holding investments patiently over time. His approach earned him the admiration of Buffett, who famously referred to Schloss as a “super investor” and praised his consistent returns and independence.
Early Life and Background
Humble Beginnings and Early Influences
Walter Schloss was born in 1916 in New York City. His path to investing was anything but traditional—he didn’t attend college and never earned an MBA. Instead, Schloss began working at an early age to help support his family during the Great Depression.
His career in finance began in 1934, when he worked as a runner for a brokerage firm. A pivotal moment came when he enrolled in night classes taught by Benjamin Graham at the New York Stock Exchange Institute. Inspired by Graham’s teachings, Schloss joined the Graham-Newman Corporation, where he worked alongside legends like Graham and Warren Buffett.
The Foundations of Value Investing
At Graham-Newman, Schloss absorbed the principles of value investing firsthand. Graham’s focus on buying stocks with a margin of safety—a price significantly below their intrinsic value—became the cornerstone of Schloss’s investing strategy.
In 1955, Schloss left Graham-Newman to start his own investment firm, Walter J. Schloss Associates. With just $100,000 in initial capital and a commitment to Graham’s principles, Schloss embarked on a career that would span nearly 50 years.
Investment Philosophy: How Walter Schloss Approaches the Market
Core Principles of Schloss’s Strategy
Walter Schloss’s investment philosophy was simple, disciplined, and deeply rooted in the principles of value investing. Here are the core tenets of his approach:
- Buy Stocks Trading Below Book Value
Schloss focused on companies with strong balance sheets and stock prices trading below their book value (the net asset value of the company). He believed that these companies offered a margin of safety, minimizing the risk of permanent capital loss. - Avoid Market Noise
Unlike many investors, Schloss paid little attention to market trends, earnings reports, or management forecasts. Instead, he relied on hard data from financial statements and focused solely on what he could quantify. - Patience and Discipline
Schloss’s approach required immense patience. He was willing to wait for the market to recognize the value of his investments, even if it took years. - Low Costs and Independence
Schloss ran a lean operation, working from a small office with minimal overhead. He avoided the expensive tools, fancy research, and large teams that many other fund managers relied on.
The Step-by-Step Approach of Walter Schloss
- Stock Selection Criteria:
- Companies trading at a low price-to-book ratio.
- Strong balance sheets with minimal debt.
- A history of consistent dividends (if applicable).
- Research Process:
- Schloss examined financial statements, focusing on the balance sheet. He avoided predictions about future earnings and focused on tangible assets instead.
- Portfolio Management:
- He diversified his portfolio, often holding dozens of stocks at any given time.
- Schloss believed in spreading risk across a broad range of undervalued companies rather than concentrating on a few high-conviction picks.
Track Record: The Wins (and Losses) that Defined Walter Schloss
Consistent Outperformance
Over the course of his career, Schloss generated a compound annual return of around 15%, significantly outperforming the S&P 500’s average return of 10% during the same period.
Notable Wins
Although Schloss didn’t discuss individual investments often, his success was rooted in identifying small-cap companies trading below their book value. For instance, during periods of economic distress, he would invest in industrial companies and manufacturers that were undervalued due to temporary setbacks.
Lessons from Setbacks
Schloss’s strategy wasn’t immune to challenges. In the late 1990s, during the dot-com bubble, value investing fell out of favor as growth stocks dominated the market. However, Schloss remained steadfast in his approach, refusing to chase speculative trends.
Lessons for the Everyday Investor
Walter Schloss’s approach is particularly valuable for individual investors looking for a straightforward, low-stress way to invest. Here are some key lessons:
- Focus on Value, Not Hype
Avoid chasing trendy stocks or following market speculation. Instead, focus on companies with strong fundamentals trading at a discount to their intrinsic value. - Stick to What You Understand
Schloss didn’t try to predict market trends or invest in complex industries. He stuck to what he could understand and analyze using financial statements. - Patience Pays Off
Be willing to wait for the market to recognize the value of your investments. As Schloss once said, “Patience is key in the stock market.” - Minimize Costs
Schloss’s frugality extended to his investment process. By keeping expenses low, you can maximize your returns over the long term. - Diversify to Manage Risk
Unlike Warren Buffett, who often concentrated his investments, Schloss diversified broadly to reduce risk. This approach can help protect your portfolio from individual stock failures.
Challenges and Criticisms
Value Investing in a Growth-Dominated Market
During bull markets, when growth stocks outperformed, Schloss’s conservative style of value investing often lagged behind. However, his strategy proved resilient over the long term, particularly during market downturns.
Low-Profile Approach
Schloss’s independence and low-profile nature meant he didn’t build the massive financial empire or public recognition that some of his contemporaries achieved. However, this was by design—Schloss preferred simplicity and stability over fame.
The Legacy of Walter Schloss
Walter Schloss left an indelible mark on the world of investing. His disciplined, no-frills approach demonstrated that success in the stock market doesn’t require complex strategies or insider knowledge.
Influence on Value Investing
Schloss’s success has inspired generations of value investors. His ability to generate consistent returns over decades serves as a testament to the enduring power of Graham’s principles.
Praise from Warren Buffett
Buffett’s endorsement of Schloss as a “super investor” speaks volumes about his influence and credibility. Buffett admired Schloss’s consistency, independence, and unwavering commitment to value investing.
Timeless Quotes and Wisdom from Walter Schloss
Here are some of Schloss’s most enduring insights:
- “Price is the most important factor to use in relation to value.”
- “I try to establish a margin of safety, which gives me the opportunity to buy assets at a discount.”
- “I never focus too much on market news and economic data. They always worry investors!”
Conclusion: The Enduring Influence of Walter Schloss
Walter Schloss’s career proves that you don’t need an Ivy League education, cutting-edge tools, or a massive bankroll to succeed as an investor. By focusing on fundamentals, exercising patience, and maintaining discipline, Schloss consistently beat the market over nearly five decades.
For individual investors, his legacy serves as a reminder to stay true to your principles, avoid speculation, and embrace the power of value investing.
Happy Investing!