Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability. Then you own those shares forever. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.
August 26, 2011
August 23, 2011
我的合伙人马茨·莱德豪森（Mats Lederhausen）曾是麦当劳（McDonald's）的全球战略主管。他向我介绍了“战略树”（Strategy Tree）这一概念。该概念和大多数有用的东西一样，表面看来相当简单。但它能让你认识到你到底想取得什么。之所以用“树”作类比，是因为战略树中的各个问题之间存在相互关联。从你为什么做某事的根本目的开始，然后将它与你的目标以及衡量进展的方式联系起来。用图来表示，战略树更像是一连串相邻的圆圈，如下图所示：
4. 你怎么判断自己在取得成功？确定关键客户和财务指标。你每周应该做几次顾客拜访？提供哪些服务项目较为合适？什么是好的顾客幸福指数？MiniLuxe采用净推介值（Net Promoter Score）来衡量顾客向其他人推介服务的可能性。他们还每周衡量财务指标，其中最重要的指标包括销售同比增长、新门店实现正现金流所用的时间、门店每平方英尺面积的销售额等。我以前提到过，了解两三个主要运营指标以及两三个主要财务指标，就会使企业管理容易许多。先是对每个指标的合适目标做出最佳预测，然后开始进行衡量，必要时对目标做出调整。
前几年，我讲那个奥巴马说：Yes，We Can!是的，我可以。但是美国经济并没有做起来，他忘了回答，How We Can？我们到底怎么做起来，怎么做这个企业，如何做是最关键的。
现在明白了，为什么benjiamin graham 看重P/B,目前比亚迪的股价正向每股资产值8.5元极具靠拢，只有买入PB 才是最安全的，PE完全可能瞬间变化无常，这也是教训吧。
經銷商網點太多了。2008年比亞迪在上海有7家4S店，其中A1網4家， A2網3家。2009年的時候增加了5家4S店，其中A1網有7家，A2網有5家。2010年經銷店數量翻倍增加，其中A1網8家，A2網9家， A3、A4網5家。
August 21, 2011
The recent questionable trading of former Berkshire Hathaway (BRK.B) employee David Sokol brought forth the fact that Charlie Munger owned Byd Company (BYDDY.PK) long before Berkshire took a large stake in the company. Of course, owning a stock for years before Berkshire bought it is quite a bit different than owning a stock for a few weeks before pitching it to Berkshire as an acquisition target.
Byd Company is a Chinese battery, mobile phone and electric car company. It was started in 1995 by Wang Chuan-Fu, a chemist and Chinese government employee, with $300,000 he raised from relatives with the intention of manufacturing rechargeable batteries. By 2000, Byd was one of the largest manufacturers of cell phone batteries and in 2003 entered the electric car market by acquiring a Chinese state-owned car company. The electric car venture was also quickly a roaring success as Byd’s F3 sedan became the best-selling sedan in China in 2009.
Munger apparently was introduced to Byd by money manager Li Lu. Lu manages an investment fund that Munger is the largest shareholder in. According to this article from Reuters, Munger invested $50 million with Lu in 2004, and a great deal of that money was invested in Byd Company.
In 2008, Munger encouraged Sokol, then-manager of Berkshire subsidiary MidAmerican, to look into Byd as an investment opportunity for Berkshire/MidAmerican. Munger thought that if he could get Sokol convinced that Byd was a great opportunity, it would be more likely that Warren Buffett could also get interested. Long story short: Sokol was impressed -- and so was Buffett, as Berkshire bought 10% of the company.
And that investment has worked out pretty well for Berkshire. At December 31, 2010, Berkshire’s stake in Byd Company was worth $1.182 billion versus an original cost of $232 million. The current share price of the unsponsored ADR $6.98, however, is off significantly from its high of $22.24 reached in 2009, and from the December 31, 2010 price of $10.95.
So that starts to get a little interesting. Buffett thought enough of the long term prospects of Byd Company to not sell when the stock reached $22.24. And now we have an opportunity to buy at $6.98. But my issue is that I have no business investing in an electric car company. I don’t know anything about the technology that Byd uses and its superiority over competitors. What I need is a sign from someone much, much smarter than me.
Perhaps we have one from Munger, who -- as you are likely aware -- is a bit of a curmudgeon who is very hard to please. He carries this over into his investing style, as he invests seldom and only in what he believes are exceptional opportunities. When he ran his hedge fund back in the 1960s and early 1970s, he favored a very concentrated portfolio, and his conviction in concentrated investing has seemingly only strengthened over time. And not only is Munger concentrated, he is really good. So if something gets his attention and I get a shot to buy at the same price, I’m interested.
Consider how he has managed the finances of the Daily Journal Corporation (DJCO). At its 2008 year end, the Daily Journal had roughly $21 million in cash and US Treasuries. One year later, the Daily Journal had $8 million of cash and US Treasuries and $54 million in marketable securities. Where did the additional 40 or so million come from? It wasn’t operations; cash flow for the year was about $8 million. It was from Munger investing virtually all of the $21 million held at the 2008 year end in Wells Fargo (WFC) in early 2009.
The link to the 10K filing is here; check out note 2, which discloses a $15 million equity investment during the year which, by year end, was worth almost $48 million.
Since that investment in early 2009, Munger hadn’t bought a single share of anything for the Daily Journal. Until the most recent quarter, that is. According to the most recent quarterly filing, the Daily Journal purchased over $10 million of two “foreign manufacturing companies.”
Anyway, given how much Munger admires Byd, what are the odds that one of those companies isn’t Byd? And given that Munger hasn’t bought a single share of anything since early 2009, what are the odds that he is making a rash, not well-thought-out investment decision now ?
Byd Company’s share price is now considerably lower than the January to March 2011 period, where Munger was likely buying. How can one resist getting to piggyback on his investment and at a better price?
July 04, 2011
In business and in personal affairs, be patient but aggressive when you know what you want; continuous learning.
Investing star Charlie Munger imparts a final few words of wisdom
Munger, billionaire Warren Buffett's investing partner for 46 years and vice chairman of Buffett's Berkshire Hathaway, meets with an audience of devotees in Pasadena for the last time.
By Tom Petruno, Los Angeles Times
7:45 PM PDT, July 1, 2011
The aging star met with his adoring fans for the last time Friday and basically told them to get a life.
"I don't want to be better known than this," Charlie Munger, billionaire Warren Buffett's investing partner for the last 46 years, told an audience of several hundred devotees at the Pasadena Convention Center.
Besides, he added with his trademark genial cantankerousness, "You people aren't normal."
Munger, 87, is vice chairman of Buffett's Berkshire Hathaway Inc. holding company. He also has for decades run Pasadena-based Wesco Financial Corp., a mini-conglomerate that was majority-owned by Berkshire.
The annual meeting of Wesco has long been a high point of the year for Munger and Buffett fans for the opportunity to hear directly from Munger, whose unvarnished commentary on the economy, Wall Street and business in general has made him a cult hero.
Because Berkshire this spring bought the final 20% of Wesco, the company no longer will have shareholder meetings. But Munger had promised one last chance for shareholders to get together. He also opened the meeting to the public.
Munger used his opening remarks to take another jab at the "megalomania" of bankers who he says brought on the real estate bubble of the last decade. A lot of banking, he said, had become "gambling in drag."
He also said some of Wall Street's computerized traders were the equivalent of "letting rats into the granaries."
The audience ate it all up.
Herbert Yu, a 44-year-old executive at a Santa Ana printing company, said Munger and Buffett "are my heroes." Burned by dot-com stocks in the early 2000s, Yu said he soon after adopted the famed investors' "value" investing style. "I've been outperforming the market" since then, he said.
Yu brought his two children, ages 10 and 7, to the meeting because he said he wanted them to soak up Munger's wisdom — even if they weren't quite sure what they were hearing. "I made a deal with them: Sit here for one hour, and then you can go to the mall," he said.
Munger held forth for three hours, with the final two devoted to questions from his admiring audience. Many asked life-coaching questions — how to succeed in marriage, with children and in careers.
In business and in personal affairs, be patient but aggressive when you know what you want, Munger advised. He also stressed the importance of continuous learning. His current field of study: astrophysics.
Not surprisingly, some of his fans tried to draw him out for advice on individual stocks. He said Coca-Cola Co., a longtime Berkshire stock holding, was "not nearly as good a business as 20 years ago," but that as major companies go, it still was "one of my favorites."
Munger also praised Costco Wholesale Corp., on whose board he sits. The retailer "is about as admirable a capitalist enterprise as ever existed," Munger said.
A few attendees asked about Berkshire's controversial investment in Chinese automaker BYD, which has suffered a plunge in sales and earnings. Munger, who typically has great praise for China, said he "loved the people" at BYD and expected to hold the stock "to the end."
Asked whether Berkshire's own shares were a true value at the current price ($117,050 for a Class A share), Munger answered indirectly: "I think people who own Berkshire at the current price will do quite all right sitting on their patoots."
March 27, 2011
新浪财经讯 北京时间2月18日晚上消息，据美国金融危机调查委员会(FCIC)发布的谈话录影带，股神巴菲特(Warren Buffett)在与FCIC对话时指出，他评估一家企业时主要看重企业提高产品价格的能力，有时他甚至不会考虑谁掌管这家公司或管理的水平如何。
加州大学伯克利分校哈斯商学院的经济学教授赫马林(Benjamin E. Hermalin)则认为，具有市场统治地位并不能阻止恶劣的管理随着时间的推移毁掉一家企业。
March 25, 2011
A Maestro of Investments in the Style of Buffett
CHICAGO — Warren E. Buffett is hardly a man of mystery.
But when investors gather in Omaha in two weeks for the Berkshire Hathaway annual meeting, there will be a nagging question mark over the head of the 76-year-old chairman: who might someday replace him in each of the two roles he plays — chief executive of Berkshire Hathaway, and its chief investment officer?
A bit more is known about the choice of a future chief executive. Mr. Buffett has said there are three candidates from various Berkshire-owned companies. Buffett watchers speculate that the list includes David L. Sokol of MidAmerican Energy Holdings; Ajit Jain, head of the reinsurance division of Berkshire's National Indemnity Company; Tony Nicely, chief executive of Geico; Joseph P. Brandon, chairman of General Re; and Richard T. Santulli, founder of NetJets.
The bigger mystery is who will become the chief investment officer. Mr. Buffett says he does not know himself. On this point of succession, "frankly, we are not as well prepared," he wrote in his 2006 shareholder letter last month.
Here is a clue, though. He or she will probably be a lot like Louis Simpson.
Mr. Simpson, 70, has long overseen the investment portfolio of Geico, the insurance company Berkshire owns, which is now valued at more than $4 billion. He is also the only man other than Mr. Buffett who has managed stock investments in Berkshire's portfolio.
Mr. Buffett is a big fan. "He is the kind of person we are looking for: smart, classy, loyal," he said of Mr. Simpson in a telephone interview on Friday. But Mr. Simpson is just six years younger than Mr. Buffett, who has written that "for the long term, though, we need a different answer."
Applicants would do well to learn from Mr. Simpson, which is easier now that he has agreed to his first interview since Berkshire Hathaway gained total control of Geico in 1995.
In many ways, Mr. Simpson, whose title at Geico is chief executive for capital operations, is a lot like his boss. The two have the same general distaste for technology stocks. They both favor intensive research to find attractive companies to invest in, and they share a willingness to bet on returns from just a handful of stocks.
In terms of style, though, there are some major differences. Mr. Simpson, a deliberate, slow-talking executive, has maintained much lower visibility. "I have always felt I could do a better job in adding value by being somewhat removed from the circus and parimutuel atmosphere of the market," he said.
Mr. Simpson works in Chicago, where he moved from the La Jolla district of San Diego two years ago because his second wife, Kimberly, a chemical engineer, missed the energy of urban life.
Though he is already well-connected among Chicago's power brokers, he tends to describe people in terms like "fancy" if they are not the plain-spoken types that populate Berkshire's host of companies.
Mr. Simpson's work life is similarly low-key. On a recent spring day, he sat in his three-room office suite on North Michigan Avenue here, where he works with a small staff, explaining that it had been a particularly busy time.
Busy, though, is relative. There were no researchers running around, no Bloomberg terminals, and no interruptions. "We are sort of the polar opposites of a lot of investors," Mr. Simpson said. "We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting, and not a lot of thinking."
He does not crow about Geico's performance except to say that "it has been very, very good," and he is disarmingly honest about investments that have not worked out.
"Pier 1 was a horrible mistake," he acknowledged. "It was our own doing. They were totally out of touch fashion-wise, and it was a disaster."
Such mistakes notwithstanding, his track record has even led Mr. Buffett to brag about him periodically. In 2004, the only time that Berkshire ever stated Geico's performance separately, Mr. Simpson over 24 years had posted a 20 percent average annual gain, surpassing the Standard & Poor's 500-stock index by 6.8 percentage points.
Since 2004, Geico's results have been somewhat better than the S.& P. index, he said, declining to be specific. In 2005, the S.& P. was up 4.9 percent, compounded. In 2006, it rose 15.8 percent.
"He has an amazing record," Mr. Buffett said in the interview. "He does not make a lot of noise about it. He is a very sensible, sound, decent guy."
To find stocks, Mr. Simpson does not read analysts' reports. "They have their own agenda," he said.
Nor does he search data on the Bloomberg terminal for ideas. "If I have the Bloomberg on, I find I am looking at what the market is doing," he said. "I am looking at every news story. I really like to be the one who is parsing the information, rather than having a lot of irrelevant information thrown at me."
Sometimes he speaks with Mr. Buffett several times a week and sometimes not for a month or two. Mr. Simpson makes his own decisions and essentially works alone.
"The more people you have, the more difficult it is to do well," he said. "You have to satisfy everybody. If you have a limited number of decision makers, they are more likely to agree."
It is hard to know which stocks are Geico's and which are Mr. Buffett's picks. Mr. Simpson holds about 10 major positions: According to filings with the Maryland Insurance Administration, they are in American Standard, Nike, Comcast, Costco Wholesale, First Data, Home Depot, ServiceMaster and UnitedHealth Group (he bought it after the stock-option scandal). Geico's biggest position is Tesco of Britain, a stock also owned by Berkshire Hathaway.
Mr. Simpson found Nike, one of Geico's most successful holdings, through a stake in the rival Reebok. He had hired a journalist-turned researcher, and the researcher thought that Reebok was the "cat's meow," Mr. Simpson recalled, adding: "Paul Fireman ran the company, but not particularly well. The more we got into it, the more I saw the really quality company with the franchise and sports brand was Nike. It was truly a worldwide brand that did not have a lot of penetration in growing parts of the world such as Asia."
Thomas Russo, a partner in Gardner Russo & Gardner, also studied that industry for investors. Geico "did an enormous amount of research," he said. "They wanted to understand the management questions," adding, "We were researching companies in that same sector, and we had a pretty good idea of what was going on."
Mr. Simpson, who grew up in Chicago and has three sons, began his investing career at Stein Roe & Farnham. During a heady investment period in the late 1960s, he learned the perils of market timing when he worked for Shareholders Management, then a hot fund company run by Fred Carr. But when the market turned, Shareholders' Enterprise Fund took a nose dive, and there were substantial redemptions. Mr. Simpson resigned. "I viewed myself an investor, and they were trading-oriented," he said.
From there, he joined Western Asset Management where he rose to chief executive. Still, that firm basically followed analysts' recommendations.
It was not until Geico's chairman, John J. Byrne, called him in 1979 to become its chief investment officer that Mr. Simpson found a niche where he could put his own ideas to work. Berkshire Hathaway was already a shareholder in Geico, and Mr. Byrne sent several candidates to see Mr. Buffett about the management job. After a four-hour interview with Mr. Simpson, Mr. Buffett called Mr. Byrne. "Stop the search," Mr. Bryne recalled him saying. "That's the fellow."
Mr. Simpson's compensation has not been disclosed since Berkshire took over Geico in 1995. At that time, he received a moderate salary and a bonus based on how much the portfolio outperformed the S.& P. 500. He said that structure had not changed.
Mr. Buffett has noted that Mr. Simpson could probably make more money elsewhere. Mr. Simpson says he is not tempted.
Does the fact that Mr. Buffett seeks a younger heir for the long term upset him?
"If he would have asked me to take over the investments for Berkshire, I certainly would have done it," Mr. Simpson said, "but I certainly did not seek it out or wait for it to happen."
That kind of patience has proved to be its own reward. "Lou can keep running money as long as he wants," Mr. Buffett said.
February 11, 2011
I’m exceptionally proud and honored to present an interview with one of the top value investors of India, Mr. Chetan Parikh. This interview with Mr. Parikh represents one of the highlights of my career. Mr. Parikh is a man whom I admire and who has extensively contributed to the value investing community (via Capital Ideas Online and his numerous writings). I hope you enjoy the interview.
Mr. Chetan Parikh’s Background
Chetan Parikh is a Director of Jeetay Investments Private Limited, an asset management firm registered with SEBI. He holds an MBA in Finance from the Wharton School of Business and a BSc in Statistics & Economics from the University of Bombay. He has been investing in the Indian capital markets through proprietary investment companies and family trusts.
Chetan was rated amongst India’s best investors by Business India magazine. He is also the co-promoter of capitalideasonline.com, a well regarded investment website. His writings have been published in Business Standard, Business World, The Economic Times, and Business India. He is a visiting faculty member at Jamnalal Bajaj Institute of Management Studies (University of Bombay) for the MBA course.
Q. There are many different approaches to investing. What led you to choose the value approach?
A. Value investing is a logical, safe and disciplined approach to investing. It requires a lot of patience which fits in with my temperament.
Q. Which investors do you admire? Besides these investors who else has influenced you?
A. Any value investor can learn a lot from the Masters. In India I’ve listened to and learnt from Prof. Rusi Jal Taraporevala and Mr. Chandrakant Sampat.
Q. What’s your opinion of the efficient markets hypothesis and practitioners of technical analysis?
A. I believe that the efficient market hypothesis in the various avatars (strong, semi-strong and weak) is not correct. Sometimes prices deviate far away from intrinsic values and it is possible to earn high risk adjusted returns. In fact, the lower the downside risk, the higher can be the upside reward. I do not know anything about technical analysis.
Q. Tell us about your approach to fundamental analysis-what is your focus? How do you search for your investment ideas? Where do most of these ideas come from? Describe your evaluation process (both quantitative & qualitative)? How long do you hold on to your positions?
A. My firm, Jeetay, principally invests in publicly traded Indian securities and seeks to maximize investors’ capital by buying securities trading at values materially lower than their true business value.
Jeetay aims to achieve high absolute rates of return while minimizing risk of capital loss. Jeetay combines the analytical vigor of determining the fair value of a security with a deep understanding of the Indian markets. Jeetay will invest in securities where it can ascertain the reasons for the market’s mispricing and the likelihood of the mispricing being corrected.
Jeetay follows the value investment philosophy, which means that the objective is to buy a security trading at a significant discount to its intrinsic value. Since the focus is on discovering undervalued stocks, the fund doesn’t base its investments on macro-economic factors like GDP growth.
Jeetay determines intrinsic value as the present value of the future cash flows of a company discounted at a rate that properly reflects the time value of the money and the risks associated with the cash flows. In other cases Jeetay invests in “Special Situations” which involve the following:
Repositioning assets to higher uses
Mergers and acquisitions / open offers
Restructuring troubled companies
The fund invests in a company if the market price is quoting at a discount of at least 60% to the intrinsic value. It sells when the market value approaches intrinsic value or it finds a security trading at a steeper discount to intrinsic value.
Jeetay believes that while in the long term, a company is valued by its fundamentals, short term mispricing occurs due to investor psychology, liquidity and macroeconomic factors. This provides opportunities for the diligent and patient investor to make outstanding risk-adjusted returns.
The time horizon of Jeetay is 3-5 years. It believes that short-term market movements can be volatile and the market may recognize mispricing only in the medium to long term. Hence the emphasis is on understanding the corporate strategy and the resultant cash flows for a 3-5 year period. The probability of the markets recognizing the mispricing becomes high over the medium to long-term period.
The firm does not limit its investments to certain asset classes or sectors. The fund evaluates any sector or asset class where a conservative estimate of intrinsic value is determinable with a reasonably high probability and invests if the security is available at a reasonable margin of safety.
The firm does extensive research to arrive at estimates of expected cash flows, asset values and earnings. Jeetay culls information from public databases, quarterly and annual filings, annual reports, meetings with management, competitors, vendors, customers and other industry participants, industry experts, trade journals and bankers. Jeetay has extensive networks in India to get data and information for superior analysis. Jeetay believes that a disciplined private equity approach to investing that stresses on buying at a discount to intrinsic value will deliver consistent absolute above average investment returns and safeguard capital irrespective of the state of the markets.
Jeetay believes that the following steps are essential to its process:
1. Opportunity Identification. Jeetay identifies opportunities through a multitude of ways. Jeetay has numerous financial models and screens that are used to filter investment opportunities within the framework of the investment philosophy. Jeetay has many contacts and professional relationships. This gives it many opportunities consistent with the investment philosophy.
2. Analysis. Jeetay does intensive financial and qualitative analysis on companies once an opportunity is identified. The analysis is mainly to arrive at whether a disparity exists or not between the traded value of the security and its intrinsic value. Jeetay has substantial experience in determining the intrinsic value of a company across sectors. Multiple valuation metrics including discounted cash flow analysis, price to earnings, dividend discount model, price to sales, price to book, comparative analysis is used to arrive at the valuation of a company.
Other than financial analysis, Jeetay extensively meets every possible associate of the company to understand the opportunity better. These include vendors, customers, middle management, bankers, competitors, large stakeholders and senior management. This helps Jeetay arrive at a closer intrinsic value and also exit an investment if unfavourable events arise or the team’s original calculation of intrinsic value was wrong.
The analysis would focus on the 3B’s, – Understanding the business, analyzing the balance sheet and looking for bargains.
Take each in turn:
Business: What is the nature of the business and its competitive strengths and weaknesses? What is the competitive ecological niche that it occupies and how protected are its profits from predators there? What are the nature of the entry barriers or ‘moats’ - intangible assets, switching costs, network effects, cost advantages? How wide and deep are the moats? Does the business cover its cost of capital? A qualitative assessment of the business should be made to understand whether it is a superior or inferior business. Evidence of pricing power or the ability to lower cost of production and distribution should be searched for.
Balance Sheet: In order of importance is the balance sheet, the cash flow statement and the profit and loss account.
Bargains: One need not to be able to determine value exactly to know whether a stock is cheap or not. As Ben Graham wrote, “To use a homely smile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age, or that a man is heavier than he should be without knowing his weight.” A discount to value, a ‘margin of safety’ is paramount, without which an investor is relying on the whims of “Mr. Market” for his investment return.
Q. As a follow up question, how do you determine intrinsic value?
A. The textbook definition of Intrinsic Value is the present value of the future cash flows discounted at a rate that realistically reflects the time value of money, risk and volatility of the cash flows.
The problem is that it is difficult to:
1. determine the future free cash flows
2. determine the discount rate
3. determine the terminal value
There are very few companies, i.e. those that are franchises earning well over their cost of capital and growing whose intrinsic value can be calculated using the Dcf approach. Ben Graham’s method of bargain identification is useful in other cases.
You don’t have to calculate intrinsic value with precision (especially where it is not possible) to know whether a stock is cheap in seldom to its value or not.
Q. Do you invest in foreign companies? If so, do you evaluate foreign companies different than those based in India and how do you hedge currency exposure(s)?
A. I have not invested in foreign companies as of yet. Sitting in India, I would have to invest in the large cap stocks in foreign markets, and have not as yet found large caps in USA to be cheap in relation to my investing universe in India. Whilst markets may change, valuation principles are universal-they are the same whether it’s the USA or India.
Q. How many stocks do you typically hold in your portfolio?
A. In my family portfolio, given the time horizon and tax considerations, there is a heavy concentration on a few stocks that have franchise value and entry barriers. There are smaller positions, but the bulk of the portfolio is in a handful of stocks.
In the managed accounts, price in relation to value is of paramount importance and many of the businesses are clearly not franchises. The portfolio thus in the managed accounts tends to be more diversified with roughly around 18-25 positions. Cash is carried at all times in the managed portfolios, the level directly correlated with the valuation of the broad market.
Q. Do you invest in any fixed income? If so, tell us about the role of fixed income investments in your portfolio.
A. I do not normally invest in fixed income securities. Cash is usually a default position and varies directly with the level of the market. The cash is usually kept in the bank or in money market funds. I do not like to take a credit risk with money that I know will eventually be opportunistically deployed in the stock markets. The key is to be able to sit on your low-yielding cash without losing your patience.
Q. . How do you judge a company’s management?
A. There are three ways of looking at management:
1. their integrity
2. their competence – both operational and in capital allocation
3. their corporate governance
In the end you want to deal with people who do not make your stomach churn. Integrity and competence are both necessary in top management. Finally there is the factor of the passion to improve the game by never becoming complacent.
Sometimes a good price can cover a multitude of sins, including poor management. But if I had to hold a non-franchise investment for any length of time, management would certainly be an important factor. In many cases, it is the jockey, not the horse that one should bet on.
Q. What makes you sell an investment?
A. I sell when:
My original thesis was wrong
Price is reached
A better option comes along
Ben Graham’s criteria should be kept in mind. Switch for:
1. Increased security
2. Larger yield
3. Greater chance for profit
4. Better marketability
Q. How do you look at risk?
A. Risk is very subjective. Academic theory has one definition of risk namely standard deviation which is wrong. Actually, if one had to use statistical distributions to measure risk, then there are three dimensions, Variance, Skewness & Kurtosis.
I do not think however that risk can only be captured by statistical measures. To me, risk is simply the chance of permanent loss of capital and an investors’ job is to eliminate that risk. He may not be able to do so for individual securities, even with a margin of safety, but he has to do it in a portfolio context.
Q. What’s your take on leverage?
A. Leverage is one of the two things that can cause a permanent loss of capital to a value investor. Avoid it, unless you are willing to take a risk of a permanent loss to your capital. The other thing that can cause a permanent loss of capital is holding on to overvalued stocks, but I assume that a value investor would not do that.
I always carry cash for optionality, rather than borrow against my holdings should the opportunity arise.
Q. Do you invest in commodities, gold, real estate, etc? If so what has been your experience with these classes?
A. I have legacy investments in real estate. I view it as an inflation hedge and a different asset class in the portfolio.
Currently I have investments in gold as a hedge against a highly likely decline in the value of the dollar and a meltdown in financial assets. The economic problems in US are severe and the wrong treatment is being given. When fiscal and monetary insanity prevails, gold always reigns supreme. I’m not making a directional bet on gold prices – it is only a hedge against my financial investments.
Q. Tell us a little more about your involvement with special situations?
A. It depends on the definition of “special situations”. If special situations means a value stock with identifiable catalysts like change in management, operational and financing restructuring, buybacks, mergers and acquisitions etc, then we certainly do invest in special situations. We have investments in spin offs and in open offers as a result of takeovers.
Q. Have you ever taken the role as an activist investor, would you ever do so?
A. I’ve never wanted to take a confrontational attitude with management although sometimes I’m forced to. If I’m not happy with their policies, I sell - but my aim is to influence management through logic and rationality, not through financial blackmail.
There is a grey area however. I’ve been connected with the press through my columns in various newspapers and magazines and I’ve written about instances of corporate misgovernance there. But I’ve never threatened management.
I do not have the temperament to fight management or for that matter, anybody. I believe in exiting relationships where there is no mutual respect, rather than slugging it out for dominance.
Q. We understand that you are very focused on bottom up value investing-what has the financial crisis taught you?
A. I wrote this piece awhile ago and it would be related to the question above.
It may be interesting to use a cross-disciplinary approach to the problems and mistakes made by banks in the sub-prime market.
The power of rewards that leads to repeated actions and the flawed compensation structure that led to misaligned incentives could be one mental model. As Raghuram Rajan pointed out in Financial Times (Jan 9, 2008), the compensation practices in the financial sector are deeply flawed. The compensation is based on the so-called ‘alpha’ that a manager of financial asset generates. There are three sources of ‘alpha’:
1) Truly special abilities in identifying undervalued assets (eg. Warren Buffett)
2) Activism – using financial resources to create, or obtain control over, real assets and to use the control to change the payout obtained on the financial investment.
3) Financial engineering – financial innovation or creating securities that appeal to particular investors.
Many managers create ‘fake alpha’ i.e. they appear to create excess returns but are taking on ‘tail’ risks which produce a steady return most of the time as compensation for the very rare, very negative returns (‘black swans’). The AAA rated CDOs generated higher returns than similar AAA rated bonds. The ‘tail risk’, so evident in hindsight, of the CDO defaulting was not as small as perceived and so the excess return was compensation for that.
The credit rating agencies that rated these securities as AAA because of their ‘insured’ status were themselves wrongly incentivized (compensated by the issuers of the securities). Furthermore once their peers started issuing AAA ratings, ‘social proof’ came into play and the ratings war as to who assigned the highest ratings for junk became a classic Prisoners’ Dilemma..
This is proving to be a game of chicken between the regulators and the players (banks and monoline insurers). In a classic game of chicken, two cars drive towards each other. The first driver who turns loses. Of course, if neither car swerves then there is a crash. The best outcome for each player results when he goes straight whilst his opponent turns. Insane players have a massive edge in a game of chicken. At this point of time, the jury is out given the level of insanity in the system.
Q. How have you evolved as an investor?
A. I guess the process of evolution is never over. I started out knowing nothing but efficient markets and so the leap to value investing was a big one. I know I’ll never leap out of value investing, but the nuances may undergo changes, as also my ability to widen and deepen my circle of competence.
Q. What is the most interesting part of your job?
A. It is searching for investment ideas, working out the odds and reading from a wide variety of sources.
Q. Which books would you recommend?
A. Here are a few, but they are by no means exhaustive.
Everything by Jared Diamond
Everything by Garett Hardin
“The Road to Serfdom” - Friedrich Hayek
“The Prophet of Innovation”
“More than your know” - Michael Mauboussin
“The Robot’s Rebellion”
“The mind of the market” - Michael Shermer
Try to read all of Mr. Munger’s book recommendations and also the books in Mr. Peter Bevelin’s Bibliography in “Seeking Wisdom: From Darwin to Munger”. I do not think that I’ll be able to read all the books that have been recommended in my life time but I’m going to give it a shot.
Q. What is the biggest mistake keeping investors from reaching their goals? How have you guarded yourself against this folly?
A. Greed, fear, sloth and envy are the four emotions that are positively inimical to becoming a better investor.
Meditation, detachment from results, but attachment to efforts, yoga, discipline in living and thinking are some of the ways for self-improvement in investing.
One must also have an open mind to new ideas and try to become in the words of Mr. Munger “a learning machine.”
Q. What should investors understand before investing in India?
A. Indian markets are very volatile, so be very careful on entry prices. “Growth” is a seductive term and stories woven about growth even more seductive, but be very careful of paying too much for it. Homework matters. Liquidity can dry up, so be clear whether you can live with relatively illiquid positions.
Q. If you could do anything besides allocating capital what would you do?
A. I would teach and write more often than I do.
Q. What message/advice would you give to readers of SimoleonSense?
A. Read a lot, be disciplined, be humble about your knowledge and stay within your circle of competence.
Q. What does the future hold for you, your funds, and website? Are you going to do this forever?
A. As long as I can, mentally and physically.
Miguel Barbosa: Mr. Parikh thank you for taking the time to interview with us.
Benjamin Graham and Security Analysis: A Reminiscence
Walter J. Schloss
Ben Graham was an original thinker as well as a clear thinker. He had
high ethical standards and was modest and unassuming. He was one
of a kind. I worked for him for nearly 10 years as a security analyst.
In re-reading the preface to the first edition of Security Analysis, I
am impressed all over again with Ben’s views. I quote . . . “[W]e are
concerned chiefly with concepts, methods, standards, principles, and
above all with logical reasoning. We have stressed theory not for itself
alone but for its value in practice. We have tried to avoid prescribing
standards which are too stringent to follow or technical methods which
are more trouble than they are worth.”
Security Analysis says it all. It is up to analysts and investors to put
Ben’s ideas into practice.
Back in 1935 while working at Loeb Rhodes (then called Carl M.
Loeb & Co.), one of the partners, Armand Erpf, gave a good piece of
advice when I asked him how I could get into the “statistical department.”
In those days and perhaps today to some extent, the best way
to advance was by bringing in business. If you had a wealthy family or
friends, you brought in commissions. Security analysis was in its infancy
and who you knew was much more important than what you
knew. If you didn’t have connections, it was difficult to get ahead. In
any case Mr. Erpf told me that there was a new book called Security
Analysis that had just been written by a man called Ben Graham.
Reproduced by permission from the private writings (1976) of Walter J. Schloss.
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“Read the book and when you know everything in it, you won’t
have to read anything else.”
I took Ben’s course in Advanced Security Analysis at the New York
Stock Exchange Institute (New York Institute of Finance).
Ben was a good speaker, enthusiastic and logical. Ben did something
that I haven’t seen done often. He would take an undervalued situation
at that time, such as the bankrupt bonds of Baldwin Locomotive,
and show how much the new securities would be worth based on their
projected earning power and assets and relate this to the price of the
bonds. Many bright Wall Streeters such as Gus Levy of Goldman Sachs,
who later became the top arbitrageur in the country, used to take his
course. I often wondered how much money people made on Ben’s ideas
by transforming them into investments.
Ben was very generous with his thoughts and his time, particularly
with young people. By offering me a job as his security analyst as I was
about to leave the Army at the end of 1945, he changed my life. I know
he helped others in our field too.
At Ben’s memorial service, Dave Dodd, Ben’s co-author, told how
he had got involved in the book.
It seems that Ben was asked to teach a course at Columbia University
on investments and he agreed to do it with the stipulation that he
would only do so if someone would take notes. Dave Dodd, a young
instructor, volunteered and took copious notes at each of Ben’s lectures.
Ben, using the notes, then went ahead and wrote Security Analysis. As
Dave said, Ben did the work but he insisted that Dave get credit by being
Professor Dodd went on to become a very successful investor and a
director of Graham-Newman Corporation, an investment trust that
Ben had founded in 1936 with his partner, Jerome Newman.
The ability to think clearly in the investment field without the emotions
that are attached to it, is not an easy undertaking. Fear and greed
tend to affect one’s judgment. Because Ben was not really very aggressive
about making money, he was less affected by these emotions than
were many others.
Ben had been hurt by the Depression, so he wanted to invest in
things that would protect him on the downside. The best way to do this
was to lay out rules which, if followed, would reduce his chance of loss.
2 BENJAMIN GRAHAM AND SECURITY ANALYSIS
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A good example of this was the day I happened to be in his office at
Graham-Newman when he received a telephone call that they had
bought 50 percent of Government Employees Insurance Co. (now
GEICO). He turned to me and said, “Walter, if this purchase doesn’t
work out, we can always liquidate it and get our money back.”
The fact that GEICO worked out better than his wildest dreams
wasn’t what he was looking for. As the saying goes, a stock well bought
is half sold. I think Ben was an expert in that area.
Graham-Newman followed the precepts set down by Ben and the
fund prospered. Compared to today’s investment company, it was tiny.
Its total net assets on January 31, 1946, were $3,300,000.
Ben’s emphasis was on protecting his expectation of profit with
minimum risk. If one wants to get hold of Moody’s Investment Manuals
for the 1947–1956 period, it is interesting to see Graham-Newman’s
holdings. Many of them were small, practically unknown companies
but they were cheap on the numbers. It is instructive to read their
annual report for the year ended January 1946. It states that their general
investment policies were twofold.
1. To purchase securities at prices less than their intrinsic value as
determined by careful analysis with particular emphasis on the
purchase of securities at less than their liquidating value.
2. To engage in arbitrage and hedging operations.
I helped Ben with the third edition of Security Analysis, published in
1951. In the appendix is an article on special situations that first
appeared in The Analysts Journal in 1946. In the article, he had worked
out an algebraic formula for risk-reward results that could be applied
today, 37 years later.
In 1949, The Intelligent Investor was published. This was a book for
the layman but it focused on security analysis and gave prestige to the
field. Its fourth revised edition is still in print.
One day, I came across a very cheap stock based on its price at the
time, Lukens Steel. We bought some but expected to buy more.
At this point, Ben went out to lunch with a man who kept telling
Ben about one blue chip after another. At the end of the meal he asked
Ben if he liked anything and Ben said we were buying some Lukens Steel.
Benjamin Graham and Security Analysis: A Reminiscence 3
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I doubt if it took a day before the man went out and bought a great deal
of Lukens and pushed the stock out of our buying range. I had the
impression after Ben told me the story that he didn’t want to be rude
and hadn’t realized how important his comments were.
He tried to keep things simple. He wrote that he didn’t believe security
analysts should use more than arithmetic and possibly a little algebra
for any investment decision.
Because Ben was a cultured, many-faceted man, he didn’t spend as
much time on investments as did others in the field. He liked to try
new ideas. In the late 1930s he became involved in promoting his evernormal
granary theory and wrote a book on it called Storage and Stability
in which some commodities and metals would be used as a backing
for our currency. His ideas made sense and with cotton at six cents
a pound and other raw materials at low prices, it was an interesting
proposal. He never had the clout to sell it to the Congress, although
Bernard Baruch, a friend of his, supported the idea and it could have
been a useful way to help the farmers and reduce the threat of inflation.
Of all the things that Ben accomplished in his lifetime, Security Analysis
was, to me, his greatest achievement.
Ben Graham was the leader in giving status to security analysts. It
was a privilege to know him.
February 04, 2011
Walter Schloss’ Presentation at The Benjamin Graham Center for Value Investing
July 25th, 2010 · 1 Comment · Uncategorized
Walter Schloss conducted a recorded video / audio presentation at the Richard Ivey School of Business’ Benjamin Graham Center for Value Investing. If you would like to see the audio / video, we have it on our value investing resource page. In this post, I am going to take notes on Schloss’ speech and add some commentary later in the week. Enjoy.
Started fund in 1955 when Graham said he was going to retire
Schloss was left handed (I never knew that)
Started out with 19 partners, each with approximately $5,000
Stayed in field until 2001 (or 2003…couldn’t recall). Son couldn’t find any good value stocks.
Started work when his father lost his job – the family had no money. Started off making $15/week. Wanted in the research department. Was denied. Was told to read “Security Analysis”
Question: How do you choose stocks? Answer: Stocks that are hitting new lows. Schloss fines Value Line very helpful. He doesn’t have a computer and likes to look at the numbers. He doesn’t talk to management teams.
Went to work for Graham in the beginning of 1946
Question: What process did you follow to minimize mistakes? Answer: I don’t like to lose money and therefore buy stocks that are protected on the downside and then the upside takes care of itself. Look for companies that do not have a lot of debt. By looking at the proxy statement and annual reports, can get a sense of how much stock the directors own, who owns a fair amount of stock, and the history of the company.
Look at companies selling at new lows. It means the company has problems. Debt exacerbates these problems.
Love companies with simple capital structures. Not a lot of debt. The company has to have history. Management needs to own stock.
Schloss admits he was never good at evaluating management character. Therefore he stuck to the numbers.
Value Line is helpful because you get a good sense of history on the company because they have 10-15 years of performance data.
Question: If stock falls, what do you do? Answer: If I like a company, I’ll buy more on the way down. Stock brokers do not like recommending stocks that are going down. The stockbrokers don’t want to look like fools. People get nervous when stocks go lower.
Likes to try to get 50% profit. Only long-term profits (don’t want to pay short term taxes)
Admits that he makes mistakes in sales. He will buy at $30, sell at $50, and see it go to $200
Likes stocks selling below book value. Reiterates how much he hates debt.
Read annual report. Figure out why the company is having problems.
If you get a stock selling significantly below book value, has a good history over 20 years, and little debt with lots of management holdings, probably a good purchase.
Margin of Safety to Schloss is if the company’s book value is substantially higher than the market price. Companies get bought out that are trading at significant discounts to book.
Question: Emotional mistakes? How do you control? Answer: Schloss does not get emotional about stocks. One reason he doesn’t talk to management teams is because management presents the company the way you want to see them. Schloss is not a good judge of people. Warren Buffett is. Schloss says you have to look at situations logically, not the way you WANT to look at it.
He wants to buy things the way there are, not the way they may be in the future. He wouldn’t buy a company with a prospect of an electric car just because of that prospect.
Seems to me that he uses Good to Cancel Orders
Question: Outstanding company at a fair price or a fair company at an outstanding price? Answer: He doesn’t want to buy good companies at what they are worth – he wants to buy these companies at a discount. Sometimes people get VERY nervous and bargains arise, but that is not too often. You want to buy stocks that you can make 50% over a couple of years.
He doesn’t like to lose money. So he buys companies that are having problems. He likes companies with no debt.
Quite often the stock market reacts emotionally. Bad news causes troubles. If you are managing money for other people you should not tell your limited partners what you own – Why? Don’t want competition. Don’t want to deal with investors emotions and don’t want to hear their complaints. If LPs are worried, don’t take them as investors.
Question: Three traits to be a successful value investor? Answer: Be calm and not to be emotional. Be intellectual and look at the facts. Never get emotionally involved in a stock.
Distinguish between temporary and permanent problems.
He likes companies to be a success. If you sell early, and the stock triples, who cares? Move on.
Question: Is the upcoming recession worse than previous ones? Answer: Schloss tries to stay away from what is going on in the overall economy. He has no idea what is going on in the economy. He buys stocks on what they are worth – and not what is going on in the macro economy.
Stop worrying about what is going on in the overall economy or where the market is going – buy cheap stocks – if you go into a recession, you’ll have to wait longer to make your money. Just buy cheap stocks.
Graham liked to compare stocks that started with the same letter of the alphabet. Intellectual exercise. Compared the stocks.
Compare stocks in the same field. Two liquor companies for instance. What are their trading levels?
Question: Has market become more efficient? Answer: As an analyst, your job is to determine why one stock is selling lower than another. If an industry is having a problem, take a look. A lot more competition but that being said, “value analysts” are still not happy buying stocks that are going down.
Harder to determine when to sell versus when to buy.
Question: Personal view on diversification? Answer: Stay away from industries that are outside of your circle of competence. More comfortable with very old industries. More comfortable in stocks than bonds because inflation eats up return. Very few people become millionaires buying bonds. Bonds are for old people.
Seems to me this guy is incredibly humble. Jives with what I have read in the past.
Question: Raising capital in the 50s as a young fund manager? Answer: Not an aggressive man in going around to raise capital. Get your feet wet with family money. Very difficult to start a fund. You don’t want to lose money. If you like math, if you like investing, you can do it as long as you control your emotions.
Question: Biggest mistake? Answer: ”I forget my mistakes.” Awesome. Schloss didn’t lose money often. Never put a great amount of money in any one stock. Held over 100 stocks at any one time.
Compared value of a company versus its working capital…i.e the company was trading at 2 dollars a share but had 7 dollars of working capital per share.
Didn’t like getting involved in legal actions
Never focused on mistakes – including selling too early
Question: China? Answer: Schloss does not buy foreign companies. It is not easy to judge foreign companies. Insiders have too much advantage overseas.
Question: When to sell / mechanics of sales? “I don’t know when to sell” Schloss will sell at 100% profit. At Graham Newman will scale their sales. Will usually hold stocks for 3 years. Schloss likes profit, but he has no formula for when to sell.
If a stock gets high enough, it becomes a lot more vulnerable.
Schloss quotes from Ben Graham from the 3rd edition of Security Analysis: McDonald’s was selling at $14, down from $35. Graham’s arbitrage formula for return per year.
Question: Max you would allocate to a stock in a portfolio? If you really like, individually, you might put 20% in one stock for yourself. In a partnership, you may put only 10% in.
Shorted stocks in the tech bubble. Historically never did it before. It made him feel uncomfortable.
Question: Research – just Value Line and Annual? Answer: Less than book value, not much debt. Then you look at company itself – company might suck, but it may have a lot of book value.
Question: How do you become comfortable with an industry? He likes simple manufacturing companies. Companies might have lots of growth, but stockholders might do poorly. Simply capitalized companies. Look at the last 20 years. And then get an annual report.
Buys stocks where the outlook is not good.
Value Line: Look where stock was ten years ago.
The point is: You do not want to lose money. Buy stocks that are depressed, that aren’t going broke.
Warren Buffett – very brilliant guy – but some people were reluctant to invest because there was no income.
Question: What is the most important thing in investing and in life that you have learned in the past 50 or so years? Answer: Honesty is the best thing you could have.
Stay tuned over the next week as we analyze this Walter Schloss’ speech on value investing.
Value Investing Resources
Here I am in the process of compiling literally everything I can find on the web as it relates to Walter Schloss, Irving Kahn, and other members of the Graham – Newman Partnership. This list will continually be updated as I stumble upon more items – that being said, if you have something to share, please shoot me an email at hunter [at] distressed-debt-investing.com
Walter Schloss Resources
Schloss honoring Janet Lowe
Profiles in Investing Walter and Edwin Schloss
Schloss on Graham from Lowe’s Biography
Walter Schloss on Liquidations
Walter Schloss List of Stocks
In Defense of Stock Dividends
Intrinsic Value is Key Factor
Walter J. Schloss_Searching for Value
Schloss Seminar at CBS ’93
The Over-Valuation of Some Blue Chip Stocks
Profiles in Investing Walter and Edwin Schloss
Who is Walter Schloss – Barrons Article
The Hippocratic Method in Security Analysis
Making Money Out of Junk
Walter J. Schloss: Searching for Value
Factors needed to make money in the stock market
Walter Schloss on Liquidations
Schloss at Grant’s Interest Rate Observer Conference
Schloss: “Why We Invest the Way We Do”
Why Schloss is Such a Great Investor
Schloss on the DJIA
Walter Schloss: 1985 Barrons Article
Benjamin Graham and Security Analysis: A Reminiscence
Walter Schloss and Value Investing – Barron’s Article from 1985
August 23rd, 2010 · No Comments · Uncategorized
One of the reasons I started a value investing blog on Walter Schloss, Irving Kahn, early Warren Buffett and other members of the Graham-Newman Corporation was my fascination on how rare their early investment style is still applied today. I think we can all agree that finding 2/3 net/nets as Ben Graham prescribed is difficult. That being said, far too often we hear about GARP or EV/EBITDA versus as asset based approach so effectively employed by Walter Schloss.
In 1985, Barron’s ran a story entitled “The Right Stuff: Why Walter Schloss is Such a Great Investor.” You can find a link to the piece in our value investing resources page. In this post, like one of our earlier Walter Schloss posts on the blog, I will be using bullet points to document my notes.
Interesting point about how Barron’s had not heard of Walter Schloss until Warren Buffett blew his cover in the ever famous “The Superinvestors of Graham-And-Doddsville”
Walter recounts how he got into the business. It is interesting to note that in this interview, he says “Graham was writing his book on the stock market, and I remember helping him with one chapter.” I never knew that part of the story – this is all before Schloss had enlisted.
Very heartily recommends The Intelligent Investor
Compares Ben Graham to an undervalued security: “It’s a funny thing about Graham. I think he was like an undervalued security, if you want to know. People said, ‘Oh, Ben Graham, he’s very smart.’ But then they’d go off and do their own little thing with computers, or whatever the popular thing was at the moment. They kind of forgot. They’d say ‘Oh, we like undervalued stocks,’ but then they wouldn’t buy them.” He then goes on to point out that Graham’s ideas made perfect sense to him.
Ben Graham’s philosophy on buying a diversified pool of stocks stems from the pain he experienced during the Great Depression.
At Graham Newman they followed “the idea of buying companies selling below working capital – at two thirds of working capital – then, when the stocks’ prices went up to match working capital per share, we’d have made 50% on our money. And the firm averaged about 20% a year on that basis.” Schloss, like I noted above, then goes on to note that during the fifties, those stocks started disappearing.
Why did these stocks trade at these levels previously? “They were mostly secondary companies; they were never the top grade companies. And they tended to be ignored by the public because they didn’t have any sex appeal, there wasn’t any growth – there was always trouble with them. You were buying trouble when you bought these companies, but you were buying them cheap. Of course, when you got them too cheap, they maybe ended up going down the tubes. So you try to be a little careful. But people don’t like to buy things that are going down.”
Philosophy: “Graham liked the idea of protection on the downside and basically, that’s what I do. I try not to lose money.”
When asked what he think the market will do, his response: “I’ve got no idea; your guess is as good as mine.”
Schloss on timing: “Timing is a very – everybody tries to do it, so I stay away from the game that everyone’s trying to do. If you buy value – and you may buy it too soon, as undoubtedly I do – then if it goes lower; you buy more. You have to have confidence in what you are doing.”
Again using five years as a yardstick. But notes their average holding period is 4 years.
Liked to stay under the radar.
On his investing style: “I am a passive investor. There are people who try to be very aggressive; they try to buy companies [Editor Note: Remember this is during the LBO Boom of the mid to late 80s]. We just buy the stock, and if it goes to what we think is a reasonable price, we sell it and move on to something else. Graham made the point in his book where he said, ‘You buy stocks like you buy groceries, not like you buy perfume.’ You’re looking for value.”
No ticker tape machine in his office – he tries to stay away from the emotions of the market. The market appeals to fear and greed – He doesn’t want to be a part of that.
Blames Warren Buffett for the uprise in value investing and how hard it is to buy cheap stocks.
Gives an anecdote about a stock that Schloss purchased for the fund and then the company was bought out shortly thereafter: “But the point is, if it hadn’t worked out that way, Stauffer was a really good company, and in a few years it would have worked out satisfactory. It happened to work out quicker, that’ all.”
Doesn’t like short term gains.
On the insert lists the rationale’s for a number of his stock picks:
“The downside is limited…so you buy it”
It isn’t exactly cheap. But it’s a good value.”
“Basically a good company and there will be another deal”
“It does have problems. I can’t say that enough.”
“The timber is worth a lot more than the market price.”
“You couldn’t replace it for what it sells for.” (On Texaco)
“A good value stock. They had a terrible break.”
“There’s no particular point selling it. I have a big profit.”
“It’s got a lot of cash flow”
Note that he was managing $45M in 1987
Notes that Graham returned a substantial amount of his limited partners capital when he couldn’t find cheap stocks in 53′.
On portfolio management: “The thing is, we don’t put the same amount in each stock. If you like something like Northwest Industries, you put a lot of money in it. But we may buy a little bit of stock, to get our feet wet, and get a feeling for it. Sometimes if you don’t own a stock, you don’t pay enough attention. Then also, we sell stock on scale. Sometimes we sell some, and then stock poops out on us, and then we’re stuck.”
Continuing: “Sometimes we get into situations where we really don’t sell at all. So we have more securities than I’d like to have, and yet, I feel comfortable owning them. Then, of course, you get a situation where you buy the stock, and it seems a good value, and it goes up a fair amount, and you like it better. You become a little more attached to it, and then you see some pluses that you may not have realized before.”
The quote above confuses me: Does he mean you like the stock because it has gone up or because you’ve done more work on it and got lucky with the price action?
Adjusted Working Capital = Current Assets – Current Liabilities – Debt
Again notes about management holding stock – seems to be very import to Walter Schloss
Talk about analyzing the balance sheet: “And of course a lot of companies have lots of assets tied up in plant and equipment. Well is it an old plant, or is it a new plant?
“You don’t have to just look at book value. You can look at what you think companies are worth, if sold. Are you getting a fair stake for your money?”
Talks about a “good company” and dubs it a “not a book value stock.” (For reference, the company was selling at 10x earnings, 5.5% dividend yield, 1.5x book, 15% ROE)
Here is a very interesting quote (probably my favorite in this article): When asked why “park money” in a stock: “If the market was very low, I’d say ‘Well, CPC probably isn’t a great stock to own. If the market is so cheap, you want something with a little more zip in it, or potential.’ In a market like ours, which is not very cheap – I wouldn’t say its way overpriced, because it isn’t; it’s in a more reasonable area-there’s more risk on the downside. CPC probably doesn’t have that much downside risk, and therefore I feel comfortable with it. If the market should collapse, we, then maybe we’d sell it, assuming we’d be getting that price, and buy something that’d gone down a lot.”
Notes how he doesn’t get involved in looking at earnings potential.
Why difficult to sell? Upward price movements feed on themselves …
On holding cash: “We’ve never really done that. We’ve always been fully invested. Which may be good, and may not be good – it’s psychological. I find I’m more comfortable being fully invested than I am sitting with cash.” …very different from a number of Value Investing Legends…
Note he doesn’t play in options, doesn’t write covered calls, doesn’t short stocks
Noted that Graham thought when there were no working capital stocks, the market was overvalued…Schloss does not that theory does not really apply anymore.
Schloss on the market: “I simply say, if there are not too many value stocks that I can find, the market isn’t all that cheap.”
Simply incredible. Stay tuned later in the week when we explore more value investing articles on Walter Schloss and start digging into some securities.
Walter Schloss is considered one of the investment greats, a value investor in the same league as the Oracle of Omaha, Warren Buffet. Like Buffett, Walter Schloss was also trained under the legendary Benjamin Graham. For a brief while in the 1950s, Schloss and Buffet even shared the same office.
For sheer uninterrupted performance record, few investors can match Walter Schloss. For 45 years from 1955 to 2000, he managed the investment partnership, Walter J. Schloss Associates and delivered an astounding compound annual return of more than 15 per cent per year compared to a gain of S&P 500 of just over 10 per cent.
And this is what Buffet had to say about Walter Schloss: "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 that 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."
"One of the things we've done is hold over a hundred companies in our portfolio. Now Warren (Buffet) has said to me that, that is a defence against stupidity. And my argument was, and I made it to Warren, we can't project the earnings of these companies, they are secondary companies, but somewhere along the line some of them will work. Now I cannot tell you which ones, so I buy a hundred of them. Of course, it does not mean you own the same amount of each stock."
"I'm not very good at judging people. So I found that it was much better to look at figures rather than people. I didn't go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we did not really talk about it, because we were small. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They would listen to you. I think it is really easy to use numbers when you're small."
"Timidity prompted by past failures causes investors to miss the most important bull markets."
"We did not get involved in many companies that turned crooked. I know there were a few people that had poor reputations and their stocks were low, and when we did buy some of those we were sorry afterwards because they figured out a way of taking advantage of you, and you were always worried that they'd do something that didn't like."
"When companies have problems they often like to have their annual meetings in cities and states where there are not too many stockholders."
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