Walter Schloss’ Presentation at The Benjamin Graham Center for Value Investing

Walter Schloss’ Presentation at The Benjamin Graham Center for Value Investing
July 25th, 2010 · 1 Comment · Uncategorized
http://www.schloss-value-investing.com/2010/07/walter-schloss-presentation-at-the-benjamin-graham-center-for-value-investing/#more-70

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.

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Value Investing Resources
http://www.schloss-value-investing.com/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
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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.
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Investment Nuggets

WALTER SCHLOSS
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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