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Walter Schloss shares stories and lessons from his life growing up in New York, getting his first job on Wall Street, enlisting in WWII, returning to work for Ben Graham, and successfully running his own partnership for 47 years.
The Notes
- “This whole story, my legacy, is about trying to avoid financial mistakes. That is also my primary reason for putting together this book. I want my grandchildren to try to avoid the kind of financial mistakes that caused great pain for earlier Schloss generations.”
- Schloss’s grandfather had a successful underwear business but his bookkeeper stole everything and lost it in the market crash in 1893.
- His father went into business in 1920 with a shady investor to make crystal radios and lost it all when the factory burned down under suspicious circumstances.
- His father also lost $10,000 (his wife’s inheritance) in the 1929 market crash. He bought two stocks on margin — Mathieson Alkali and Bridgeport Brass — and lost everything.
- His mother was scarred by the Depression.
- Lesson: “Wealth is hard to accumulate and all too easy to lose.”
- His grandfather, father, and mother’s experiences influenced Schloss’s view toward money, investing, and his desire to avoid losses.
- His sister was a professional dancer in Broadway shows.
- “There is good stress — which comes from the exhilaration of doing something you love. But when you do something that’s not consistent with your character, even though it might make sense logically, it can be upsetting and damaging to you. It is also important to have a sense of humor — to appreciate the incongruities of life — and to find work that you enjoy. “
- College was not an option because he needed to make money since his father was out of a job.
- His first Wall Street job was at Carl M. Loeb & Co. as a runner. He was promoted to “the cage” as a cashier. After a year he asked for a promotion to the securities analyst department but was denied.
- His boss at Carl M. Loeb & Co. told read Ben Graham’s Security Analysis. “Read that book and you won’t need anything else.”
- Schloss took a few night courses, over five years, taught by Ben Graham at the New York Stock Exchange Institute. He received a certificate in investments from the Institute in 1940.
- “Many Wall Street big shots — like Gus Levy, the head of Goldman Sachs — would go to the Institute, listen to Graham, and buy the stocks he recommended. Graham was giving away free stock tips.”
- WWII
- He joined the army after the attack on Pearl Harbor.
- After basic training, he was sent to Washington DC where he worked sending and receiving coded messages.
- His group was eventually wrapped into the 833rd Signal Service Company. They were shipped to Iran, to find a better way to get supplies to the Russians. Supplies had to go around Africa, to the Persian Gulf, then transported by truck, rail, and plane to the Russian border. His company ran the communications. In total, 4.5 million long tons of supplies were shipped in this manner from November 1942 to the end of the war to keep the Russian army supplied and fighting on the eastern front.
- Was sent back to the U.S. for Officer Candidate School in 1944. He was made second lieutenant and assigned to the Pentagon.
- Throughout the war, he sent postcards to Ben Graham to “say hello, wish him a Happy New Year, that kind of thing.”
- Before he was discharged, Graham responded with a letter asking if Schloss was interested in working for him as an analyst.
- Valuable Human Qualities (letter from his mom)
- Dependability — “It’s a word that contains the concepts of honesty, reliability, and thorough integrity. It is the attribute that is looked for in business and professional men without it no one can succeed.”
- Perseverance — “Another quality without which nothing can be accomplished. But it is very important that this attribute does not degenerate into stubbornness, a mere hanging on because one has started and won’t give up.”
- Clarity of Vision — “This is the ability to see things, conditions and people without permitting yourself to be overwhelmed by your emotions… If you see the true relationship between people or circumstances you will be able to form opinions and make decisions without being influenced by what you want them to do.”
- Self-Confidence — “Is vital in all relations in life.”
- Shrewdness — “Which is not a pretty quality, is a very important one in a business man because we have noticed that all the successful business men we know have it. We are not, fortunately or unfortunately, a shrewd family.”
- Married Louise Filer in 1946, had two children — married for 53 years.
- Graham-Newman
- Began on December 31st, 1945 at $50 per week.
- Looked for stocks selling below working capital — stocks with a market value less than current assets (cash, inventories, and receivables) minus liabilities. Graham believed it was the surest way to make money.
- They avoided “high flyers” because they sold at a premium.
- Schloss worked as an analyst at Graham Newman for 9 and a half years.
- On Ben Graham:
- “He was a contrarian. He advocated an approach to investing that was virtually unheard of at the time: buying stocks that were undervalued and then buying even more when the price went down.”
- “He used to say that an intelligent investor should buy stocks like you buy groceries, not like you buy perfume. He also tried, as much as possible, to avoid speaking with company management. He felt these conversations would affect your judgment. I adopted that policy as well.”
- “Graham passed along to me a strong belief that emotions should not influence investment decisions.”
- Government Employees’ Insurance (GEICO)
- Graham had a chance to buy 50% of the company but originally declined. His lawyers told him to reconsider.
- Graham bid $750,000 for 50% and was accepted.
- “Walter, if it doesn’t work out, we can always liquidate it and get our money back.”
- Graham Newman violated a securities law with the purchase of GEICO. Investment companies needed SEC approval to own more than 10% of an insurance company. The SEC told Graham to get rid of it.
- Graham tried to rescind the transaction, but the seller said no.
- The SEC forced Graham Newman to distribute GEICO stock to Graham Newman shareholders at cost. Graham Newman made nothing on the deal. Yet, it would be the best investment for its shareholders, assuming they held on to it.
- Schloss received some GEICO shares (as a Graham Newman shareholder). He sold his shares to pay hospital bills when his son was born and again when his daughter was born.
- Schloss Associates
- Started at age 39 after Ben Graham retired from Graham Newman.
- A Graham Newman shareholder said he’d invest money with Schloss if he started a partnership.
- Started with $100,000 — $5,000 was his — from a small number of friends. Ended with about $130 million.
- The partnership distributed money back to partners on an annual basis.
- Took a desk in Tweedy Browne’s office at the request of Howard Browne.
- Investing Approach
- “I tried to buy companies on the way down and sell them on the way up. I preferred secondary companies — the struggling firms that most investors overlook. Great companies are generally not cheap enough. So I looked for stocks that were down, but which, I believed, would eventually recover.”
- “It takes a strong stomach to buy into a company that’s having problems, and then buy even more if its stock price drops.”
- “With the market, timing is very difficult, especially the selling part.”
- “The market can be a great humbler — but obsessing about missed opportunities just makes you miss more opportunities.”
- “Once I sell a stock. I forget about it.”
- “We never strayed from our approach.”
- “I try to only do business with honest people. When I have bought stock from unsavory characters, I did it because the stock seemed cheap. But I always ended up paying for it — disreputable people always figure out a way to take advantage of you, and you’re always nervous.”
- He owned over 100 stocks. “No one stock would be a big winner, but having a large portfolio of stocks protected us from financial disaster.”
- He never told the partners what he owned in the portfolio. He did it so partners couldn’t follow his trades on the side. He learned it from his Graham Newman experience because people could follow Graham’s trades, making it harder to buy at lower prices. He also did it to avoid issues with partners not liking the stocks in the portfolio.
- He charged 25% of the profits and only made money if the partnership made money. He took no salary.
- He liquidated the partnership starting in 2001 because they couldn’t find any more “cheap stocks.”
- Schloss also helped manage the endowment for the Freedom House for some time.
- Averaged 20.5% percent return per year over 47 years (1956 to 2002).
- He had 7 losing years to 13 losing years for the S&P 500. The worst was a 12.8% loss in 1990, the only double-digit loss for his partnership.
- “Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do — and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.” — Warren Buffett
- Characteristics of a True Value Investor (from a speech)
- I type on an old, upright Underwood typewriter.
- I like to buy suits on sale.
- I take public transportation.
- I shine my own shoes.
- I like iceberg lettuce.
- I buy stocks that go down before going up.
- I don’t lie awake at night trying to “predict” what the market will do.
- I get a haircut when the market drops precipitously.
- I bring my own Scotch tape to the post office.
- I think First Call means that lunch has arrived.
- “I have always believed that optimists do better over the years than pessimists.”
- “The only thing harder than making money, is making it back once it’s lost.”
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