Walter Schloss was a relative unknown on Wall Street, quietly racking up a 21% annual return over 28 years. Schloss was one of the few Graham disciples who worked with the man – even helped write a chapter in his book – and followed Graham’s strategy the closest after starting his own partnership. Then Warren Buffett outed him as a Superinvestor.
In 1985 he sat for an interview with Barron’s that gets into his early days with Ben Graham, Graham’s strategy, and Schloss’s philosophy on market timing, selling, and picking the right strategy.
On Ben Graham, his strategy, and why value investing works.
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. Or they’d say, “It’s a great idea, but the efficient market is taking care of it,” or whatever. And I thought Graham’s ideas made a good deal of sense.
Ben was great believer in buying a diversified group of securities so that he limited his risk. He was badly hurt by the Depression, and he didn’t want to do that again. We basically 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 20% a year on that basis, and it was a great deal, as long as these stocks were around. But of course, in the Fifties, they started dissappearing.
They were mostly secondary companies; they were never 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 little careful. But people don’t like to buy things that are going down.
Basically, its a contrarian philosophy, and people really like buying things that are doing well. But to make money, you have to spend a little time at it. It isn’t just, “Oh, I think I’ll buy this because it’s got a nice name,” or “my friend told me to buy it.” This is a business like any other business.
Graham liked the idea of protection on the downside, and basically, that’s what I do. I try not to lose money.
Graham made the point in his book where he said, “You buy stocks like you buy groceries, not the way you buy perfume.” You’re looking for value.
These companies have huge assets; they’ve got problems. How are they going to work their problems out? I don’t know. but the public doesn’t like to buy problems. Take Union Carbide. It’s a good value stock. But they had a terrible break with Bhopal. That happens once in while when you’re invested. You buy something, then something terrible happens and hurts the market price. But it doesn’t really change the valuation; just the way people look at it.
On market timing.
I’m not very good at timing. In fact, I’ve stayed away from it. I think it makes life easier – people come to me and say, ” Well, what do you think the market’s going to do?” And I always say, “I’ve got no idea; your guess is as good as mine.”
Timing is a very – everybody tries to do it, so I stay from the game that everybody’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’re doing.
When I buy a stock, I have kind of an idea where I want to sell it. But if you’ve been with a stock for five years – I would say our average holding period is four years – and things have been developing nicely, it may change your benchmark.
The market is a very emotional place that appeals to fear and greed…all these unpleasant characteristics that people have. Making judgements is very difficult. Knowing when to sell – making a decision to sell is the most difficult thing to do.
Selling is, of course, the most difficult, because – how high is up? When you sell something, and I’ve done it so often, you don’t really like to look at it afterwards….So I mean – the gigantic moves that I missed! But I thought 100% and 200% profits were pretty good. I didn’t realize the really great moves that some of these stocks could make.
If Texaco went to $45 a share, what would one do? That’d be a nice profit, up 10 points. But when it gets up there, you start thinking, “Well, it’s selling up here for a reason.” It starts feeding on itself. That’s why it’s much more difficult to know when to sell than when to buy.
On sticking to your strategy.
You don’t try to play the other guy’s game. You play the things you do, that you feel comfortable with, and Edwin and I are comfortable with this kind of thing.
I don’t understand high tech. I’m sure there are probably good buys in some of these companies that have been beaten down, but if you really don’t know, it’s better not to get involved.
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