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Walter Schloss – One of the Greatest Value Investors of All Time

Have you ever heard of Walter Schloss?  I’m guessing not, but by the end of this article you’re going to be referring to him as Walter BOSS!

Walter Schloss was one of the lucky few that was able to learn directly from Benjamin Graham, but he has maintained a relatively low amount of recognition when compared to the amount of success that he has had with his investing methodologies. 

In the words of Walter Schloss, his investing method really comes down to this quote, “Basically, we try to buy value expressed in the differential between its price and what we think its worth.”

When I first started researching Walter Schloss, I was instantly attracted to the title of this article on Walter Schloss’ website titled “The Other Warren Buffett:  Meet Walter Schloss.”

The article goes on to talk about his upbringing and learning from Graham and some of his success stories and his view of some of the important things to look for, such as P/E and liquidity of a company.

In the past, Andrew has had Tobias Carlisle on his podcast to talk about value-investing and the importance of taking a contrarian view on thing, more specifically trying to zig when others zag, and zag when others zig. 

Tobias Carlisle also has an excerpt on Walter Schloss on his website, The Acquirer’s Multiple, that talks about how to invest stress-free for 40 years.  The main takeaway that I got from reading this can be summarized with the Ben Graham quote, “a stock well bought is half sold.” 

That really sums up the mindset of some of these value-investors.  They’re always looking for the bargain buy.  The stock that is very under-valued and being sold at a discount to its intrinsic value.  And Walter Schloss is no different.

Some of the key factors that Walter Schloss evaluated are:

1 – Price/Earning (P/E)

This is important for obvious reasons.  P/E is a great indicator of how expensive a stock is at face value.  I somewhat view this as the sticker price.  Yes, other things might be able to give you a better, more well-rounded look at the value of a stock, but I always will start with P/E.  But just because I always start here, I will never end here – P/E is a starting point – if you use if for your only analysis, you will surely be disappointed in the long run.

2 – Price/Book (P/B)

I recently wrote a post based off of a chapter of What Works on Wall Street that talks about the importance of a P/B ratio that is less than one.  In that book, James O’Shaughnessy thinks that a P/B under 1 is potentially the best indicator of a stock that is going to perform well. 

Schloss takes it a step further and says to target something that is .8 or less!  Hard to disagree with the success that Schloss has had.

3 – Stock that’s not at their 52-week high

The thought process behind this is that if the stock is at a 52-week high then a pullback might be coming soon.  Personally, I don’t worry too much about this as long as the other numbers all make sense.  This is more of the “icing on the cake” by at the end of the day, who knows more – me or Schloss?  Should be obvious…not me lol.

4 – Strong Dividend

DIVIDENDS! 

My favorite word.  Isn’t it crazy how all of these super successful value-investors look for strong dividends?  And Andrew, Dave and myself all preach the value of them as well? 

Guess what – it really isn’t just us.  Dividends are a great source of security and guaranteed return.  Not guaranteed in the sense that the dividend will never go away but guaranteed in the sense that if you buy a stock and get a 4% dividend yield the first year that you own it, you’re guaranteed to never lose more than 96% of your investment because you have 4% in cash.  Yes, losing 96% of your investment is still awful but that’s not the point that I’m making – I’m saying that it’s a source of security and steady income. 

Of course, I highly recommend that you DRIP your dividends so that you can continue to add to your portfolio and maximize the time that your money is in the market and compounding!

5 – Management should own a lot of the stock

If Management owns the stock, then they believe in the company.  This one is very simply.  If management doesn’t really believe, then they’re not going to have a lot of their investments tied up in the company. 

This is something that can be tracked but is more of a qualitative evaluator in the sense that there is no hard rule of thumb or ratio that is good or bad – it’s more of a personal comfort with the management.

6 – Company should have at least a 20-year track record

This is nothing more than finding a company that has a steady history of success.  Being in business 20 years and showing continued growth should give you the confidence that things aren’t going to change anytime soon,

7 – Low Debt/Equity (D/E)

Having a low D/E is simply saying if things really took a turn for the worst, the company might be able to sell off some assets and right the ship.  This is very important when evaluating a company on paper and something that is commonly overlooked in expensive, speculative stocks.  Remember, speculation isn’t investing – it’s gambling!

8 – Stay invested and diversified

Make sure that your money is always invested.  It doesn’t always have to be in stocks if you think a market correction might be coming, but keep it invested in something else.  Maybe bonds or a high yield savings account but keep that money compounding! 

Diversification becomes more and more important the more money that you have invested and the close you are to retirement.  If you’re 25 and have $5000 – be as risky as humanly possible.  If you’re 70 and have $2 million – yeah, be diversified.  It’s all about where you are in your life, your goals, and your risk tolerance.

I highly recommend that you take some time and go learn more about Walter Schloss on your own. Warren Buffett referred to him as one of the 9 “Superinvestors of Graham-and-Doddsville” so yeah, I’d say that we can all stand to learn a thing or two from Walter Schl…BOSS!