Deep Value Master, Walter Schloss

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Walter Schloss had a phenomenal track record over many decades.  His accounts returned profits almost every year, so the amount he managed stayed small.  His approach is a good one for individual investors. he would buy cheaply and average down. However, now might be a difficult time to practice his approach with many sectors of the market lacking a margin of safety unless you delve into (horrificly cyclical) certain mining companies, oil-drillers, and community banks.  But if you are interested in the deep value approach, you must study Schloss.  Does your personality match his approach?

The Superinvestors of Graham and Doddsville by Warren Buffett

Schloss_May_8_2008

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Profit_Guru_Walter_Schloss_interview

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16 Investing Rules from Walter Schloss

Walter Schloss – OID Interview

Walter Schloss Lecture: http://youtu.be/v-7e_97icWY

Learning from Schloss (excellent review) http://youtu.be/5KM9eY7BbzA

What do YOU think? 

19 responses to “Deep Value Master, Walter Schloss

  1. Walter Schloss is my favourite investor of all time and his style is my personal preference. I think many investors have gravitated towards the Buffett/Munger school of value investing which makes a lot of sense in some respects. Creating a concentrated portfolio of fantastic businesses and holding for the long term will be where the big returns are made. So why do I subscribe to the Schloss style?

    1) Personality – As a statistics graduate, I knew I had a quantitative mind-set but became aware that I had to be very careful of my own biases towards the use of mathematics in the investment industry. Schloss stated over the years that the majority of his work was quantitative. He was not blindly buying companies but he relied on the numbers of Valueline and the company reports to judge the value and risk of the business. Experience over time would have also surely helped in the more qualitative judgements he must have made. However, the use of numbers was something I thought suited my personality rather than the type of thinking required to determine the economics and competitive advantages of a Buffett-type business. I’m not confident I have the ability to do that.

    2) The Schloss-Model – I found the type of portfolio Schloss ran was a mental model that was powerful to me. If any of your readers have not read it, I would highly recommend Tweedy Browne’s ‘What Has Worked In Investing’. The main conclusion is that the low valued equity of depressed companies has outperformed over history. The idea of fishing in the section of the equity markets that have outperformed over time made a lot of sense to me. The second aspect was how you had to buy these equities in order to create a portfolio that outperforms. There are several analogies that can be used; casino owner, grocery store, insurance firm. Let’s take the casino owner. When a customer comes in to play on the roulette table, you have a statistical advantage that they will lose the bet and you will take his/her money. But of course there will be times when the customer wins and you have to pay out. So to make a profit from running the roulette table you need a volume of customers playing the table and over time, you will make money due to the odds being in your favour. Schloss alluded to this kind of portfolio management in his interviews where he said he buys a 100 stocks as he’s not sure which ones will work out. The process and set up of his portfolio is a very interesting concept to consider.

    3) Emotions – I came to the conclusion that the methods employed by Schloss and others in the deep value community suited me better from an emotional standpoint. I think Buffett made an interesting observation when he said Schloss likes to lean into a headwind, buying businesses in industries with poor economics enduring difficult times, effectively the opposite of Buffett’s approach. That being said, Schloss did from time to time buy high quality businesses, I assume when they were depressed. He also looked back 20+ years so he tended to buy established businesses even in poor industries. But the key to me was deciding which method kept my emotions in check. If the Schloss approach means lower returns per annum than some investors but a process I can stick to for the long term, then so be it.

    Whether you find his approach appealing or not, I highly recommend studying Walter Schloss.

  2. Thanks for a thoughtful, well-reasoned discussion of why you like Schloss. If you don’t understand why the approach works and your personality doesn’t fit, then investing successfully using his deep value methods will be a struggle.

  3. Schloss is also a big favorite of mine. I consider myself a mix of early Buffett, Pabrai, Schloss, and Greenblatt. In the end this combination looks a lot like the the methods taught by Bruce Greenwald. I run a more concentrated portfolio because understanding the business and it’s assets productivity value helps me ignore Mr. Market’s irrationality, yet paying anything more than a discount to replacement value feels, to me, like speculating. This could be a result of my business ownership background were you don’t know or care on a day to day basis what the “market” thinks your company is worth. You just care what the business will produce in revenue/income, which is based on the assets that the business owns.

    I know Schloss and his son shut down their business because of lack of cheap BV stocks. I wonder if Graham’s net-nets transitioned to Schloss book-value which is transitioning to Greenwald’s replacement value stocks. Or we could just be in an overvalued market with cheap BV plays right around the corner…

  4. My bias is that future opportunities will be better than today’s picked over, hyper QE’d market. Stay patient my friends.

  5. I think MFLX is a undervalue pick at current price at 8.90

  6. Anyone find any new good pick ?. 20/2/2015

  7. What is in the bargain bin?.16/3/2015
    Clue– Midland

  8. DWSN at 4.39 27/3/2015
    you pay low prices in gloomy consensus.

  9. What is in the bargain bin?. 27/5/15
    Clue- Houston

  10. Just looking for the same minded.
    Please post some name.
    Thank you.

  11. GIFI 9/6/2015@ 10
    Buy stocks like grocery not perfume.

  12. MFLX finally sold @ $23.95, I think it should worth $30

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