Walter Schloss: Learning From The Master

Walter Schloss is on the short list of the most interesting investors I’ve ever studied on Wall Street. He worked under Ben Graham himself, and struck out on his own once he saw the outsized attention that Warren Buffett was receiving under Graham’s tutelage and realized that his best life outcome would result from striking out on his own rather than living under the shadow of what would become the most high-profile investor that the world had ever seen.

Schloss developed an offbeat investment strategy that consisted of buying gobs of cheap stocks (at one point, he owned several hundred stocks in his partnership, causing Warren Buffett to joke that his favorite story from biblical times must have been Noah’s Ark because Walter liked to buy two of everything). He also had rock bottom expense rates for administering his investment strategy. At one point, it was reported that he was earning over $19 million in client fees while only spending $11,000 in annual costs to run his partnership. He famously resisted heavy computer usage and meeting with management, instead comparing what he encountered in a company’s annual report to the prevailing price of the stock.

From 1956 through 1988, Walter Schloss posted annual returns of 21.6%. He was as good as Warren Buffett, during a time period when the S&P 500 returned 9.8% annualized.

Among Schloss’ extremely successful track record during this period, I pay close attention to the recession year of 1974, when the market indices were down 26.5%. During the same year, Schloss’ investment partnership was up 52.2%. During one of the three worst stock market years of the past half-century, Schloss was delivering the kind of returns that the lay investor only experienced during the 1997-1999 dotcom bubble frenzy.

What did Schloss do with the partnership’s assets that distinguished his returns so heavily?

First, he bought shares in a company called Boston & Providence Railroad on the basis that it was semi-liquidating itself to sell of its real estate holdings to the Penn Central Railroad. Schloss knew that some heavy cash infusions were coming to the business, and he was right. During 1974, B&P Railroad mailed $387 in one-time dividends to Schloss for some of the shares that had cost him $96 just two years earlier. He collected triple his money, and he still held onto the B&P stock.  

Elsewhere for the partnership, he was gobbling up shares of McDonald’s, which had gone public about a decade earlier but was temporarily out of favor on Wall Street because it was gobbling up physical real estate near highway exits (and thus appearing capital intensive because it was partially capital intensive) and also it wasn’t making money as a supplier to franchisees by choice, but this was a marked reversal from franchisor/franchisee norms. Between 1973 and the end of 1974, McDonald’s stock almost quadrupled in price.

People act like these opportunities are gone, but they are not. You can find them if you read annual reports and find subsidiaries that are not fully reflected in the price of the stock. Recently, I was talking Paypal investors that have a $112 stock that was spun off on a 1:1 basis out of shares of eBay stock that was then trading in the $20s. This was just four years ago!

I owned BHP Billiton, which spun off South32, and that quickly fell to $3 because no one wanted to own South African metalloy smelters. Guess what? A dollar of profit is a dollar of profit, and it spends just the same regardless of whether it’s generated by a millennial on a phone at Starbucks or by a chain-smoker mining nickel and aluminum in Colombia.

People talk all they want about being independent thinkers. Very few actually do it, especially when it could lead to mockery or even social subordination from their peer group. Walter Schloss did not care what you thought of his pencils, erasers, and 800 square foot office overcrowded with file cabinets. He read his annual reports, focused on cheap objective metrics of value with probably more of a recognition of qualitative factors than his oversimplified legacy suggests, and pounded out returns that matched Warren Buffett’s without the benefits of leverage from an insurance float that can tack on four to six percentage points to annual performance.

Walter Schloss was an amazing man who delivered value for his investors and actually understood business and wanted what was best for his clients and stayed true to the things that made him rich even once he was rich. If you want to learn the most about investing, you need to read everything about Warren Buffett, Charlie Munger, Benjamin Graham, Peter Lynch, Walter Schloss, John Templeton, Phil Fisher, and Seth Klarman. Learning and manifesting what they knew and made publicly available is alone sufficient for a successful investing life.

The great thing about Schloss’ record is that it was a vindication of rationality through cause-and-effect. He’d find actual assets on a balance sheet that were worth more than the trading price of the stock (rather than relying on future earnings growth to save the day), and then would find the value realized within 3-5 years as it was sold off or some event led to it becoming properly publicized.

Originally posted 2019-05-18 20:11:01.

Like this general content? Join The Conservative Income Investor on Patreon for discussion of specific stocks!