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The Man who Defied Warren Buffett and Won the Investing Game in His Own Way

On 17 May 1984, Warren Buffett wrote a seminal article about investing titled “The Superinvestors of Graham and Doddsville”. In the article, he highlighted a group of nine investors with super track records spanning more than 10 years. However, there was one “superinvestor” in particular whom Buffett took time to add additional comments on.

That person was the late Walter Schloss, and interestingly, his investment approach couldn’t be more different than Buffett’s.

Graham and Doddsville, revisited

In the article, Buffett had this to say about Schloss:

“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 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.”

You see, unlike Buffett, who emphasizes in investing in quality companies at fair prices, Schloss was a disciplined practitioner of “cigar-butt” investing. This investing method focuses on unloved shares (which are typically companies possessing businesses of low quality), and the possibility of squeezing out one last profit out of those shares. This is akin to getting that “one last puff of a cigar” – if you may.

In his approach, Schloss would be looking for companies which are trading at a discount to their book values. He would also look for those companies to be carrying almost no debt and have reasonable insider ownership.

In contrast to Buffett, Schloss would almost never talk to a company’s management team, and he may even have limited understanding of the company’s underlying operations. At the same time, Schloss also diversified widely, holding 50 to 100 stocks at a time – this is again another difference to Buffett’s more concentrated portfolio-approach.

But before we speak ill of Schloss’s investing style, we should remind ourselves that Buffett did put his name in the coveted list of the nine superinvestors.

The reason?

According to Buffett’s article, Schloss’s WJS Partnership delivered a stunning annualized return of 21.3% over 28 years. For some perspective on his investing prowess, the WSJ Partnership’s gains would be more than twice the long term annualized returns of 8.39% for the SPDR STI ETF (SGX: ES3) since its inception in 2002. The SPDR STI ETF is a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

Defying Buffett

But, why would Schloss knowingly defy Buffett’s take on investing despite the latter’s amazing investing results? We may get a clue on Schloss’s mindset from the book The Value Investors by Ronald Chan. In the book, Chan noted the following comment from Schloss himself:

“I always held 50 to 100 stocks at any given time because it would have been very stressful if one particular stock had turned against me. Psychologically, I am just built different than Warren. I see that there are many people trying to be like Warren, but they should take note that he is not only a good analyst; he is a good judge of people and businesses. I know my limitations, so I’d rather invest in the way that I am most comfortable with.”

Said another way, throughout his investing career, Schloss innately understood his own differences when compared to Buffett. As such, he chose the investing approach which best suited his own character.

Foolish take away

The takeaway here isn’t that investors should or shouldn’t invest in “cigar-butts” (for the record, investing in such shares in Asia hasn’t worked out too well).  Instead, the biggest lesson from Schloss is that understanding our own character, including our own strengths and limitations, is very important in investing. No one person is similar, and each of us may have our own unique perception of risk.

When we become self-aware of our own natural tendencies, we can better fashion an investing approach which best suits us, even if it differs from Buffett’s or any other famous investor’s approach. As Schloss has shown, Foolish investors might find investing success by following their own interpretation of investing, and not through wholesale imitation of another faraway person’s approach.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.