The late Walter Schloss was one of the select few investors who has earned the admiration of investing guru, Warren Buffett. According to Buffett’s 1984 article “The Superinvestors of Graham and Doddsville”, Schloss’s WSJ Partnership delivered a breath-taking annualized return of 21.3% over 28 years. To get a sense of Schloss’s achievement, the WSJ Partnership’s performance would be more than twice the long term annualized returns of 8.4% 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). Given his track record, there would be many things we…
The late Walter Schloss was one of the select few investors who has earned the admiration of investing guru, Warren Buffett. According to Buffett’s 1984 article “The Superinvestors of Graham and Doddsville”, Schloss’s WSJ Partnership delivered a breath-taking annualized return of 21.3% over 28 years.
To get a sense of Schloss’s achievement, the WSJ Partnership’s performance would be more than twice the long term annualized returns of 8.4% 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).
Given his track record, there would be many things we can learn from Schloss. And, one key lesson about his investing philosophy lay in this bit of information: Schloss was able to continue running his partnership for a good 47 years in total before his retirement. And he did so by sleeping soundly every night.
Stress free investing
Schloss was well known for his preference for “cigar-butt” investing. This investing method would typically have the investor focus on lower quality and unloved companies. It was akin to finding discarded cigar butts, and looking for the possibility of squeezing “one last puff of the cigar.” In his approach, Schloss would be looking for companies trading at discount to book value, with almost no debt, and reasonable insider ownership.
In Buffett’s 2006 letter to his shareholders, the investing maestro noted that Schloss’s “cigar butt” approach took no real risk – with risk here defined as the chance of a permanent loss of capital. Schloss himself noted that he was able to reduce his stress levels if he could buy a reasonably good business with assets at a depressed share price.
Stress free diversification
To supplement his “cigar butt” approach, Schloss would also widely diversify his share holdings. In fact, Schloss would be invested in the shares of 50 to 100 plus different companies at a time; he ended up going through about 1,000 shares throughout his career. In a 2003 interview with the Heilbrunn Center for Graham and Dodd, Schloss explained his reasons for diversifying:
“One of the things we’ve done — Edwin [his son, Edwin Schloss] and I — is hold over a hundred companies in our portfolio. Now Warren (Buffett) has said to me that, that is a defense against stupidity. And my argument was, and I made it to Warren (Buffett), we can’t project the earnings of these companies, they’re secondary companies, but somewhere along the line some of them will work. Now I can’t tell you which ones, so I buy a hundred of them”
In short, diversification provided peace of mind for Schloss, as he noted that it would have been very stressful if any one particular stock had turned against him if he had held a concentrated portfolio.
Stress free simplicity
Buffett also praised the simplicity of Schloss’s approach. In his 2006 letter to shareholders that I referenced earlier, Buffett quipped:
“When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.”
You see, Schloss spent very little time on thinking about the economy, or the quarterly performance of a company. He simply felt that if he could get a good price backed by as much quality tangible assets as possible, the upside can take care of itself.
To be sure, the takeaway here is not about whether we should follow Schloss’s investing methods. For the record, such an investing approach in Asia hasn’t worked out too well. My own preference is also towards finding great companies with great leaders for the long term.
The deeper lesson here is that the investing approach that we choose to take should be suitable for our own personality, and – critically – our own lifestyle. In this instance, Schloss achieved those remarkable long-term returns of his by running his fund only on weekdays from 9:30 am to 4:30 pm. This was unusual, his son Edwin Schloss would note:
“A lot of money managers today worry about quarterly comparisons in earnings. They’re up biting their fingernails until 5 in the morning. My dad never worried about quarterly comparisons. He slept well.”
In other words, Schloss was able to find the investing approach which gave him the comfort level to be stress-free. Ultimately, Schloss saw his investment approach the same way he viewed investing, by taking an investing approach which was sustainable for the long-term, and sleeping soundly every night.
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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.