3 Factors to Make Money in the Share Market

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. With a track record like that, there may be a thing or two Foolish investors can learn from him.

For that, we are in luck: in a single page document written in 1994, Schloss highlighted 16 factors needed to make money in the share market. Of the 16 factors, I would like to highlight 3 for our Foolish readers today:

1. Remember that a share of stock represents a part of a business and is not just a piece of paper

Here at the Fool, we are fans of viewing shares as a business, and not pieces of paper. So, Schloss’s point resonates well here. Furthermore, this point also appears high up on his list of factors. So, new investors might want to take note.

After all, if we buy shares of – say, Old Chang Kee Ltd (SGX: 5ML) – we are not just buying a piece of paper worth $0.80 per share (last Friday’s closing price). In effect, we are buying an ownership stake in the business of Old Chang Kee, and will be receiving a small faction of every future Curry’O that the company sells. With one in every three products sold being its puff products  – it’s a good stream of revenue for the curry puff maker. You can read more about the company here and here.

2. Have a philosophy of investment and try to follow it

Schloss’s point here is best made while looking at the track records of the superinvestors named by Buffett in the Superinvestors of Graham and Doddsville. Below is a tabulation of the track records of five of the nine Superinvestors who were named.

Superinvestor Tenure Annual Compound Rate Over Tenure Total Percentage Gain Over Tenure
Stan Perlmeter 1965 – 1983 23.00% 4277%
Bill Ruane 1970 – 1984 17.90% 775%
Tom Knapp 1968 – 1983 20.00% 1661%
Walter Schloss 1956 – 1984 21.30% 23104%
Charlie Munger 1962 – 1975 19.80% 1157%

Source: The Superinvestors of Graham and Doddsville

While the results of the superinvestors demonstrate uniform outperformance, the kicker came when Buffett added one key observation:

“I should add that, in the records we’ve looked at so far, throughout this whole period, there was practically no duplication in these portfolios.”

In short, what this means is that there are different investing styles that can help you achieve investing success. This is evident from the stunning track records of the superinvestors, and the different styles that helped them achieve it. Hence, we should find the investing style which best resonates with us, and try follow it.

For Schloss, he was best known for casting his net around stocks that were trading below their book value. Within the SGX, a company like Hongkong Land Holdings Limited (SGX: H78) might interest him. The property investment and management group was trading at a price-to-book value of 0.64 as of last Friday.

3. Don’t be in too much of a hurry to sell. Before selling, try to re-evaluate the company again.

To this point, Schloss gave the example that some folks would sell when a share they own goes up by 50%.  Avid Foolish readers may remember that selling shares should not be done on the basis of share price alone. We’ll be better off if we were to evaluate where the company is trading in relation to its underlying value, and look ahead for positive business developments.

Take diamond planning and grading products maker Sarine Technologies Ltd (SGX: U77) for instance. For the year 2012, the company’s share price rose by 72.4%. If investors hastily sold shares on the basis of the rise in share price alone, they would have missed a further 160% rise since the end of 2012. Foolish investors who kept their eyes on the business developments might well have noticed that the company’s performance continued to get better in the two years since the end of 2012.

Sarine Technologies' business metrics

Source: S&P Capital IQ and Company’s filings; data for 2014 are as of 30 September 2014

I hope you enjoyed reading about one of the great investors of the past. There is much more to learn from all 16 factors outlined. If you would like to read the entire document, please see below. It’s awesome.

Read more about investing and get more investing tips and tricks, FREESign up here to The Motley Fool Singapore’s weekly investing newsletter, Take Stock Singapore.

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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.