4 Golden Rules on Investing From the Greatest Investor You Never Heard Of

I recently found gold while surfing the web. No, not the physical metal. Instead, what I found was a treasure trove of investing insights from one of my all-time favourite investors: the late Walter Schloss.

“Walter who?” you might ask. While Schloss’s level of fame is certainly nowhere near that of Warren Buffett, the two are actually close friends who first got acquainted while they were both working for the hedge fund of the legendary Benjamin Graham more than half a century ago.

After Graham retired, Schloss went on to start his own fund in the mid 1950’s and went on to amass an astounding investing record over the next four-plus decades.

Schloss’s fund delivered an annualised return of 16% (net of fees) for its investors from 1955 to 2002. For some perspective on Schloss’s achievement, a $10,000 investment made in his fund back in 1955 would have become more than $10 million in 2002.

So, what is this treasure trove of investing insight? It’s actually a document written by Schloss titled “Factors needed to make money in the stock market.” In it contains 16 golden investing rules that Schloss lived by. I thought I would share the first four today.

Rule No. 1: Price is the most important factor to use in relation to value

This rule is a homage to Benjamin Graham. Schloss strongly believed in not over-paying for a stock as doing so can help reduce the risk of incurring permanent losses in his investing capital. It’s a lesson we should take to heart.

Rule No. 2: Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

In a similar vein to many other great investors, Schloss sees a share as a partial stake in a living, breathing business, and not just a meaningless stub.

With such a view point, Schloss wouldn’t be chasing a stock just because its price has been rising, nor would he be in a hurry to sell just because the price has fallen. Neither should you.

Rule No. 3:   “Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).”

Schloss believed in using a company’s book value (total assets sans all liabilities) as the main anchor when estimating the real business value of a firm. This is in divergence from the more common method of using a company’s earnings.

This is because he thinks that a firm’s earnings can fluctuate wildly from year to year, which is not the case with book value since the metric actually tends to change only slowly over time.

Schloss also tended to avoid companies with high leverage ratios (i.e. companies that use a lot of borrowed money). This is because excessive leverage can kill even the best managed company if there’s even the slightest hiccup.

Rule No. 4: Have Patience. Stocks don’t go up immediately.

The price of a share does not need to go up just because you own it. The best thing we can do is to focus on the intrinsic value of a company and not worry so much about what its share price is doing over the short-term.

Foolish Takeaway

There are tons of wisdom inside Schloss’s 16 golden rules. So here it is again. Do check it out. It’s great.

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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 writer Stanley Lim doesn't own shares in companies mentioned.