3 Great Lessons from an Investing Legend That Can Make You a Better Investor

Walter Schloss might not be as well-known to the general public as investing greats like Warren Buffett or Peter Lynch, but Schloss is someone who can also be rightfully called a legend in the business.

Schloss launched his own fund in 1955 after working for a few years under Benjamin Graham, Buffett’s famous investing mentor and teacher. Over the course of 47 years running it (Schloss stopped managing clients’ money in 2002), he racked up a truly phenomenal record with annualised returns of 16%, far out-pacing the 10% annual gain delivered by the S&P 500 (a U.S. market index).

For some perspective, at a 16% annual return, every $1000 invested with Schloss in 1955 would have become $1.07 million.

Given Schloss’s achievements, there’s so much that investors can learn from him. With that, let’s take a look at three of Schloss’s key investing principles that can serve as great calls to think.

1. Look for stocks with low valuations

As a classic value investor, Schloss favoured stocks that are trading at low price-to-book (PB) ratios. More specifically, his preference is for companies that were selling for less than their book values; the book value of a company is the value that’s left-over if the firm were to theoretically liquidate all its assets and settle all its obligations.

When Schloss sees a company with a PB ratio of less than 1, that company might be a candidate for an investment. Schloss’s rationale for focusing on a company’s assets over its earnings is that asset values change slowly over time while earnings are more volatile and arguably more susceptible to accounting manipulation.

In Singapore’s context, real estate outfit Ho Bee Land Ltd (SGX: H13) and commodities trader Noble Group Limited (SGX: N21), by virtue of their PB ratios of 0.54 and 0.68 respectively, can be examples of companies which might interest Schloss to take a deeper look.

2. Diversification as a form of strength

Buffett has a famous saying regarding diversification: “Diversification is a protection against ignorance.” In other words, Buffett thinks that diversification works better only for investors who do not really know what they’re doing.

But, Schloss showed that one can remain diversified without having to sacrifice investing returns: Throughout his career, he may own more than 100 stocks at any one point in time.

Schloss’ defense for his use of wide diversification is that he’s not a good judge of business trends or managerial smarts. So, he tried to compensate for these by casting a wide net over a basket of cheap stocks.

There’s another advantage that can come with diversification when investing in a manner like Schloss. Cheap shares are often cheap because they have low-quality businesses. As a result, each individual cheap share can run the risk of blowing up.

To that point, my colleague Chong Ser Jing had previously shared examples of local shares with extremely low price-to-tangible book values (this is a slightly more stringent way of valuing a share based on its assets by removing intangible assets) of between 0.4 and 0.2 that ended up losing money for investors over a period of two years.

It’s only with wide diversification can an investor who’s buying really cheap shares protect himself against the risk of blowing up.

3. Ignoring noise

I’ve so far failed to mention something interesting: Buffett and Schloss were close friends for decades prior to Schloss’s passing in 2012. But despite Buffett’s massive success as an investor who favoured great companies at reasonable prices, he couldn’t persuade Schloss from straying from his preferred path of investing in really cheap shares without worrying too much about the quality of the underlying business. Here’s Buffett describing this funny anecdote:

“[Schloss] knows how to identify securities that sell at considerably less than their value to a private owner: And that’s all he does… 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 is one of his strengths; no one has much influence on him.”

Such is Schloss’s ability to ignore what’s going on around him and stay disciplined.

This act of staying true to one’s roots and to not deviate from what works over the long-term can be a very important trait when investing. No matter how great your strategy can be, there will be short-term timeframes when it just doesn’t work and there will likely always be something which looks more attractive than what you’re doing – the key though, is to be aware of what you’re good at and stick to it. If you stray outside your circle of competence, your investing results may end up suffering.

There’s a lot more that investors can learn from Schloss – the great man has after all, at least 47 years’ worth of experience in the business to impart – but the three simple principles I’ve shared can still help make us all better when it comes to investing.

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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 James Yeo doesn’t own shares in any companies mentioned.