I have a few personal investing heroes and the least well-known of them would likely be the late Walter Schloss. In 1946, Schloss started working for the great investing sage Benjamin Graham. Nearly a decade later in 1955, Schloss left Graham and started managing other people’s money on his own. What followed next was a multi-decade track record of excellence. From 1956 to 2000, Schloss’s U.S.-based fund had delivered a compound annual return of 15.3%. Over the same period, the broader U.S. stock market had grown at an annualised rate of just 11.5%. To get a sense of Schloss’s accomplishment…
I have a few personal investing heroes and the least well-known of them would likely be the late Walter Schloss. In 1946, Schloss started working for the great investing sage Benjamin Graham. Nearly a decade later in 1955, Schloss left Graham and started managing other people’s money on his own.
What followed next was a multi-decade track record of excellence. From 1956 to 2000, Schloss’s U.S.-based fund had delivered a compound annual return of 15.3%. Over the same period, the broader U.S. stock market had grown at an annualised rate of just 11.5%.
To get a sense of Schloss’s accomplishment in the investing business, every $1,000 invested in his fund in 1956 would have become $525,000 in 2000. If the same $1,000 was plonked into the U.S. stock market instead, it would have grown into only $111,000 or so.
Schloss is a fascinating investor to me because he did not depend on fancy-pants math, valuation models, or market forecasts to invest. He merely sought to invest in stocks that were selling at a lower price than his appraisal of their intrinsic business values. His office is spartan (it’s a rented closet space), and his ‘investing team’ consisted only of himself and his son, Edwin, who joined the business in the 1970s.
In 1994, Schloss typed out a short memo titled (link opens PDF) Factors needed to make money in the stock market. The memo contained 16 factors which Schloss had depended on while running his fund. Here are eight of those golden rules (any emphases would be mine) along with my comments.
Rules No.1 to 4: Check out here
Rule No.5: “Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.”
It’s important that we do our own research and be comfortable with what we’re investing in. It’s no use following someone’s “hot tip” – even if the tip’s the best long-term investing idea in the world, an investor can still be scared off by the first whiff of any temporary bad news that occurs if it’s not an idea that makes him or her comfortable.
Sometimes, it can be even be dangerous to follow respected investors into certain investments as we can’t know their full intentions until only after the fact. Here’s a good personal example from my colleague Morgan Housel:
“I made my worst investment seven years ago.
The housing market was crumbling, and a smart value investor I idolized began purchasing shares in a small, battered specialty lender. I didn’t know anything about the company, but I followed him anyway, buying shares myself. It became my largest holding — which was unfortunate when the company went bankrupt less than a year later.
Only later did I learn the full story. As part of his investment, the guru I followed also controlled a large portion of the company’s debt and and preferred stock, purchased at special terms that effectively gave him control over its assets when it went out of business. The company’s stock also made up one-fifth the weighting in his portfolio as it did in mine. I lost everything. He made a decent investment.”
Schloss’s reminder to not “sell on bad news” is worth highlighting too. There have been no shortage of bad news that the world has to deal with on an annual basis. And yet, economies – and stock markets – have managed to slowly inch their way forward one step at a time.
Here’s a good example. The Asian Financial Crisis (1997-1998), bursting of the Dot-Com Bubble (early 2000s), SARS outbreak (2002-2003), and Global Financial Crisis (2007-09), have all occurred within the past 20 years. Yet, Singapore’s gross domestic product (GDP) has jumped by more than 300% from S$124.6 billion in 1995 to S$390.1 billion in 2014.
Rule No.6: “Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.”
In the sixth factor, Schloss touches on the need to look for where our investing theses may be faulty. This is something unnatural for most – as humans, we’re hardwired to look mostly for information which agrees with us (this is known as confirmation bias) – but yet is crucial.
Charles Darwin, the famous figure behind the theory of evolution, had a habit of noting down things which went against his own ideas. Here’s what investing maestro Charlie Munger once said about Darwin:
“One of the great things to learn from Darwin is the value of the extreme objectivity. He tried to disconfirm his ideas as soon as he got ’em. He quickly put down in his notebook anything that disconfirmed a much-loved idea. He especially sought out such things.
Well, if you keep doing that over time, you get to be a perfectly marvelous thinker instead of one more klutz repeatedly demonstrating first-conclusion bias.”
Rule No.7: “Have the courage of your convictions once you have made a decision.”
Rule No. 8: “Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.”
One of the interesting (or frustrating, depending on your vantage point) things about investing is that there are many roads to Rome. Some successful investors swear by a diversified portfolio of statistically cheap stocks (those which carry low valuations, like say a low price-to-earnings ratio or low price-to-book ratio), while some like to stick with a concentrated portfolio of high-quality growth stocks. Both can work.
Source: S&P Capital IQ
As the table above shows, at both shares’ closing prices yesterday, they are carrying low single-digit PE ratios and are priced below their book values. For some perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund mimicking the fundamentals of the Straits Times Index (SGX: ^STI) – has a PE and PB ratio of 11.6 and 1.2, respectively, at the moment.
When it comes to a high-quality growth stock, a share like Hour Glass Ltd (SGX: AGS) may fit the bill. From its fiscal year ended 31 March 2010 (FY2010) to FY2015, its earnings per share had grown at a compound annual rate of 11.9%. Over the same period, its returns on equity had also averaged at 17.2%; that’s an impressive achievement especially when considering that its balance sheet had always carried more cash than debt in that timeframe (the use of high levels of borrowings can increase a company’s returns on equity).
In any case, what’s important here is to note that the key to investing well is to find what works for you (provided the investing philosophy is based on a logical premise) and stick with it. Schloss found his own philosophy under Graham and he followed it faithfully, achieving great success in the process.
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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 Chong Ser Jing doesn't own shares in any company mentioned.