In my personal list of investing heroes, the least well-known of them all would likely be the late Walter Schloss. Schloss had picked up the art of investing from the great investing sage Benjamin Graham when he started working for him in 1946. Nearly a decade later in 1955, Schloss left Graham and started managing other people’s money on his own. What followed next was more than 40 years of success. From 1956 to 2000, a long period of 44 years, Schloss’s U.S.-based fund had delivered a compound annual return of 15.3%. Over the same period, the broader U.S. stock…
In my personal list of investing heroes, the least well-known of them all would likely be the late Walter Schloss. Schloss had picked up the art of investing from the great investing sage Benjamin Graham when he started working for him in 1946. Nearly a decade later in 1955, Schloss left Graham and started managing other people’s money on his own.
What followed next was more than 40 years of success. From 1956 to 2000, a long period of 44 years, 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%.
For some perspective on Schloss’s accomplishment, every $1,000 invested in his fund (in the stock market) in 1956 would have become $525,000 (just $111,000) in 2000.
Schloss fascinates 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 produced a short memo titled (link opens PDF) Factors needed to make money in the stock market. The memo contained 16 factors which Schloss had relied on while running his fund. Here are 12 of those golden rules (any emphases would be mine) along with my comments.
Rules No.1 to 8: Hit this link
Rule No. 9: “Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you ca sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value.
Be aware of the level of the stock market. Are yields low and P-E ratios high? Is the stock market historically high? Are people very optimistic etc.?”
Rushing to lock up your gains can be a big mistake. How so? Consider a long-term winner in Singapore’s stock market like Vicom Ltd (SGX: V01). Since the start of 2005, shares of the vehicle inspection and testing outfit have gained 527%.
Source: S&P Capital IQ
If you were to look at Vicom’s price chart above, it’s obvious to see that the stock has broken numerous all-time highs along the way to where it is today. As Vicom’s share price expanded over the years, so too did its value, as alluded to by the company’s growing revenue and earnings that you can see in the chart below. An investor who bought at the start of 2005 and anxiously locked in his first 100% gain without consideration of the company’s future growth would have lost out on so much more.
Source: S&P Capital IQ
Forget about looking at the gains you’ve made in a stock when considering a selling decision. Instead, focus on the relationship between the stock’s price and its business value.
Rule No. 10: “When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which show that there is some vulnerability in it.”
Rule No. 11: “Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.”
Diamond manufacturing systems maker Sarine Technologies Ltd (SGX: U77) is a great example of how swift a company’s earnings can change as compared to its assets.
Source: S&P Capital IQ
A smart point’s being made here by Schloss: While it can make sense for investors to focus on a company’s earnings when making an investing decision, it has to be coupled with a good understanding of the business. Failure to do so can result in pain.
Rule No. 12: “Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lost a lot of money it is hard to make it back.”
Humility is an important trait to have in investing. Seth Klarman, another less-known but hugely successful investor, once said:
“You need to balance arrogance and humility… when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it… That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.”
We have to keep Klarman’s words in mind. The stock market can be a very unforgiving place for the arrogant and the overconfident.
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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 owns shares in Vicom and Sarine Technologies.