The late American investor Walter Schloss wasn’t well-known, although he did possess a phenomenal track record of investing success. It’s a pity because there’s so much that current investors can learn from him given his decades of market-beating experience (his fund and the U.S. stock market had generated compound annual returns of 15.3% and 11.5%, respectively, from 1956 to 2000). Here are three great insights from Schloss – along with my comments – that I’ve picked out from a fantastic investing speech he had given many years ago. On investing in commodity-related stocks Question: “Are you involved with commodities…
The late American investor Walter Schloss wasn’t well-known, although he did possess a phenomenal track record of investing success.
It’s a pity because there’s so much that current investors can learn from him given his decades of market-beating experience (his fund and the U.S. stock market had generated compound annual returns of 15.3% and 11.5%, respectively, from 1956 to 2000).
Here are three great insights from Schloss – along with my comments – that I’ve picked out from a fantastic investing speech he had given many years ago.
On investing in commodity-related stocks
Question: “Are you involved with commodities at all and if so…do you see silver as under-valued?”
Schloss: “You know, I have no opinion about any commodity or where it’s going to go and Asarco [a stock Schloss owned at the time of the speech] is a commodity company in copper. I have no idea if copper can keep going longer.
But I just think that the stock is cheap based upon its price, not necessarily because I know what’s going to happen to the price of the copper any more than silver. I have no opinion on any of those things. It saves me a lot of time.”
Many oil & gas stocks in Singapore have been decimated as a result of oil plunging from over US$100 per barrel in 2014 to around US$30 today. Some notable examples are the giant rig-builders Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) – their shares have lost 41% and 51% in value, respectively, since the start of 2015.
I’ve seen a surge in interest for oil & gas stocks from some investors as a result of the sharp falls. What’s worrying though is the investors thinking they know what oil is going to do and wanting to bet on oil & gas stocks as a way to capitalise on the movement of oil prices. Contrast this with how Schloss invested in a copper-related company: He had invested on the basis of the company being cheap at a certain price, not on what copper’s going to do.
The difference between the two is important because the movement of commodity prices can be notoriously hard to pin down. Moreover, it’s worth noting that a commodity-related company’s stock need not necessarily be a winner even if the related commodity grows in price substantially.
Take Australian gold miners. Over the decade from September 2005 to September 2015, the S&P / ASX All Ordinaries Gold Index – an index of Australian gold mining stocks – had declined by nearly 4% per year even as the price of gold rose by close to 10% annually.
On knowing your own strengths and weaknesses
Question: “Buffett keeps talking about like a handful of thick bets. It sounds like you don’t do that.”
Schloss: “Oh, no, we can’t. Psychologically I can’t, and Warren as I say, is a brilliant, he’s not only a good analyst, but he’s a very good judge of businesses and he knows, I mean my gosh, he buys a company and the guy’s killing himself working for Warren. I would have thought he’d retire.
But Warren is a very good judge of people and he’s a very good judge of businesses. And what Warren does is fine. It’s just that it’s not our – we just really can’t do it that way and find five businesses that he understands, and most of them are financial businesses, and he’s very good at it. But you’ve got to know your limitations.”
Schloss shows how important it is for us to know what we’re good at and where our shortcomings are. A failure to do so can be disastrous when investing. It may result in us adopting strategies that are ill-suited to our psyche, thus potentially leading us to commit stupid mistakes all the time.
On the need to evolve with the ever-changing market
Question: “Has your approach changed significantly?”
Schloss: “Yes, it’s changed because the market’s changed. I can’t buy any working capital stocks anymore so instead of saying well I can’t buy ‘em, I’m not going to play the game, you have to decide what you want to do.
And so we’ve decided that we want to buy stocks if we can that are depressed and are some book value and are not too, selling near to their lows instead of their highs and nobody likes them. Well why don’t they like them? And then you might say there may be reasons why. It may simply be they don’t have any earnings and people love earnings. I mean that’s, you know, the next quarter that’s the big thing and of course we don’t think the net quarter is so important.”
As investors, it’s important to know that the financial markets can evolve over time such that one strategy that has worked in the past may no longer do so today. The history of dividend yields and bond yields in the U.S. is a great example.
Source: Robert Shiller’s data
The chart above shows dividend yields and bond yields in the U.S. from 1900 to 1949. Notice the two occasions when dividend yields had dipped below bond yields: They coincide with the Panic of 1907 and the Great Depression of 1929, two episodes when the U.S. market crashed big.
But then something interesting happened. Dividend yields started dropping below bond yields in the 1950s and then stayed that way until the late 2000s. Check out the chart below, which plots dividend and bond yields since 1950.
Whereas U.S. stocks had crashed in the first-half of the 20th century whenever dividend yields dropped below bond yields, that trend has since disappeared. From 1955 to today, the S&P 500 – a broad U.S. stock market index – has increased 52-fold. Investors who depended on the relationship between dividend yields and bond yields to invest would have missed out on over six decades’ worth of gains.
In any case, it’s well worth your time to check out Schloss’s speech. Here it is again.
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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 companies mentioned.