A value investing screen in the Graham school based on Schloss's focus on stocks that are hitting new lows and those trading at a price lower than their book value per share.
Walter J. Schloss studied under Ben Graham in 1935 and then worked with him. In 1955, he left Graham's company and started up his own investment firm. Schloss's son, Edwin, joined the firm in 1973 and the two of them closed out the fund in 2000 and Walter stopped actively managing others people's money in 2003. He was a very humble investor working from the same one-room office over the whole period. He didn't t talk to management teams as he felt he wasn't good at evaluating management character. He didn't use a computer or the internet but liked to look intensively at the numbers (using ValueLine and annual reports).
Warren Buffett highlighted Schloss's investing in a famous article called “The Superinvestors of Graham-and-Doddsville". Schloss summarized his own approach as being:
“We want to buy cheap stocks based on a small premium over book value, usually a depressed market price, a record that goes back at least 20 years…and one that doesn't have much debt."
Definition of a Schloss Screen
A set of indicative criteria for a Schloss investing screen might be:
- A stock at or near its 52-week low price – Being at or near a low could signal a possible bargain stock, although it is important to distinguish between temporary and permanent problems. As Greenwald notes, Walter and Edwin Schoss "scrutinize[d] the new lows list to find stocks that have come down in price. If they find stocks is at a two or three year low, so much the better".
- No long-term debt - Schloss avoided companies with much debt as this increased the risk profile of the investment.
- Price Less Than Book Value per Share - Schloss saw it as a potential bargain if the price per share was below the book value per share. Buffett said that Schloss “doesn't worry about whether it's January…whether it's Monday…whether it's an election year. He simply says if a business is worth a dollar and I can buy it for 40 cents, something good may happen". Edwin, was more flexible in wanting some asset protection but being more willing to look at a company's earnings power.
- Insider Ownership above average for the industry - Schloss wanted company management to own stock in the company.
- Long Price History – Schloss liked to look at where a stock was ten or more years ago so he valued the long financial history available in ValueLine.
Does it work?
Over the 45 years from 1956 to 2000, Schloss's fund earned a CAGR of 15.7%, compared to the market's return of 11.2% annually over the same period, hence Buffett's reference to him as a "super investor".
How can I run this Screen?
Watch Out For
Schloss did not buy foreign companies on the basis that it is not easy to judge them, and insiders had too much advantage overseas. He advised investors to stay away from industries that are outside of one's circle of competence and was more comfortable with very old industries, especially manufacturing.
In general, he aimed for a 50% profit from any holding before selling. If a stock's price is falling and the company's fundamentals are sound, he would buy more.
Schloss believed in significant diversification beyond what some value investors would recommend – sometimes up to 100 stocks – with a maximum holding in one stock of not more than 20% of the portfolio. However, he noted:
“The thing is, we don't put the same amount in each stock. If you like something like Northwest Industries, you put a lot of money in it. But we may buy a little bit of stock, to get our feet wet, and get a feeling for it. Sometimes if you don't own a stock, you don't pay enough attention".
From the Source
Although his memoirs - "The Memoirs of Walter J. Schloss: A Personal and Family History" – are now out of print, there are various lectures and interviews by Schloss available online. You can see a presentation he gave to Richard Ivey School of Business in 2008. There's also a interview with Jim Grant, 65 Years on Wall Street, as well as a lecture he gave in 1996 to the Behavioral Economics Forum at the Harvard Faculty entitled “Why we invest the way we do".
- Wikipedia on Walter Schloss
- Finding Value Among the “Lows": The Walter J. Schloss Approach
- Forbes Cover Story on Schloss
- Barrons - The Right Stuff: Why Walter Schloss is Such a Great Investor (1985)
There's a very comprehensive set of links on Schloss here: http://www.schloss-value-investing.com/value-investing-resources/