The Superinvestors of Graham-and-Doddsville: Walter Schloss

The Columbia University School of Business is synonymous with value investing. It's where Benjamin Graham, the father of value investing taught and developed the style of investing we now know as deep-value investing during the 1920s.

In 1984, in honour of the 50th anniversary of the publication of Benjamin Graham and David Dodd's book, Security Analysis, the University invited Warren Buffett (undoubtedly Graham's most successful student) to speak to students. Buffett's speech became the driving force behind his now famous essay, 'The Superinvestors of Graham-and-Doddsville'.

Walter Schloss

One of Buffett's 'Superinvestors' was Walter Schloss, who learned his trade under the stewardship of Benjamin Graham.

Schloss never went to college. In fact, his financial education was limited to an evening class with Graham, which he enrolled on after reading 'The Intelligent Investor'. Soon after taking the class, Schloss went to work for Graham at the Graham-Newman partnership. He left the partnership during 1955 and the rest, as they say, is history:

“...armed only with a monthly stock guide, a sophisticated style acquired largely from association with me, a sub-lease on a portion of a closet at Tweedy, Browne and a group of partners...Walter strode forth to do battle with the S&P…" -- Warren Buffett praising Walter Schloss in a letter to members of the “Buffett Group" before its Hilton Head conference in 1976.

Schloss liked his “cigar-butt" companies and sought to acquire as many companies trading at 1/3 net working capital as possible. Schloss' screening criteria were:

• Trading at a discount to book value
• Trading at a low P/E multiple
• Been around for more than ten years
• Had no long-term debt
• Trading at or near its 52-week low
• Had a high insider ownership
• Had a good dividend yield

“…He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again." -- Buffett, The Superinvestors of Graham-And-Doddsville

And this approach worked extremely well. These are the returns of the Schloss partnership from inception through to 1984:

From 1955 to 2002, by Schloss' estimate, his investments returned 16% per annum on average after fees, compared with 10% for the S&P 500 over the period.Schloss' strategy is easy to replicate. He was never going to be the next Buffett, so he didn't try to be. Instead, he stuck to his principles and deep-value education:

...therefore, [I] went with a more passive approach to investing which may not be as profitable but if practised long enough [the compounding would achieve better than average returns]...I also liked the idea of owning a number of stocks. Warren Buffett is happy with owning a few stocks and he is right if he's Warren but when you aren't, you have to do it the way that's comfortable for you and I like to sleep nights…"

Looking for deals

The Stockopedia, Walter Schloss 'New Lows' Screen attempts to replicate Schloss' strategy. While the screen's results should never be taken as investment advice, they highlight some potentially attractive opportunities.

One company that shows up in the new lows screen is AMREP, one of those opportunities where you really need to put the work in to find the value.

AMREP distributes magazines and other print publications, a business that has been slowly dying for some time. Revenue is falling at a rate of around 10% per annum, the company has made a loss for six of the past six years, there's no dividend yield and the shares have fallen around 50% over the past twelve months.

Still, at present AMREP is trading at a P/TB ratio of 0.39 and the company also owns 20% of the real estate in a city in New Mexico. This is where the value is hidden. Management is developing and selling these lots and some estimates have put the value of the redeveloped land at $120m to $180m, more than 6x to 8x AMREP's current market value. If you've got the time, AMREP is definitely one for further research.

Depressed industry

Another US company that's showing up on the 'new lows' screen is Dawson Geophysical Co. Dawson is a provider of onshore seismic data for oil and gas companies. The group's shares have been hit by the falling oil price, taking them to a low not seen since 2009.

Nevertheless, the company has been around since the 1950s, so it knows how to handle itself in a crisis. Dawson has a net cash balance of $38m, offers a dividend yield of 2.6% and has a quick ratio of 4x. The shares currently trade at a P/B of 0.5. This could be a good turn around play on the US oil & gas market.

Conglomerate discount

An opportunity in Europe is Salzgitter AG, which is currently trading at a P/TB of 0.4, supports a dividend yield of 1.3%, and has a net cash balance, according to Stockopedia's figures.

Salzgitter is a holding company for more than 200 subsidiaries. While its valuation has been impacted by the weak European economy, the market is also placing a hefty 'conglomerate discount' on its subsidiaries. A break up of subsidiaries, or European economic recovery could result in a substantial re-rating of the shares.

EXOR SpA, is another European value opportunity. One of Europe's leading investment companies, EXOR is a holding company and its net asset value currently stands at around €40.5 per share, based on 222.4 million shares in issue. Presently, EXOR trades at €33.4 per share, 17.5% below its NAV. EXOR is currently trading near its 52-week high, so it's not a Schloss' investment but there could be value to be found here. If you want find out more about hunting for big winners in the stock market, a free investment guide from Stockopedia could make a big difference.

Stockopedia's Guides to Making Money in Value & Dividend Stocks can help you become a more successful investor in 2015 and beyond. They are simple and straightforward reports on what works in the stock market and explain how to find shares that can enhance your returns.

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