Walter Schloss, the great value investor in a closet
His office was part of a closet.
No secretary. No analysts. No Bloomberg terminal. No ticker tape.
Just a daily newspaper, a monthly Value Line subscription, and a filing cabinet.
Over 47 years, Walter Schloss compounded at 21% a year before fees. $100 invested with him in 1955 became $94,769 by 2002. Over the same period the S&P 500 turned $100 into $6,620.
No degree, and two courses with Graham
Walter Schloss was born in 1916. At 18 he worked as a runner on Wall Street. No university degree.
Then someone at the firm handed him Benjamin Graham's Security Analysis. The firm paid for him to take two courses with Graham.
One book. Two courses. That is the entire extent of Walter Schloss's credentials, and it was enough to make history.
After the Second World War he joined Graham-Newman in 1946. There he shared an office with someone else: Warren Buffett. When Graham retired and moved to California, Schloss needed new work.
A Graham-Newman shareholder came to him: "Walter, if you start a fund, I'll put money in." Walter & Edwin Schloss Associates began with $100,000 and 19 investors.
Warren Buffett was regarded as Graham-Newman's star. Schloss was regarded as someone who would never make partner. He proved otherwise over 47 years, not by doing anything exceptional, but by doing one simple thing and never changing it.
A closet office and a newspaper
Schloss sublet a closet-sized space at Tweedy, Brown & Co. One desk. One filing cabinet. No ticker tape in the office; he deliberately kept it out.
Buffett described it: "Schloss continues to outperform managers who work in temples filled with paintings, staff and computers. And he accomplishes this feat by rummaging among the cigar butts on the floor of capitalism."
The only tools he used: a daily newspaper as his main source of prices, Value Line for financial data, and company reports sent on request.
He kept the portfolio secret from every partner. One exception: a nervous partner wanted to know the holdings. Schloss named a few, including bankrupt railroad bonds and similar things. The man withdrew from the partnership immediately. A year later he died. Schloss never disclosed the portfolio again.
The method: balance sheet, not income statement
Schloss did not start from earnings or growth. He started from one question: if this company were liquidated today, what would shareholders receive?
His favourite metric: book value per share. He preferred to buy at one-half or two-thirds of book. His reason: "Asset values change much more slowly than earnings." Earnings can be adjusted, dressed up, forecast wrongly. Real assets, plant, equipment, cash, are much harder to fake.
Schloss's screen fits into a few criteria: price below two-thirds of book, price near a multi-year low, debt no more than 100% of equity, management holding meaningful stock and not overpaying themselves, and the stock having no "sex appeal", the kind the market is completely ignoring.
He never met management. "I'm not good at judging people. So I find it much better to look at the figures rather than people." And the deeper reason: management knows what you want to hear and will say exactly that. Balance sheet numbers do not lie in that way.
A hundred stocks, and the paradox of humility
Schloss held up to a hundred stocks at once. Buffett called this "protection against ignorance". Schloss agreed, and that is the part nobody usually mentions.
He knew he did not understand any single company well enough to bet heavily on it. Rather than pretend otherwise, he built a method that does not require deep understanding of each name: buy a hundred companies on the same principle, and let probability work.
Over 47 years he invested in roughly a thousand securities. Most were boring. No handful of large wins explains his success; the consistency of the method across thousands of transactions does.
When a stock fell after he bought it, he bought more. "I never put stop losses on my holdings because if I like a stock in the first place, I like it more if it goes down."
Average holding period: four years. Selling target: "try to make 50% on any holding before selling." And one iron rule: never sell a stock on bad news. The market's first reaction is always the strongest, and usually excessive.
Sixteen principles on one page (1994)
In 1994 Schloss typed them onto a single sheet. No book. No speaking tour. Just sixteen points.
Sixteen principles important enough to compress 47 years:
- Price is the most important factor. Try to establish the value of the company.
- A stock represents a piece of a business, not just a piece of paper. Use book value as a starting point.
- Make sure debt does not equal 100% of equity.
- Be patient. Stocks do not go up immediately.
- Don't buy on tips or for a quick move. Don't sell on bad news.
- Don't be afraid to be a loner, but be sure you are correct. Buy on a scale down and sell on a scale up.
- Have the courage of your convictions once you have made a decision.
- Have a philosophy of investment and try to follow it.
- Don't be in too much of a hurry to sell. Before selling, re-evaluate the company and see where the stock sells against book value.
- Be aware of the level of the market. Are yields low and P/Es high? Is everyone very optimistic?
- When buying a stock, it is helpful to buy near the low of the past few years.
- Try to buy assets at a discount rather than buying earnings. Assets change more slowly than earnings.
- Listen to suggestions from people you respect, but it is your money.
- Try not to let your emotions affect your judgement. Never feel too good about making money or too bad about losing it.
- Remember you are handling other people's money. That makes not losing it even more important.
- Don't be in a hurry if you have no ideas. Sit on cash and wait until something comes along.
Principle 16 deserves its own mention: "If you have no ideas, sit on cash and wait." This is what most investors cannot do; they feel the need to act. Schloss understood that waiting is an action.
Know yourself, and don't try to be Buffett
Asked whether he was a qualitative or quantitative investor: "Warren is brilliant, there's never been anybody like him and there never will be. But we can't be like him. You have to satisfy yourself about what you want to do."
He knew he was not good at judging people, so he did not meet management. He knew he was not good at forecasting future earnings, so he did not forecast. He knew he enjoyed a little trading, so he allowed enough turnover to satisfy that without exceeding it.
This is the rarest form of intelligence in investing: knowing precisely where your limits are and building a system that lives inside them. Most investors lose money because they go past those limits, not because they are not clever.
The simplest track record in investing history
From 1956 to 2002: 15.3% a year after fees (21% before), against 10% for the S&P 500. Schloss had five down years; the S&P had seven. In 1974, a brutal year, he beat the S&P by more than 20 points. The following year, in a strong bull market, he made 52.2% against the S&P's 36.9%.
Buffett described it: "Walter 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."
In 2002 Schloss closed the partnership. The reason: there were no longer enough undervalued stocks that fitted his method. He did not change the method to find more ideas. He stopped.
The QuietVC lesson
Walter Schloss teaches things not many people in the industry want to hear.
First, balance sheet before income statement. Real assets are harder to fake than accounting earnings. Buy assets at a wide enough discount and let time work.
Second, low overhead is real alpha. No analysts, no Bloomberg, no smart office. Every dollar saved on running costs is a dollar compounding for investors.
Third, knowing yourself is a competitive advantage. Schloss did not try to be Buffett. He knew what he was good at and built the system around it. Investors who lose money usually are not stupid; they are trying to do something that does not suit their temperament.
Fourth, with no ideas, sit still. That is his sixteenth principle, and the one fewest people manage. Waiting is an action, not passivity. And sometimes it is the most important one.
Walter Schloss died in 2012 at 95. No monument. No school named after him. Not one book he wrote.
Just one page with sixteen lines. And 47 years proving they work.
Silent discipline. Compound value.