Walter Schloss attended Ben Graham's finance course before World War II
and went to work for Graham-Newman in 1946. Leaving to establish Walter J.
Schloss Associates in 1955, he was joined by his son, Edwin, in 1973.
As one of Warren Buffett's "Super-Investors of Graham and Doddsville" in
his Hermes article of the same name, the Schlosses have run circles around the
indexes. For the 33 years that ended 12/31/88, Walter J. Schloss Associates earned a compound annual return of 21.6% per year on equity capital vs. 9.8% per year for the S&P 500 during the same period.
Read one of the rare interviews of him Here
Some of the Interesting Excerpt from the interview
On Graham Buying GEICO
When Graham-Newman bought it, GEICO was ready to take off but they
didn't know it. Nobody recognized that their gradual growth was about to
accelerate. It was viewed as just a nice little company making money.
After they bought it, of course, it suddenly took off and their timing turned
out to be brilliant
Why Most Parents would be terrible Investors
And different children have to be treated differently. Some people are even
afraid of money. My mother, for example, would have been one of the worst
investors and my father was a terrible investor.
And it's because they lived through fear - through the Depression.
As a the result, they allowed fear to make their judgments
Investing During Great Depression 1929
Graham was concerned with limiting his risk and he didn't want to lose
money. People don't remember what happened before and how things were.
And that's one of the mistakes people make in investing as well.
In the last 15 years, it's been a remarkable stock market. But people forget
what things were like during the 1930s. I think Graham - because he lived
through that period - remembered it, was scared it would happen again, and did
everything he could to avoid it.
But in the process of avoiding it, he missed a lot of opportunities. That's one
of the problems you always have - you don't really lose, but you don't really
make, either. I believe you should remember what took place - even if you
weren't around at the time. One of the problems of a lot of the people who went
through the Depression - Ben Graham, Jerry Newman, and others - is that they
keep on thinking that things will always be like that.
Even Graham used to say - and quite correctly - that you can't run your
investments as if a repeat of 1932 is around the corner. We can have a recession
and things can get worse. But you can't plan on that happening. People who did
miss this tremendous market.
Some people can do it. Most people can't and I don't think they should try.
Another Anecdote of the 1929-30 Crash!
Great Depression 1929 vs 1973-74 Stock Market Crash
It was much like 1929. The only difference was that in 1929, the companies went bankrupt. In 1973-74, the stocks went from $70 to $3. They didn't go bankrupt. They just went way down
If you truly think you're right and some lawyer tells you otherwise, stick to your guns - even if the other guy knows more. You've got to make up your own mind
You really have to stick to your guns no matter what other people think.
It's also important to know what you know and what you don't know.
Warren Buffett Fun Fact
Who is a better writer Warren or Graham?
Interesting Story of GEICO Acquisition
OID: We did a piece on GEICO recently but we're not familiar with that
a facet of the story.
Walter Schloss: It's still true today - an investment company can't buy more
than 10% of an insurance company without the approval of the SEC.
Edwin Schloss: But Graham-Newman didn't know it at the time.
Walter Schloss: They'd paid $750,000 for half of the company. Fred
Greenman, who was Graham's attorney and an old friend, had brought the
GEICO deal to them.
When Graham bought the stock, the SEC said, "You can't buy more than
10%. You violated the SEC laws, even if it was inadvertent."
Manny Cohen, a tough administrator at the SEC, said, "You've got to get rid
of it. Go back to the people who sold it to you and see if they'll take it back."
So they went back to the family from whom they'd purchased the interest and
tried to sell it back. But they said, "No. We don't want it. We sold it. Forget it."
OID: Amazing. And this was the best investment Graham ever made in his
career by a wide margin.
Walter Schloss: Next, the SEC looked at the profit-sharing arrangement
and asked themselves how they could make sure that Graham-Newman
wouldn't get any profits out of it.
The answer that they came up with was to require Graham-Newman to
distribute the GEICO shares to its shareholders at cost. So that's how Graham Newman's stockholders got their GEICO stock and became millionaires.
Even more ironic, the 25% of GEICO stock that was not owned by Graham-
Newman and other outsiders was retained by the founders' family - when Leo
Goodwin died, he left the stock to his son.
His son went into other ventures. But instead of selling his stock to finance
them, he borrowed against his GEICO stock. When it collapsed in 1976, he was
wiped out. The bank sold him out and he committed suicide.
Warren [Buffett] bought most of that stock when it went way down. And
that's how Warren got the GEICO stock that Goodwin had owned.
So that's a short history of GEICO. The whole thing was pathetic in a way -
some people became millionaires, some didn't benefit at all and others went
broke
A Tale of Two Cities
On Growth Stocks
Walter Schloss Stock Buying Approach
We just try to buy cheap stocks. That's really all. We try to buy things that are out of favor - stocks that others don't want
We prefer to invest in asset-rich situations but it's important to be flexible
when so many are focusing on those situations
On Meeting Management
Most people who have been really successful in the securities markets say the same thing - that they're not smart enough to get into the market and out of it. So they tend to remain more or less in the market at all times.
Staying Invested/ Market Timing
We try to buy good values and not worry too much about what the market is going to do. You could say, "How come you had 90% of your money in stocks if you thought the market was too high?" Our answer was that what we owned didn't seem that overpriced. But when the market went down, our stocks went down too.
Investing Mistakes
Being too aggressive initially - buying so much of stock initially that when the price moved lower, it took too much capital to average down. We've occasionally bought so much that we couldn't buy as much as we'd like when it went down further without becoming overly concentrated
Sometimes, we may also be a little too greedy. For example, we may sometimes get into securities where there's too much leverage. When leverage goes against you, it can be very dangerous. We try to stay away from those kinds of situations.
Selling and Switching
OID: If that's the case, what is the most common reason for selling
something?
Walter Schloss: I guess because it's selling at a price we think is reasonable. Usually what happens is that when a company's earnings are getting better, its value goes higher; and it's somewhat difficult for us to adjust to the new facts. If we buy a stock at $30 and believe it's worth $50, once it gets up to $50, we may believe it's really worth $60. But it's hard to adjust to the new circumstances. So there's a tendency to sell too soon.
We're buying in a way that we don't have to be too smart about the business
That’s it from my end for this week. Thanks for reading.
See you again next week!
Dhaval.
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