Walter Schloss

Walter Schloss (1916-2012) was a legendary American investor and one of the original disciples of Benjamin Graham, the father of value investing. Profiled by Warren Buffett in his famous 1984 speech, 'The Superinvestors of Graham-and-Doddsville', Schloss was a shining example of how a simple, disciplined approach could lead to extraordinary results. Remarkably, Schloss never attended college. He learned his craft by attending Graham's evening classes at the New York Stock Exchange Institute and later working at Graham-Newman Corp. His investment style was a pure, quantitative form of value investing, often described as 'cigar butt' investing. He focused relentlessly on buying stocks for far less than their tangible asset value, with little regard for the company's current earnings or management quality. His decades-long track record proved that you don't need a PhD or complex spreadsheets to beat the market; you need patience, discipline, and a commitment to buying cheap.

Schloss was the ultimate 'cigar butt' investor, a term famously used by his mentor Graham. The analogy is simple: imagine finding a discarded cigar on the street that has one good puff left in it. It isn't glamorous, and you wouldn't want to hold it forever, but that one puff is essentially free. In investing terms, this meant Schloss hunted for companies that the market had thrown away. These were often ugly, unloved businesses in struggling industries. He wasn't interested in their growth prospects or what analysts were saying. His sole focus was on the balance sheet. He looked for companies trading at a significant discount to their book value, or better yet, their net working capital. He believed that by buying a large basket of these 'cigar butts' for 40 or 50 cents on the dollar, something good was bound to happen eventually—a takeover, liquidation, or a cyclical recovery—delivering that final, profitable puff.

Schloss didn't rely on complex models. Instead, he operated from a set of simple, powerful principles, which he once distilled into a 16-point checklist. These rules are a masterclass in behavioral discipline and financial prudence.

• Price is paramount. He famously said, “Price is the most important factor to use in relation to value.” He focused on what he paid, not on forecasting the future.
• Buy assets, not earnings. Future earnings are uncertain. Tangible assets on a balance sheet are more reliable. He used book value as his primary yardstick.
• Practice patience. “If a stock is cheap, it may not go up for two or three years,” he noted. He was willing to wait for value to be recognized.
• Have courage. Buy when there is 'blood in the streets,' even your own. He wasn't afraid to buy a stock as its price was falling, as long as the value proposition remained intact.
• Protect your downside. His entire strategy was built around a deep margin of safety. Buying assets for pennies on the dollar provided a built-in cushion against error and bad luck.
• Be wary of debt. He understood that high debt levels could wipe out equity holders in a downturn, turning a cheap stock into a worthless one.

Two themes run through Schloss's entire career: simplicity and diversification. Simplicity was his mantra. He did all his research using publicly available financial reports, like the 10-K, and subscribed to the Value Line Investment Survey. He rarely, if ever, spoke to company management, believing they were always trying to sell you something. He didn't use computers, preferring to do his work with a pencil and paper. This kept him grounded in the facts and insulated from market noise and slick corporate storytelling. Unlike Buffett, who prefers a concentrated portfolio of wonderful businesses, Schloss was a firm believer in wide diversification. He often held 100 or more stocks at a time. He knew that many of his 'cigar butts' would not work out, and some might even go to zero. By spreading his bets widely, he ensured that the winners would more than make up for the losers, protecting his capital and allowing the law of averages to work in his favor.

Schloss's legacy is his astounding track record. From 1956 to 2002, his investment partnership generated a compound annual return of approximately 15.3% after fees. Over the same period, the S&P 500 index returned about 10% annually. He achieved this with a simple, repeatable process that any investor can learn from. Warren Buffett summed up his genius perfectly: “He knows how to identify securities that sell at a discount from private-owner value… He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me.” Walter Schloss proved that investing doesn't have to be complicated to be successful. It requires discipline, emotional control, and an unwavering focus on buying value.