Posted in About, Value Investment, Warren Buffett, tagged Warren Buffett on June 22, 2010| 3 Comments »
Forbes has released Forbes on Buffett, a compendium of articles on Warren Buffett, beginning with a November 1969 article on his early investment partnership:
…Buffett is what is usually called a Wall Streeter, a Money Man. For the last 12 years he has been running one of the most spectacular investment portfolios in the country.
Download a .pdf copy here (hat tip to Market Folly).
Posted in About, Stocks, Value Investment, tagged portfolio construction, Warren Buffett on April 28, 2010| 6 Comments »
Portfolio construction and position sizing are key elements in investing. For every investor, there exists a tension between the desire to maximize the rate of growth of the portfolio while simultaneously minimizing the chance of blowing up. The Kelly Criterion is the method to determine the optimal portion of the portfolio to be invested in any given opportunity. Buffett, Munger, Whitman and Pabrai are all proponents of the theory.
John L. Kelly, Jr, the developer of the Kelly Criterion, seems to have been a remarkable character. According to his entry in Wikipedia, he was a physicist, “recreational gunslinger”, daredevil pilot, developed the vocoder, the first demonstration of which was the inspiration for the HAL 9000 computer in the film 2001: A Space Odyssey, and was a keen blackjack and roulette player, which is a little odd, because his criterion recommends against a bet on the roulette wheel. He died of a brain hemorrhage on a Manhattan sidewalk at age 41, never having used his formula to make money.
The Kelly Criterion output varies depending on two things: the investor’s certainty about the outcome of the investment (the “edge”) and the expected return (the “odds”). I have found it difficult to apply in practice. Hunter at Distressed Debt Investing has a great post on Peter Lupoff’s application of Kelly Theory to event-driven investing in Tiburon Capital Management’s portfolio. Lupoff’s post deals with some of the issues I have had, and is well worth reading.
Posted in Stocks, Value Investment, Warren Buffett, tagged Berkshire Hathaway Inc. (NYSE:BRK.A), Berkshire Hathaway Inc. (NYSE:BRK.B), Short, Warren Buffett on March 17, 2010| 15 Comments »
Yesterday I ran a guest post on the short case for Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) by S. Raj Rajagopal, an MBA student at Johnson Graduate School of Management at Cornell University. The post generated several requests for the valuation supporting Raj’s short thesis, which Raj has provided and I’ve reproduced below.
Here is the valuation underpinning Raj’s short case for Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B):
(Click to enlarge)
Please contact Raj if you would like to discuss his valuation or his short case.
[Full Disclosure: I do not hold a position in BRK.A or BRK.B. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
Posted in About, Stocks, Value Investment, Warren Buffett, tagged Value investing, Warren Buffett on March 8, 2010| 2 Comments »
When I started out investing I summarized Warren Buffett’s letters to shareholders into a document I jokingly called the “Tractatus Logico-Valere.” The title, Latin errors aside, was intended to be an homage to Ludwig Wittgenstein’s Tractatus Logico-Philosophicus (which, according to Wikipedia, may in turn have been an homage to the Tractatus Theologico-Politicus by Baruch Spinoza). The idea was to create a comprehensive summary of Buffett’s investment process set out in a succinct, logical fashion. I kept Wittgenstein’s seventh and final proposition – “Whereof one cannot speak, thereof one must be silent” – as my own and interpreted it to mean “where you can’t value something, don’t invest” or “stay in your circle of competence.” My Tractatus wasn’t very good, and I’m not Warren Buffett’s shoelace. Consequently, I didn’t do very well with it. (Wittgenstein was not similarly burdened with self-doubt. Wikipedia says that he concluded that with his Tractatus he had resolved all philosophical problems, and upon its publication retired to become a schoolteacher in Austria.) My abortive experience attempting to create a comprehensive guide to earnings and growth-based investing has given me a great appreciation for those who are able to successfully create such a document and live by it. One investor who has done so is setting out his process for the world to see at The Fallible Investor.
The author of The Fallible Investor is a private investor who has “previously worked for a private hedge fund in Bermuda and Bankers Trust in Sydney, Australia.” He calls himself The Fallible Investor because he “often makes errors when he invests, and says, “Recognising such a weakness is also useful. As Taleb says:
Soros… knew how to handle randomness, by keeping a critical open mind and changing his opinions with minimal shame… he walked around calling himself fallible, but was so potent because he knew it while others had loftier ideas about themselves. He understood Popper. He lived the Popperian life.
I have found particularly useful his elucidation of the linkage between return-on-invested-capital, market value, replacement value, and sustainable competitive advantage:
I define the replacement value of a business as what the business’s assets would be worth if it’s ROIC was equal to its cost of capital.
The market value of a business with a high ROIC and no sustainable competitive advantage should (assuming the market eventually prices a business at its intrinsic value[1]) fall to its replacement value. This should happen because if an incumbent business has a high ROIC, and no sustainable competitive advantage, other businesses will enter this industry, or expand within the industry, to seek these higher returns. These competitors will drive down the incumbent business’s profits until its ROIC declines to the average return of a commodity business. Once this occurs, the incumbent business can only be worth the cost of replacing the business’s assets.
Professor Greenwald has another way of describing this process. He points out that if an incumbent business, with no competitive advantage, has a replacement value of $100 million and its market value is $200 million[2], competitors will drive its market value down to $100 million. Competitors will calculate that by spending $100 million to reproduce the assets of that business they can also create an enterprise with a market value higher than $100 million. These competitors will think, correctly, there is no reason for why they should have a different economic experience from the incumbent because there is nothing it can do that they cannot. Remember the incumbent business has no sustainable competitive advantage. Competitors, by reproducing the assets of the incumbent business, will increase the supply of products or services in the industry. There will now be more competition for the same business. Either prices will fall or, for differentiated products, each producer will sell fewer units. In both cases, the incumbent’s profits will decline and the market value of its business will decline with them. This process, capacity continuing to expand, and the profits and the market value of the incumbent’s business falling, will continue until the incumbent’s market value falls to the replacement value of its assets ($100 million). Its competitors will suffer the same fate.
Greenwald points out that while this process does not happen smoothly or automatically it will eventually turn out this way. It happens because the incentives for businesspeople to take advantage of the market’s excessive valuation of the incumbent’s business are too powerful.[3]
The market value of a business with a sustainable competitive advantage can, by contrast, stay much higher than its replacement value simply because it can sustain a high ROIC.
[1] The intrinsic value of a business is what I think the business is worth to a rational businessperson.
[2] Assuming the business has a high market value because it has a high ROIC.
[3] P38, ‘Value Investing: From Graham To Buffett And Beyond’, Bruce Greenwald et al, 2001.
The Fallible Investor has provided me with a full copy of his notes. I highly recommend following his posts as he sets out his investment process on the site.
Posted in About, Stocks, Value Investment, tagged Buffett, Liquidation Value, Warren Buffett on November 13, 2009| 8 Comments »
The superb Abnormal Returns has a post “Investing by the seat of their pants,” which, among other things, discusses William Bernstein’s conjecture that “only a tiny fraction, 1 in 1000, investors have the skills to become truly competent investors.” In the preface of his new book, Bernstein suggests four abilities successful investors must enjoy (via Information Processing):
First, they must possess an interest in the process. It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.
Second, investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist explained to me more than a decade ago, fractions are a stretch for 90 percent of the population.
Third, investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression. Alas, as we shall soon see, this is something that even professionals have real trouble with.
Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth one: the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it. “ Stay the course ” : It sounds so easy when uttered at high tide. Unfortunately, when the water recedes, it is not. I expect no more than 10 percent of the population passes muster on each of the above counts. This suggests that as few as one person in ten thousand (10 percent to the fourth power) has the full skill set. Perhaps I am being overly pessimistic. After all, these four abilities may not be entirely independent: if someone is smart enough, it is also more likely he or she will be interested in finance and be driven to delve into financial history.
But even the most optimistic assumptions — increase the odds at any of the four steps to 30 percent and link them — suggests that no more than a few percent of the population is qualified to manage their own money. And even with the requisite skill set, more than a little moxie is involved. This last requirement — the ability to deploy what legendary investor Charley Ellis calls “ the emotional game ” — is completely independent of the other three; Wall Street is littered with the bones of those who knew just what to do, but could not bring themselves to do it.
Bernstein’s is an interesting thought experiment. Steve Hsu at Information Processing, after considering the abilities identified by Bernstein, categorizes them as follows:
…the right interests (history, finance theory, markets — relatively easily acquired, as these subjects are fascinating), personality factors (discipline, controlled risk taking, decisiveness — not so easily acquired, but can be improved over time) and intelligence (not easily acquired, but perhaps the threshold isn’t that high at 90th percentile).
Bernstein’s list and Hsu’s categorization of it feels right. Whether it winnows the universe of competent investors down to 1 in 10,000 is open to debate, but I think few would have a genuine quibble with the content of the list. The only other element that I would suggest – and it is possible that it’s already captured within Bernstein’s list as “emotional discipline” – is the ability to think and act counterintuitively.
There are many examples of strategies that are counterintuitive and produce above-market returns. Value is a counterintuitive strategy. Glamour feels like a better bet than value, but studies have shown over and over again that value outperforms glamour or momentum. Tangible asset value – liquidation value investing or low price-to-book value investing – is counterintuitive even to practitioners within the value school, who predominantly seek Buffett-style earnings and growth. The counterintuitive element is that companies within the lowest price-to-book quintile – not, by any means, earnings machines – tend to grow earnings faster than companies in the highest price-to-book quintile, a phenomenon that value investors recognize as “mean reversion”. Even with the liquidation value investment world itself, the counterintuitive strategy – buying loss-making net nets – outperforms the intuitive one – buying net nets with positive earnings.
This suggests to me that the ability to understand a concept from an intellectual standpoint is a necessary but insufficient condition for competent investing. One must also be able to suspend instinct or intuition or disbelief and follow intellect through to action. That seems to me to be a rare trait, but one that I believe can be developed. Is it possible that, if one follows a counterintuitive strategy for long enough and succeeds with it, it becomes intuitive? I think so, but I’d like to see what you think too.
Update
I knew I was asking for it when I wrote the panglossian, “I think few would have a genuine quibble with the content of the list.” An astute reader has a quibble, and I’m embarrassed to say that I think he’s right:
I flatly deny Bernstein’s assertion that “investors need more than a bit of math horsepower.” I cite the highest authority:
1. Ben Graham explicitly warned against “calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra.” Indeed, “whenever [calculus] is brought in, or higher algebra, you could take it as a warning signal that the operator is trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.”
2. “If calculus were required,” Buffett has said, “I’d have to go back to delivering papers. I’ve never seen any need for algebra … It’s true that you have to divide by the number of shares outstanding, so division is required. If you were going out to buy a farm or an apartment house or a dry cleaning establishment, I really don’t think you’d have to take someone along to do calculus.”
3. Elsewhere, Buffett has said “read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.”
4. In one of his books, Peter Lynch recounts at length that the mathematical stuff he learnt in MBA-School were hindrances rather than helps, and that “the arts/philosophy side” (or words to that effect) of his education have stood him in much better stead. Indeed, I recall Lynch saying something like “all the maths you need to invest competently you learnt in primary school.”
5. The “Ben Graham, Meet Ludwig von Mises” paper you cited a while back discusses the Austrian conception of value, markets and entrepreneurial discovery. None of these things rely upon maths, probability or stats. But they do, I think, hinge upon the ability to think unpopular or contrarian thoughts — like adherence to the Austrian School!
Mind you, I’ve never liked Bernstein and indeed have long thought that he does far more harm than good. This assertion is but one in a long list of silly things he’s said over the years. In short, not only is mathematics NOT a necessary condition of successful investment; it may be a sufficient condition of investment failure.
Posted in About, Austrian Economics, tagged Austrian School of Economics, Gold, Warren Buffett on November 10, 2009| 20 Comments »
Warren Buffett’s position on gold is well known, if a little difficult to fathom. This is from Buffett’s appearance on CNBC’s Squawk Box on March 9, 2009, but could have been taken from any of his commentary over the last fifty years:
BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?
BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.
Then there’s this comment from Buffett on the relative performance of Berkshire Hathway book value and an ounce of gold over fifteen years in the 1979 letter to shareholders:
One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.
Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold.
For tis the sport to have the enginer
Hoist with his owne petar.
Posted in About, Liquidation Value, Stocks, tagged Liquidation Value, Warren Buffett on August 19, 2009| 14 Comments »
Updated.
Megan McArdle has written an article for The Atlantic, What Would Warren Do?, on Warren Buffett and the development of value investing, arguing that better information, more widely available, will erode the “modest advantage” value investors have over “a broader market strategy” and Warren Buffett’s demise will be the end of value investment. We respectfully disagree.
The article traces the evolution of value investing from Benjamin Graham’s “arithmetic” approach to Buffett’s “subjective” approach. McCardle writes that the rules of value investing have changed as Buffett – standard bearer for all value investors – has “refined and redefined” them for “a new era”:
When Benjamin Graham and David L. Dodd wrote the value-investing urtext, Security Analysis, in 1934, the rules were more hard-and-fast. Graham and Dodd looked for companies whose price was less than their intrinsic value, and offered various formulas for divining this value.
Buying stock in firms where the intrinsic value of the assets is higher than the market capitalization worked well in the depths of the Great Depression, when investors were wary of holding equity. Between 1929 and 1932, the Dow lost just about 90 percent of its value, bottoming out at 41.22. What economists call the “equity premium”—the extra return that investors demand to compensate for the risk of holding stocks—has never since been so high. That’s why Graham and Dodd could find companies whose liquidation value offered a substantial “margin of safety” for people who bought their equity.
Moreover, book value and other balance-sheet-based metrics have become less useful, as the market, and the economy, have changed. Persistent inflation means that the historical cost of the assets on the balance sheet in many cases bears only passing resemblance to their actual worth. Meanwhile, firms get more and more of their value from intangible assets, like intellectual property or strong brands, that don’t show up in the financial statements. Geico, one of Buffett’s crown jewels, gets much of its value not from physical equipment or even investment savvy, but from a sterling brand name built on relentless advertising.
McCardle says that the rules have changed so much that Graham’s approach no longer offers any competitive advantage:
Much of what Graham and Dodd did so well was simply hard coolie labor. In an era before spreadsheets or financial databases, they looked at company reports and painstakingly did the arithmetic to see where a company stood. That effort offers no competitive advantage in today’s information-saturated market. So while value investors still hew to the core notion of determining a company’s intrinsic value, waiting for the market to misprice the stock, and then buying on the cheap, nowadays that determination has much more of a subjective skill element.
As proof of this assertion, McCardle offers this:
Well, for starters, the market still hasn’t fallen to Graham-and-Dodd levels; most of the managers I talked to groused that they were finding few real bargains. The market was irrational enough to drag down their investment results, but too rational to offer stocks at deep discounts from intrinsic value. Meanwhile, many of their potential investors had just lost half their money.
Value investors love to deride academics and the efficient-market hypothesis, but they can’t deny that stock-screening tools and other analytics have taken away many of the best bargains. At least some managers have lost the will to wait patiently for superdeals and have taken on more risk to get more return. As we walked to dinner through the soft Omaha twilight, a fund manager I had encountered at a “meet and greet” suddenly said, “The only way to make money these days is leverage.”
…
And my dinner companion seemed to be saying that value managers couldn’t compete with other funds without taking at least some of those bets.
McCardle concludes with the following:
Right now, the academic literature suggests that value investing has a modest advantage over a broader market strategy. Better information, more widely available, may continue to erode that edge. But the principles of prudence, patience, and thrift will always, in the end, offer a better chance at outsize returns. The question is whether, once Saint Warren passes, his followers will find the courage to stick to them.
In response, we’d like to make the following observations:
Better information, more widely available, will not erode value’s edge
There are as many different styles of value investment as there are value investors, the uniting element being an adherence to the concept of “intrinsic value,” which is simply defined as a measure of value distinct from price. Many investors describing themselves as value investors have subtly different measures of intrinsic value, from liquidation value, to asset value, to earning power, to private market value and, if the fund manager McCardle met at the twlight “meet and greet” is an indication, some of the investors wearing the “value” badge do nothing of the sort. While investors of the same stripe often coalesce around the same opportunity, there are so many different perspectives that one type (say, the liquidation value investor) could easily sell to another (say, the earning power investor), and both could be right in their assessment of the intrinsic value of the stock, and have made money in the process. This means that diffusion of information won’t cause the value opportunities to disappear, because the interpretation of that information is the key step. As Shai points out in the comments with his Klarman quote, value investment is as much about attititude as it is about intellect or access to information. Being smart, having five screens and a Bloomberg terminal won’t get you close to Walter Schloss’ record, which he achieved with a borrowed copy of Value Line working 9.30am to 4.30pm.
Buffett has not rejected Graham, and has not redefined value
Graham’s contribution was to establish the value investment framework – the concept of intrinsic value – and to describe how one could operate successfully as an investor, most notably through the concept of margin of safety. Graham discussed a number of ideas about the manner in which intrinsic value could be assessed, and was so expansive in his teaching that he left very little ground uncovered for future value investors. It is a tribute to Buffett’s genius that he was able to find new ground within Graham’s framework, which he did by blending Phil Fisher’s philosophy with Graham’s. Buffett’s divergence from Graham’s methods was not, however, a rejection of Graham’s philosophy. Buffett has said on occassions too numerous to quote that he still works within Graham’s framework and has said that his change was a function of the increasingly large sums of capital he had to invest, and not a problem with Graham’s approach. In a June 23, 1999 Business Week article, Buffett said:
If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
When asked in 2005 what his approach would be if he had to invest less than $10M, Buffett still indicated that he preferred Graham style securities. That’s not a rejection of Graham’s investment philosophy, or his approach.
Don’t bother looking for Graham-style opportunities, they’ve disappeared
Leave them all for us. If there was ever an investment style that should suffer from too many practioners, Graham’s “net current asset value” proxy for liquidation value investing is it. NCAV investing is about as simple as investing gets, and a free screen is all that an investor requires to find NCAV opportunities. Yet our research demonstrates that even this strategy continues to outperform the market. We probably can’t run a multi-billion dollar portfolio on the basis of a simple NCAV screen, but we’ll cross that bridge when we get to it. For the average investor, investing in Graham-style NCAV opportunities is all we’ll ever need. You say those opportunities have disappeared? Have a look at the screens on our blogroll. There are plenty there. When those opportunities do disappear – and they will eventually – it won’t be because of all those supercomputers chasing them, it’ll be a function of valuation. Prices go up, and prices come down. When they’re up, it’s hard to find investable opportunities, and when they come down, it’s easier to do so. It has always been thus, and it will always be so. When there aren’t many opportunities around, that’s a signal from the market. It’s telling you to wait. As a friend of Greenbackd says, “Patience can be a bitter plant, but it has sweet fruit.”
There are other value practitioners who will carry the torch forward
Klarman, Tweedy Browne, Greenblatt, Tilson, Dreman, Gabelli, Miller, Price, Whitman, Pabrai, Biglari (please insert any names I’ve forgotten into the comments) and a host of others toiling away in obscurity will carry the torch forward. Value investment is in good hands.
Posted in About, Activist Investors, Greenbackd, Liquidation Value, Stocks, Warren Buffett, tagged Activist investment, Warren Buffett on February 13, 2009| 3 Comments »
The Manual of Ideas has a copy of Empirical Finance Research’s paper “Fundamental Value Investors: Characteristics and Performance” (.pdf). The paper examines the investment methods of professional value investors (defined as the members of the valueinvestorsclub.com) and concludes that value investing is a broad church encompassing many different styles, but predominantly consists of “Warren Buffett-style growth investors:”
We find that investors are overwhelmingly concerned with assessing intrinsic value. Discounted cash flow models, earnings multiples, GARP, and other similar valuation techniques are overwhelmingly used (87.50% include this analysis in their recommendation). Based on these results, professional value investors tend to be Warren Buffett-style growth investors…
The paper seems to quantitatively confirm our qualitative (read, baseless) assertion in the About Greenbackd page that “assets are a contrarian measure of value.” Less than a quarter of professional value investors incorporate the value of tangible assets in their investment decisions:
[A]pproximately 24% of value investors do incorporate the classic value technique of focusing on tangible asset undervaluation. The other favorite tools of value investors are open market repurchases (12.12%), the presence of net operating loss assets (5.29%), restructuring and spin-off situations (5.12%), and insider trading activity (4.70%).
The paper also indirectly tackles the question oft posed by commenters on this site which, incidentally, questions the very raison d’etre of Greenbackd: why opportunities to invest below liquidation value and alongside activist investors persist even after the filing of the 13D notice:
According to efficient market logic (Fama (1970)), the rational arbitrager should act alone, drive the price to the fundamental level, and reap all the rewards of the arbitrage he has found. Unfortunately, arbitragers find this difficult in practice. Two primary reasons for this are capital constraints and the limits to arbitrage arising from the realities in the investment management business (Shleifer and Vishny (1997)).
The paper is typical of Empirical Finance Research’s rigorous approach and well worth the effort.
Posted in About, Greenbackd, Liquidation Value, Warren Buffett, tagged Liquidating Value, Walter Schloss, Warren Buffett on January 29, 2009| 5 Comments »
Walter Schloss might be one of Benjamin Graham’s lesser-known disciples, but to Warren Buffett, perhaps Graham’s most famous disciple, Schloss is a “superinvestor.” In The Superinvestors of Graham-and-Doddsville, an article based on a speech Buffett gave at Columbia Business School on May 17, 1984 and appearing in Hermes, the Columbia Business School magazine, Buffett said of Schloss:
Walter never went to college, but took a course from Ben Graham at night at the New York Institute of Finance. Walter left Graham-Newman in 1955 and achieved the record shown here over 28 years.
Here is what ‘Adam Smith’ – after I told him about Walter – wrote about him in Supermoney (1972):
He has now connections or access to useful information. Practically no on in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.
…
Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about 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 to me. And he does it over and over and over again. He owns many more stocks than I do – and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.
This is Schloss’ record, extracted from Buffett’s article (click to go the article for the full-size table on page 7):
Over 28 1/4 years between 1955 and the first quarter of 1984 (when Buffett wrote the article), WJS Limited Partners returned 5,678.8% and in the WJS Partnership returned an astonishing 23,104.7%. Annualised, that’s 16.1% in WJS Limited Partners and 21.3% in the WJS Partnership. Both dwarf the S&P’s gain of 887.2% or 8.4% annually over the same period.
Fast forward 24 years to a February 2008 Forbes article titled, Experience:
Although he stopped running others’ money in 2003–by his account, he averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500–Schloss today oversees his own multimillion-dollar portfolio with the zeal of a guy a third his age.
The Experience article highlights a few things about Schloss that we really like (mostly because they coincide with Greenbackd’s views on investing). First, he’s an asset investor:
“Most people say, ‘What is it going to earn next year?’ I focus on assets. If you don’t have a lot of debt, it’s worth something.”
Schloss had earlier discussed his preference for assets over earnings at the New York Society of Security Analysts (NYSSA) dedication of the Value Investing Archives in November 2007 (from the article NYSAA Value Investing Archive Dedication: Walter Schloss by Peter Lindmark):
“We try to buy stocks cheap.” His investment philosophy is based on equities which are quantitatively cheap and he often holds over 100 securities. Although he expounds that, “Each one is different. I don’t think you can generalize……But I think you just have to look at each situation on its own merits and decide whether it’s worth more than its asking price.” He prefers to buy assets rather than earnings. “Assets seem to change less than earnings.”
Second, as Buffett pointed out in his article, he’s not particularly interested in the nature of the business:
Schloss doesn’t profess to understand a company’s operations intimately and almost never talks to management. He doesn’t think much about timing–am I buying at the low? selling at the high?–or momentum.
Lindmark’s article also notes Schloss’ disinterest in the underlying business:
Mr. Graham simply did not care, and tried to purchase securities strictly on a quantitative basis. Mr. Schloss advocated buying decent companies with temporary problems. He stated, ” Warren understands businesses – I don’t. We’re buying in a way that we don’t have to be too smart about the business….”
Finally, we have to admit that we admire Schloss’ gentlemanly approach to running his business:
Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange’s closing bell.
You can see Schloss speaking here at the Ben Graham Center For Value Investing, Richard Ivey School of Business. Our favorite line:
If this doesn’t work, we can always liquidate it and get our money back.
Greenbackd 