Walter Schloss: I Like To Buy Stocks With Downside Protection

Source: wikipedia

Walter J. Schloss was a well-regarded value investor as well as a notable disciple of the Benjamin Graham school of investing. Compared to Warren Buffett, Schlosser's holdings are more diversified and extremely demanding of safety.

Someone said, "He has great integrity and does not charge management fees if the fund loses money that year. I was touched by his comment that many of my investors are poor and need money to live, and I must give them dividends once in a few years. That's the norm on earth."

Over the period 1956 to 2000, Mr. Schloss and his son Edwin provided investors a compounded return of 15.3% compared with the S&P 500’s annual compounded return on 11.5%. The cumulative return for the period was 698.47 times, significantly outperforming the 80 times return of the S&P 500 over the same period.

Schloss started managing the fund in 1955 after Benjamin Graham retired

Mr. Schloss started on Wall Street in 1934, at the age of 18, in the midst of the depression (working for Loeb Roades, then called Carl M. Loeb & Co). During the late 1930’s, Schloss took courses from Benjamin Graham at the New York Stock Exchange Institute. 

When Mr. Schloss had been working for Graham for several years, once Mr. Schloss was in Graham's office, he received a call from his lawyer. The lawyer told him that he had bought him stock in the Public Employees Insurance Company (Government Employees' Insurance, GEICO) for $1.3 million that day.

He said, "Walter, if this stock does not meet expectations, we can always liquidate the company and get the capital back." You can see from this incident how important it is to buy for value.

How to choose stocks? Buy stocks that make new lows.

Mr. Schloss said: "I don't want to lose money. I buy stocks that I think have downside protection and just go with the flow as to how much they can go up.

The main thing is to pick companies that don't have a lot of debt. The company's annual report gives you an idea of how many shares are held by the company's directors, who the major shareholders are, and what the company's history is. It is not a good choice for a company with high debt, even if the business situation can eventually improve because of high leverage.

I like to buy companies with a simple capital structure that don't have a lot of debt, management holds a fair share of stock, and the company has a long history of finding a company and looking at how long it's been in business and what kind of business it's in."

When a stock goes down, continue to buy or reconsider?

Mr. Schloss‘s answer is  "A lot of times, you buy a stock and it gets into trouble, that's why the stock price is low, and that's when it may continue to fall. All you have to do is believe that buying at a lower price is a good thing."

Most people are reluctant to recommend stocks that are falling because of a psychological aversion to falling stocks.

If a stock drops from 30 to 20, it has lost 1/3 of its money. If it goes back to 30 and the stock that has fallen a lot comes back up, most people would probably consider whether to sell.

"I'm not willing to sell when it gets up to cost. A lot of times I buy stocks because they are falling and they get into trouble. When possible, I think it's better to make a 50% profit. The problem is a stock that was bought at 30 and went up to 50, if it was a long-term gain, I would probably sell."

"The stock could go up to 200, I've had that happen and don't care too much about that mistake. I really don't want to lose money, so I don't like to be in debt."

About the margin of safety

Mr. Schloss said, "I think the margin of safety is that the net assets are well above the market price. Having that margin of safety doesn't guarantee that you're right, but I just think there's something tangible there that if the price is low enough, someone will buy the company."

The management itself has the will to run the company well, and your interests are not in conflict with the management. But for some reason, the company is in trouble. For example, the company is in trouble because of a lawsuit over the quality of its raw materials, which is always inevitable. So try not to buy a company that may be subject to a lawsuit because of product quality issues.

Buy a good company at a reasonable price or buy an average company at a super low price?

Mr. Schloss replied, "That's a good question. I'm not willing to buy good companies at what I think is a reasonable price. It's not that I'm not willing to buy good companies, it's just that I want to buy at a discount. I want to make money, I don't want to lose money.

If you want to make money, you better buy at a price that is guaranteed to go up 50%. It can take years for a stock you buy to go up, so you must have the patience to wait for that day."

Is it a good time to buy stocks in a recession? Is it easier to find cheap stocks?

There may be opportunities. Mr. Schloss's view is that as long as stocks are cheap, there's nothing to worry about, but for one reason or another, people are swayed by emotions, and that's when it's a good opportunity to buy stocks and take advantage of such opportunities.

However, I think it's important not to try to guess where the market is going or predict the future. It's best to just buy companies that you feel are a good value and just wait, maybe a longer wait, but a lot less work. Don't think about what will happen to the stock market and what will happen to the economy.

Is the market more efficient, with frequent management changes, making it harder to find companies worth buying?

There's an efficient market theory that says all stocks are reasonably priced. Mr. Schloss thinks as analysts we have to spot the differences and look at why some stocks are overpriced and some are underpriced.

"I like to buy companies that are in industries that are struggling. That's when there are opportunities. Some companies are good companies, some are not so good. If the industry is in trouble, we look at the companies in the industry and we may find something worth buying.

I think the only problem is that it's much harder to know when to sell than when to buy."

When to sell? Sell all of them together or sell them in tranches on the way up?

Mr. Schloss replied, "I would say I don't know when to sell. I think that basically a stock bought at 50 is more vulnerable when it goes up to 100 and I might sell because it's doubled and I don't want to worry about it.

However, we are selling in tranches, and it's best not to sell all at one price level. I might sell some of it at 85, depending on how long it's been held. We usually hold the stock for about three years and don't buy and sell frequently.

When we buy, we have a rough idea of how long we will hold the stock, and when we hold and wait, we read the earnings report and track how the company is doing. I like to make money, but I don't have a formula that says I have to sell when it goes from 50 to 100.

During the holding period to observe, the stock will also fall, up too high is more vulnerable. 50 bought, up to 100, you say I do not sell, and then down to 50, you will feel very stupid, did not make money. So, I usually sell on the way up."

Source: https://www.cmtzz.cn/article/54775