Four investment principles that cemented Walter Schloss’s place among the world’s iconic investors.

Iconic American investor Walter Schloss achieved great success by adopting value investing techniques. An avid follower of value investing pioneer Benjamin Graham, Schloss’ investment strategies continue to be scrutinized and implemented by modern investors.

Walter Schloss gained valuable experience working directly with Graham at Graham-Newman Corp. in the 1950s. During this time, he absorbed Graham’s value investing principles and laid the foundation for a successful approach.

In 1955, Schloss started an investment partnership, initially managing funds for family and friends. He remained steadfast in his commitment to value investing and continued to consistently generate impressive returns over the next few years.

Over 45 years, Walter J. Schloss Associates has delivered an average annual return of 15.3%, outperforming the S&P 500’s return of 10.5%. This outstanding performance solidified Schloss’s status as a master of value investing. His penchant for investing in smaller and overlooked companies has resulted in some hidden gems in his portfolio. Notable wins include his 50x return on Blue Chip Stamps and his 10x growth on Emerson Radio.

Below are some of the basic tenets of Walter Schloss’ investment philosophy.

Concentrate on undervalued stocks

Mr. Schloss advocated acquiring stocks that were trading well below their intrinsic value. He used various metrics such as price-to-book ratio, price-to-earnings ratio, and dividend yield to identify undervalued stocks.

Schloss went beyond mere metrics to deeply understand a company’s core value. He scrutinized annual reports and industry publications and personally visited companies to gain first-hand insight into their operations and prospects. Mr. Schloss considered factors such as management quality, brand strength, competitive advantage and broader economic conditions when evaluating potential investments. He wasn’t afraid to go against the flow, investing in stocks that were unpopular and ignored by others. His unique analysis has allowed Mr. Schloss to discover hidden gems ahead of the crowd.

Exercise patience and maintain discipline

As a long-term investor, Schloss advocated the habit of holding stocks for a long time. He did not hesitate to wait for an investment to mature, even if it required a sustained stage of market volatility.

Mr. Schloss became famous for ignoring short-term market fluctuations and refusing to let daily or quarterly fluctuations sway his investment decisions. He understood that focusing on day-to-day fluctuations in the market could lead to emotional mistakes and deviations from a solid long-term strategy.

Throughout his career as an investor, Mr. Schloss has faced numerous market crashes and periods of extreme volatility. However, his unwavering confidence in his research and the intrinsic value of his holdings allowed him to keep his cool and weather the storm. He remained calm, recognizing that short-term economic downturns often present opportunities for patient investors.

Through the discipline of holding investments for the long term, Schloss harnessed the power of compound interest, where profits are reinvested and grow exponentially over time. This approach yielded significantly higher returns compared to frequent trading activities.

Achieve portfolio diversification

Mr. Schloss adhered to the principle of diversifying investments across a variety of stocks to reduce risk. Typically he maintained a portfolio consisting of his 50-100 stocks.

Diversification played an important role in Walter Schloss’ investment strategy. By maintaining a variety of stocks across different sectors and industries, Mr. Schloss effectively reduced the impact of poor performance in individual companies on the overall portfolio. This method protected him from scenarios where weaknesses in a single investment could negatively impact the entire collection.

By maintaining a diverse portfolio, Schloss has been able to explore a wider area, increasing the likelihood of discovering hidden gems in overlooked sectors and smaller companies. This diversified approach has expanded our access to potential alpha sources and generated excess returns above the market average.

Diversification has helped Schloss overcome emotional biases that can influence investment decisions. By diversifying your investments across a variety of stocks, you are less likely to become overly attached to a particular stock, and you are less likely to make irrational choices based on emotions such as hope or fear.

maintain emotional calm

Mr. Schloss exemplified a calm and rational approach to investing without giving in to emotion. He avoided impulsive decisions and remained steadfast in his established investment plan.

Schloss acknowledged that emotions play a big role in investment decisions. He actively fought against emotions such as greed during market highs and fear during market declines, adhered to carefully crafted investment plans, and avoided impulsive reactions.

He ignored the emotional manipulation often seen in financial news and market commentary. Instead, Schloss prioritized hard data, extensive research, and analysis to make informed decisions rather than emotional knee-jerk reactions.

With a long-term focus on investing, Schloss distanced himself from daily market fluctuations and emotional roller coasters. This perspective allowed him to make informed decisions based on the fundamentals, rather than succumbing to short-term fears.

Walter Schloss’ impact goes far beyond his incredible individual returns. His legacy is rooted in a commitment to lasting success and disciplined value investing. The principles he espoused, which emphasize a long-term, disciplined approach to value investing, remain relevant and provide valuable lessons for investors of all experience levels. Whether you are an experienced investor or a beginner, a deep dive into Schloss’s approach can provide valuable guidance.