Walter Schloss - old-school value investor

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At 91, the man Warren Buffett famously dubbed a "superinvestor" is still picking unloved stocks.
http://www.forbes.com/forbes/2008/0211/048.html

Walter
Schloss has lived through 17 recessions, starting with one when Woodrow
Wilson was President. This old-school value investor has made money
through many of them. What's ahead for the economy? He doesn't worry
about it.
A onetime employee of the grand panjandrum of value,
Benjamin Graham, and a man his pal Warren Buffett calls a
"superinvestor," Schloss at 91 would rather talk about individual
bargains he has spotted. Like the struggling car-wheel maker or the
moneylosing furniture supplier.
Bushy-eyebrowed and avuncular,
Schloss has a laid-back approach that fast-money traders couldn't
comprehend. He has never owned a computer and gets his prices from the
morning newspaper. A lot of his financial data come from company
reports delivered to him by mail, or from hand-me-down copies of Value
Line, the stock information service.
He loves the game. 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. In a day of computer models that purport to quantify
that hideous and mysterious force called risk, listening to Schloss
talk of his simple, homespun investing methods is a tonic.
"Well, look at that," he says brightly, while scanning the paper. "A list of worst- performing stocks."
During
his time as a solo manager after leaving Graham's shop, he was a de
facto hedge fund. He charged no management fee but took 25% of profits.
He ran his business with no research assistants, not even a secretary.
He and his son, Edwin (who joined him in 1973), worked in a single
room, poring over Value Line charts and tables.
In a famous 1984
speech titled the "The Superinvestor of Graham-and-Doddsville," Buffett
said Schloss was a flesh-and-blood refutation of the Efficient Market
Theory. This hypothesis holds that no stock bargains exist, or at least
ones mere mortals can pick out consistently. Asked whether he considers
himself a superinvestor, Schloss demurs: "Well, I don't like to lose
money."
He has a Depression-era thriftiness that benefited
clients well. His wife, Anna, jokes that he trails her around their
home turning off lights to save money. If prodded, he'll detail for
visitors his technique for removing uncanceled stamps from envelopes.
Those beloved Value Line sheets are from his son, 58, who has a
subscription. "Why should I pay?" Schloss says.
Featured in Adam Smith's classic book  Supermoney
(1972), Schloss amazed the author by touting "cigar butt" stocks like
Jeddo Highland Coal and New York Trap Rock. Schloss, as quoted by
Smith, was the soul of self-effacement, saying, "I'm not very bright."
He didn't go to college and started out as a Wall Street runner in the
1930s. Today he sits in his Manhattan apartment minding his own capital
and enjoying simple pleasures. "Look at that hawk!" he erupts at the
sight of one winging over Central Park.
One company he's keen on now shows the Schloss method. That's the wheelmaker. Superior Industries International
    (nyse:
      SUP -

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    ) gets three-quarters of sales from ailing General Motors
    (nyse:
      GM -

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    )
and Ford. Earnings have been falling for five years. Schloss picks up a
Value Line booklet from his living room table and runs his index finger
across a line of numbers, spitting out the ones he likes: stock trading
at 80% of book value, a 3% dividend yield, no debt. "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 screens for companies ideally trading at discounts to
book value, with no or low debt, and managements that own enough
company stock to make them want to do the right thing by shareholders.
If he likes what he sees, he buys a little and calls the company for
financial statements and proxies. He reads these documents, paying
special attention to footnotes. One question he tries to answer from
the numbers: Is management honest (meaning not overly greedy)? That
matters to him more than smarts. The folks running Hollinger International
    (other-otc:
      HLGAF.PK -

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    ) were smart but greedy--not good for investors.
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. He
doesn't think about the economy. 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.
Schloss owns a prized 1934 edition of Graham's  Security Analysis
he still thumbs through. Its binding is held together by three strips
of Scotch tape. In the small room he invests from now, across the hall
from his apartment, one wall contains a half-dozen gag pictures of
Buffett (the Omaha sage with buxom cheerleaders or with a towering
stack of Berkshire Hathaway
    (nyse:
      BRKA -

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    ) tax returns). Each has a joke scribbled at the bottom and a salutation using Schloss' nickname from the old days, Big Walt.
Schloss
first met that more famous value hunter at the annual meeting of
wholesaler Marshall Wells. The future billionaire was drawn there for
the reason Schloss had come: The stock was trading at a discount to net
working capital (cash, inventory and receivables minus current
liabilities). That number was a favorite measure of value at
Graham-Newman, the investment firm Schloss joined after serving in
World War II. Buffett came to the firm after the Marshall Wells
meeting, sharing an office with Schloss at New York City's Chanin
Building on East 42nd Street.
Schloss left the Graham firm in
1955 and with $100,000 from 19 investors began buying "working capital
stocks" on his own, like mattressmaker Burton-Dixie and liquor
wholesaler Schenley Industries. Success drew in investors, eventually
rising to 92. But Schloss never marketed his fund or opened a second
one, and he kept money he had to invest to a manageable size by handing
his investors all realized gains at year-end, unless they told him to
reinvest.
In 1960 the S&P was up half a percentage point,
with dividends. Schloss returned 7% after fees. One winner: Fownes
Brothers & Co., a glovemaker picked up for $2, nicely below working
capital per share, and sold at $15. In the 1980s and 1990s he also saw
big winners. By then, since inventory and receivables had become less
important, he had shifted to stocks trading at below book value. But
the tempo of trading had picked up. He often found himself buying while
stocks still had a long way to fall and selling too early. He bought Lehman Brothers
    (nyse:
      LEH -

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    ) below book shortly after it went public in 1994 and made 75% on it in a few months. Then Lehman went on to triple in price.
Still, many of his calls were spot-on. He shorted Yahoo
    (nasdaq:
      YHOO -

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and Amazon before the markets tanked in 2000, and cleaned up. After
that, unable to find many cheap stocks, he and Edwin liquidated,
handing back investors $130 million. The Schlosses went out with flair:
up 28% and 12% in 2000 and 2001 versus the S&P's --9% and --12%.
The
S&P now is off 15% from its peak, yet Schloss says he still doesn't
see many bargains. He's 30% in cash. A recession, if it comes, may not
change much. "There're too many people with money running around who
have read Graham," he says.
Nevertheless, he has found a smattering of cheap stocks he thinks are likely to rise at some point. High on his watch list  (see table)
is CNA Financial, trading at 10% less than book; its shares have fallen
18% in a year. The insurer has little debt, and 89% of the voting stock
is owned by Loews Corp.
    (nyse:
      LTR -

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    ),
controlled by the billionaire Tisch family. He says buy if it gets
cheaper. "I can't say people will get rich on it, but I would rather be
safe than sorry," he says. "If it falls more, I won't worry about it.
Let the Tisches worry about it."
Schloss flips through Value Line
again and stops at page 885: Bassett Furniture, battered by a lousy
housing market. The chair- and tablemaker is trading at a 40% discount
to book and sports an 80-cent dividend, a fat 7% yield. Schloss mutters
something about how book value hasn't risen for years and how the
dividend may be under threat.
His call: Consider buying when the company cuts its dividend. Then Bassett will be even cheaper and it eventually will recover.If
only he had waited a bit to buy wheelmaker Superior, too. It's been two
years since he bought in, and the stock is down a third. But the
superinvestor, who has seen countless such drops, is philosophical and
confident this one is worth book at least. "How much can you lose?" he
asks. 

Edited by valueman - 03/Mar/2008 at 2:58pm