Thursday, 23 February 2012

Walter Schloss, ‘Superinvestor’ Who Earned Praise From Buffett, Dies at 95

By Laurence Arnold - Feb 21, 2012 9:22 AM GMT+0800
Walter Schloss, right, stands for a photo with his son Edwin. Source: Heilbrunn Center for Graham and Dodd Investing, Columbia Business School via Bloomberg
Walter Schloss, the money manager who earned accolades from Warren Buffett (BRK/A) for the steady returns he achieved by applying lessons learned directly from the father of value investing,Benjamin Graham, has died. He was 95.
He died on Feb. 19 at his home in Manhattan, according to his son, Edwin. The cause was leukemia.
From 1955 to 2002, by Schloss’s estimate, his investments returned 16 percent annually on average after fees, compared with 10 percent for the Standard & Poor’s 500 Index. (SPX) His firm, Walter J. Schloss Associates, became a partnership, Walter & Edwin Schloss Associates, when his son joined him in 1973. Schloss retired in 2002.
Buffett, a Graham disciple whose stewardship of Berkshire Hathaway Inc. has made him one of the world’s richest men and most emulated investors, called Schloss a “superinvestor” in a 1984 speech at Columbia Business School. He again saluted Schloss as “one of the good guys of Wall Street” in his 2006 letter to Berkshire Hathaway shareholders.
“Walter Schloss was a very close friend for 61 years,” Buffett said yesterday in a statement. “He had an extraordinary investment record, but even more important, he set an example for integrity in investment management. Walter never made a dime off of his investors unless they themselves made significant money. He charged no fixed fee at all and merely shared in their profits. His fiduciary sense was every bit the equal of his investment skills.”

Began as ‘Runner’

To Buffett, Schloss’s record disproved the theory of an efficient market -- one that, at any given moment, assigns a reasonably accurate price to a stock. If companies weren’t routinely overvalued and undervalued, Buffett reasoned, long- term results like Schloss’s couldn’t be achieved, except through inside information.
Schloss, who never attended college, began working on Wall Street in 1935 as a securities-delivery “runner” at Carl M. Loeb & Co. He said Armand Erpf, the partner in charge of the statistical department, recommended that he read “Security Analysis” by Graham and David Dodd, published a year earlier. The book became a classic in the field. The firm then paid for Schloss to take two courses with Graham sponsored by the New York Stock Exchange Institute.
Schloss stayed in touch with Graham while serving four years in the U.S. Army during World War II, then went to work for Graham before striking out on his own.
The Schloss theory of investing, passed from father to son, involved minimal contact with analysts and company management and maximum scrutiny of financial statements, with particular attention to footnotes.

Focus on Statements

“The Schlosses would rather trust their own analysis and their longstanding commitment to buying cheap stocks,” Bruce Greenwald, Judd Kahn, Paul Sonkin and Michael van Biema wrote in “Value Investing: From Graham to Buffett and Beyond,” their 2001 book.
“This approach,” the authors wrote, “leads them to focus almost exclusively on the published financial statements that public firms must produce each quarter. They start by looking at the balance sheet. Can they buy the company for less than the value of the assets, net of all debt? If so, the stock is a candidate for purchase.”
An example was copper company Asarco Inc. The Schlosses bought shares in 1999 as the stock bottomed out around $13. In November of that year, Grupo Mexico SA (GMEXICOB)bought Asarco for $2.25 billion in cash and assumed debt, paying almost $30 a share.

‘Guts to Buy’

“Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down,” Schloss said at a 1998 conference sponsored by Grant’s Interest Rate Observer. “And that’s really the history of Ben Graham.”
Buffett, in his 2006 letter to shareholders, said Schloss took “no real risk, defined as permanent loss of capital” and invested “in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success.”
Edwin Schloss, now retired, said yesterday in an interview that his father’s investing philosophy and longevity were probably related.
“A lot of money managers today worry about quarterly comparisons in earnings,” he said. “They’re up biting their fingernails until 5 in the morning. My dad never worried about quarterly comparisons. He slept well.”
Walter Jerome Schloss was born on Aug. 28, 1916, in New York City, the son of Jerome H. Schloss and the former Evelyn Gomprecht, according to a paid notice in the New York Times. He attended the Franklin School in Manhattan, now part of the Dwight School.

Early Lessons

Schloss learned lessons about earning and saving from his father, whose radio factory warehouse burned down before a single unit was sold, and from his mother, who lost her family inheritance in the 1929 market crash, Alice Schroeder wrote in her 2009 book, “The Snowball: Warren Buffett and the Business of Life.”
He enlisted in the Army on Dec. 8, 1941, the day after Japan’s surprise attack on Pearl Harbor, and rose to the rank of second lieutenant. He served in Iran as part of the Signal Corps, then moved to the Pentagon in Washington to complete his tours of duty.
During this period, he stayed in touch with Graham, who was looking for a securities analyst just as Schloss was finishing up his wartime service. Schloss joined Graham-Newman in 1946.
Schloss first met Buffett at an annual meeting of wholesaler Marshall Wells, which drew both investors because it was trading at a discount to net working capital, according to a 2008 article in Forbes magazine. When Buffett joined Graham- Newman, he and Schloss shared an office.
While Buffett became a star inside the firm, Schloss was “pigeonholed as a journeyman employee who would never rise to partnership,” Schroeder, a Bloomberg News columnist, wrote in her book.
Schloss left Graham-Newman in 1955 and, with $100,000 from an initial 19 investors, began buying stocks on his own.
His wife, Louise, died in 2000. They also had a daughter, Stephanie. In 2001, Schloss married the former Ann Pearson.

Walter Schloss -- What a Guy

Today brings the news that superinvestor and Buffett friend Walter Schloss is no longer with us.
I admired Walter for many reasons: his devotion to his family, his investing prowess, and his zest for life. His first wife was ill with serious depression for decades and throughout, he cared for her tirelessly. Meanwhile, he worked in a tiny closet-sized office at Tweedy Brown, and used essentially nothing but pencils, paper, and Value Line to produce some of the best investing results in history. Later his son Edwin joined him in the business, but they never deviated from the style that made him a success, which his friends referred to as mainly buying "buggy-whip manufacturers," moribund companies that were trading for less than their carcasses would be worth.
As for the zest, there is a photo in The Snowball of Walter dancing at his 90th birthday party. He was really cutting the rug, not just doing a pose for the camera, and you can tell how much fun he was having and what a lively person he was from that picture. That night he told me how much he enjoyed still being able to play tennis at his age. He had recently remarried and was fully involved in life.
The first time I ever spoke to Walter was several years earlier, in a phone interview. Warren had mentioned that Walter's political views were a "little more right wing" than Buffett's own. When we got on the phone, Walter immediately wanted let me know he just could not understand how Warren could believe the things he did about taxes. While Warren would always take his calls, Walter had found that if the subject turned to politics they tended to end quickly. So Walter figured that I was a possible vehicle to get his views through to Warren, and he made that very clear. My interview transcript ended up consisting about 75% of a message to Warren about his wrong-headedness on taxes. I must say that Warren took it well.
That was my introduction to the dynamic among the insiders in the Buffett Group. Walter was one of the earilier interviews, and as it turned out, only a prelude to a series of people who wanted to use part of their interviews to send the same message. But Walter was more outspoken than most. It seems appropriate that the news of his death would come on President's Day.
The most notable thing I remember about Walter, though, was not his politics; it was his generosity. It was he who helped me really understand what life was like working at Graham-Newman. He also contributed greatly to the portrait of Warren as a young investor. Walter gave me an abundance of information about Ben Graham, and later donated his papers to Columbia University. These are only examples, and I'm sure that many other people have stories of how open-hearted this man was. He will be very much missed.

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