An equally important strategy: Stay within your circle of competence.

The other term in their strategy is equally important.  This is what the Schlosses shared.


"We don't buy derivatives, indexes or commodities.

We don't short stocks.  We have in the past, and have made some money, but the experience was uncomfortable for us. 

We don't try to time the market, though we do let the market tell us which stocks are cheap.

We did invest in bankrupt bonds at one time, and if the situation presented itself to us, we might again.  But that field has become crowded over the years, and like most value investors, we don't want too much company.

We stay clear of ordinary fixed income investments.  The potential returns are limited, and they can be negative if the interest rates rise.

We buy stocks.  We invest in cheap stocks.

If we find a cheap stock, we may start to buy even before we have completed my research.  We have at least a rudimentary knowledge of many companies and we can consult Value Line or the S&P stock guide for quick check into the company's financial position. 

We believe the only way really to know a security is to own it, so we sometimes stake out our initial postion and then send for the financial statements. 

The market today moves so fast that we are almost forced to act quickly."

When to Buy, When to Sell: Value Investors Buy too Soon and Sell too Soon

The notion that an investor can buy a stock that has reached the bottom of its fall is a fantasy.  No one can accurately predict tops, bottoms, or anything in between. 

More often than not, value investors will start to buy a stock on the way down.  The disappointments or reduced expectations that have made it cheap are not going away anytime soon, and here will still be owners of the stock who haven't yet given up when the value investor makes an initial puchase.  If it is toward the end of the year, then selling to take advantage of tax losses can drive the price even more.  Because they are aware that they are - to use the industry cliche - catching a falling knife, value investors are likely to try to scale into a position, buying it in stages. 

• For some, such as Warren Buffett, that may not be so easy.  Once the word is out that Berkshire Hathaway is a buyer, the stock shoots up in price. 
• Graham himself, Walter Schloss recounts, confronted this problem.  He divulged a name to a fellow investor over lunch; by the time he was back in the office, the price had risen so much that he could not buy more and still maintain his value discipline. 
• This is one of the reasons why the Schlosses limit their conversations.

Still, when asked to name the mistake he makes most frequently, Edwin Schloss confesses to

• buying too much of the stock on the initial purchase and
• not leaving himself enough room to buy more when the price goes down. 

If it doesn't drop after his first purchase, then he has made the right decision. 

• But the chances are against him. 
• He often does get the opportunity to average down - that is, to buy additional shares at a lower price. 
• The Schlosses have been in the business too long to think that the stock will now oblige them and only rise in price. 

Investing is a humbling profession, but when decades of positive results confirm the wisdom of the strategy, humility is tempered by confidence.

Value investors buy too soon and sell too soon, and the Schlosses are no exceptions. 

• The cheap stocks generally get cheaper. 
• When they recover and start to improve, they reach a point at which they are no longer bargains. 
• The Schlosses start to sell them to investors who are delighted that the prices have gone up. 
• In many instances, they will continue to rise, sometimes dramatically, while the value investor is searching for new bargains. 
• The Schlosses bought the invetment bank Lehman Brothers a few years ago aat $15 a share, below book value.  When it reached $35, they sold out.  A few years later it had passed $130.  Obviously that last $100 did not end up in the pockets of value investors. 
• Over the years, they have had similar experiences with Longines-Wittnauer, Clark Oil, and other stocks that moved from undervalued through fair valued to overvalued without blinking. 
• The money left on the table, to cite yet another investment cliche, makes for a good night's sleep.

The decision to sell a stock that has not recovered requires more judgement then does selling a winner.  At some point, everyone throws in the towel. 

• For value investors like the Schlosses, the trigger will generally be a deterioration in the assets or the earnings power beyond what they had initially anticipated. 
• The stock may still be cheap, but the prospects of recovery have now started to fade. 
• Even the most tolerant investor's patience can ultimately be exhausted. 
• There are always other places to invest the money. 
• Also, a realized loss has at least some tax benefits for the partners, whereas the depressed stock is just a reminder of a mistake.

Footnote: 
Over the entire 45 year period from 1956 through 2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year. 

For the nine and a half years that Walter Schloss worked for Ben Graham and for some years after he left to run his own partnership, he was able to find stocks selling for less than two thirds of working capital. But sometime after 1960, as the Depressin became a distant memory, those opportunites generally disappeared. Today, companies that meet that requirement are either so burdened by liabilities or are losing so much money that their future is in jeopardy. Instead of a margin of safety, there is an aura of doubt.