By Laurence Arnold - Feb 21, 2012 8:22 AM GMT+0700
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 fours 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.
To contact the reporter on this story: Laurence Arnold in Washington at larnold4@bloomberg.net
To contact the editor responsible for this story: Charles W. Stevens at cstevens@bloomberg.net
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