I just read an old Forbes piece on Walter Schloss: Making money out of junk. As many regular readers know, Schloss is one of my all time favorite investors. Read more about Schloss on my resource page and also check the Walter Schloss category. He made 21% per year for 47 years, investing in a simple, methodical, low stress manner working 9-4:30 with no other employees or assistants other than his son Edwin.
Here are some key takeaways from the interesting Forbes piece:
- Focus on cheap stocks. This means not worrying about earnings at the moment, only asset protection.
- You have three things in your favor here:
- Earnings turn around and the stock appreciates significantly
- Someone buys control of the company (buyout)
- The company begins buying its own stock
One thing I’ve really learned with Schloss is that it’s difficult to buy stocks that have problems. I think that’s a reason why many value investors underperform. They end up buying good businesses, but at prices that will only yield mediocre future returns because it’s hard to buy stocks with problems, or stocks with seemingly no way out. That’s the very reason why the latter type of stocks get mispriced. It’s hard for everyone (including value investors) to own them. This is an important thing to remember. Think differently. Sir John Templeton said you have to do things differently from the crowd if you want a better than average result.
Make a List of Investors Who Have Actually Achieved Significant Results
I have a relatively short list of investors that I’ve extensively studied that have produced exceptional long term results. I highly recommend doing this as it will provide insight into what actually creates significant outperformance. (It’s not always what you might think). There are lots of well known investors, but when you look at their track records, many of them have produced just average results (maybe 100 or 200 basis points better than the S&P). I’m not interested in modest outperformance. I’m certainly not interested in average performance (although in the investment business, the S&P 500-which I consider “the average”-is actually quite good). Nonetheless, I want to do much better.
So make a list of guys who have made 30% a year, or 50% a year in Greenblatt’s case. Study Schloss who made 21% per year for 47 years. Study Graham and Buffett. Study Pabrai. You might notice the same key things I noticed…
How Did The Best Investors Achieve Their Results?
Two things that I’ve noticed over and over again when studying the investors who have outperformed (Pabrai, Buffett, Schloss, Graham, Greenblatt, etc…):
- They were very concentrated (they did extensive research and bought big positions), or
- They were diversified, but they bought stocks that no one else wanted (they were far less concerned about understanding the intricacies of the business, and more concerned with valuation and numbers)
Easier said than done (even for most value investors). Concentration is tough, and buying junk is tough. That’s why it’s easier (and less profitable) to own a diversified basket of good companies. It’s easier on you emotionally, and it’s easier to pitch to clients. Over time, you’ll do just fine, but your results won’t be much different than what the overall S&P 500 does.