I came across a link today at Above Average Odds (a great value investing blog by the way) that I found interesting. It was a letter (actually two separate letters) that Warren Buffett wrote to his investment group regarding his friend Walter Schloss. I am a huge follower of Walter Schloss (and needless to say, Buffett as well).
Schloss’ investment style is one that I try to emulate in my own investing, and it’s one that I feel most individual investors would benefit from. It’s methodical, logical, simple, and replicable. And it’s successful because it’s based on buying cheap stocks, holding them patiently, selling them as they approach fair value, and repeating the process. The Schloss strategy relies on hitting “singles” over and over and allowing those gains to compound over time while enjoying the margin of safety that comes from owning numerous undervalued stocks. It’s a process we try to emulate here at BHI, and it’s one I try to replicate in my clients’ and my personal portfolios.
So I’m always interested to read new things on Walter Schloss. Buffett basically wrote the letter to his investment friends, describing how good Schloss’ results have been. The first letter was written in 1973, after Schloss had been managing his partnership for 18 years. The second letter was written in 1995, after an incredible 40 year run where Schloss produced 21% annual gross returns (15.7% to his investors after his 25% performance fee).
The letters are under one page. Check them out here: Buffett Letters on Walter Schloss
I like this quote from Buffett:
“Walter continues to outperform managers who work in temples filled with paintings, staff and computers. And he accomplishes this feat by rummaging among the cigar butts on the floor of capitalism. It’s quote a 38-year track record; a tribute to Ben as a teacher, Walter as a student, and to the advantage of a free puff.”
Buffett is commenting on Schloss’ strategy of using nothing but a Value Line in a tiny office, looking day after day for cheap stocks, what Buffett calls “cigar butts with one last puff left”. Buying undervalued stocks works in a big way. Check out the numbers from Schloss (focus on the last two columns which represent Schloss’ gross return and the Dow’s return; the 3rd column from the right represents Schloss’ investors net return after fees-Schloss took 25% of the profits subject to a high water mark so he only made money when his investors made money):