What James Bond and a Superinvestor have in common

What James Bond and a Superinvestor have in common (originally posted in May 2008)

There was an Archie comic that one had read many years ago in which he was stuck in a washroom and there was a raging fire outside the door. Archie kept thinking to himself, “What would James Bond do? What would James Bond do?” That’s when he got a brainwave - use a can of shaving foam to burst the doorknob open.

Putting oneself in the shoes of successful people to see how they would have managed a situation is very interesting. One such person that we look up to for our inspiration is Walter Schloss.

In a famous 1984 speech titled the "The Superinvestor of Graham-and-Doddsville," Buffett had proclaimed Schloss, 91, as one of the Superinvestors.

And why not – Schloss, who never went to college and in fact started out as a Wall Street runner in the 1930s, has lived through 17 recessions and innumerable stock market ups and downs.

Started in late 1955, Walter J. Schloss Associates during its 47-year performance history generated in excess of 15% gross annualized returns for its partners, 50% more than the S&P 500. An investor with $100,000 in the S&P 500 from January 1, 1956, to December 31, 2002, would have made $9.3 million. That same $100,000 invested in the Schloss partnership would have generated over $78 million.

A onetime employee of arguably THE creator of the concept of value-investing, Benjamin Graham, Schloss has a laid-back approach that today’s traders couldn't even begin to comprehend. He has never owned a computer and gets his prices from the morning newspaper.

A lot of his financial data comes from company reports delivered to him by mail, or from Value Line, the stock information service. How refreshing for today’s day and age where computer programs indicate when to buy or sell based on ‘market technicals’!

What are his investing methods? For one, he loves companies quoting below book value. In his view, assets are more stable than earnings. The market ofcourse thinks differently and focuses on short term prospects. And this throws up opportunities. In Schloss’s long experience, a company whose shares can be bought at a significant discount to their book value has a great chance of either becoming profitable again, or being taken over by other companies. Both scenarios hold great prospect with regard to the stock price. Ofcourse this approach tends to take time and his usual holding period is 4 years. And Schloss has the patience to hold on. “Something will happen”, he likes to say.

Walter and his son Edwin are minimalists. Their office has one room (Schloss has that Depression-era thriftiness and even his wife once commented that he trails her around their home turning off lights to save money), they don’t speak to analysts or use the internet (even though surely this is an extreme in today’s times!). They do not attempt to get inside the business to know the details of the operation better than the management itself. They don’t claim or want that expertise, preferring to be generalists with a broader vision. What they do trust is their own judgment, based on discipline which has been perfected over time. And it always starts by reading the companies Balance Sheet right down to the footnotes.

Schloss once said, “I’m not very good at judging people. So I found that it was much better to look at the figures rather than people. I didn’t go to many meetings unless they were relatively nearby. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They’d listen to you. I think it’s really easier to use numbers when you’re small."

He adds, “I would suggest that investors be very careful what they buy. I don't like debt, so buy a company that has not much debt. What I usually did was get companies that were having troubles, and the stock market doesn't like trouble. Then you have to have the courage and convictions and buy enough of the stock that would make a difference to you.”

We feel the above advices are invaluable while investing in the stock market. Here are some pointers:

Time in the market: Most investors want quick returns and long term investment for them means a couple of months or at most a quarter. With this approach, they tend to miss the woods for the trees. A short term downfall in profit of a company could actually be an opportunity to buy.

Book Value: Application of their strategy of investing in stocks available for under or at book value is very useful if used intelligently. For instance today in the banking sector, which we generally dislike because of the high leverage, there are a few options which are beginning to look interesting.

Use of debt by companies: Investors of a similar vintage as Schloss had an aversion to debt because of their experience of The Great Depression. But these are relevant concerns for any period. An individual going through a tough time financially can live on a small income as long as there are no fixed interest costs or debt repayment liabilities. But what if they had a mortgage payment to make every month? Then they are looking at bankruptcy or a debt spiral. Similarly, while choosing companies to invest in, especially when the world’s economic prospects are not exactly crystal clear, we feel it is better to look for ones with little or no debt. This is one reason of our attraction to the IT and foreign Pharma companies which have generally suffered due to concerns on the US economy and local pricing concerns respectively.

Ignore the Noise: There are too many people who profess to be experts in sectors or the stock markets. We have written about them earlier. Its one of the ironies that people who are closest to the sector or companies often make the biggest mistakes regarding them. Like Schloss, we also prefer to look at companies based on hard figures and not on the judgments of various experts.

In short, there are obvious great learnings in studying how someone like Walter Schloss bought and managed his investments. So next time we don’t have answers on how to react to a market situation, don’t be surprised if we mutter to ourselves, “What would Schloss do? What would Buffett do?”