Tuesday, April 22, 2014

Walter Schloss 16 Steps To Make Money On Wall Street

(All of the following information was received during a Gurufocus.com webinar "Replicating the Investing Technique of Walter Schloss)

Walter Schloss was a very successful investor who was a student of the investing legend and "father of value investors" Benjamin Graham. Walter Schloss advocated to buy for value, diversify adequatley (extreme diversification is not needed) and to be patient. Walter Schloss rarely talked to management as he thought they pull a curtain over investors and did not like Phillip Fisher's "Scuttlebutt" method which is partially employed by Warren Buffett.

Walter Schloss advocated for looking at assets (book value) rather than focusing on the income statement. His reasoning behind this is that asset value fluctuate more slowly than you see in the income statement. Earnings are very difficult to predict and most analysts are often off on their earnings predictions. Schloss bought at low price/book ratios. When he did look at earnings he liked low prices to normalized earnings which are earnings that are averaged out over a number of years.

Like most other value investors Schloss like stocks with long histories and track records (15-20 years). A adeqately diversified, cheap basket of stocks was his strategy for risk reduction. He often owned 60-100 stocks at one time, had a maximum concentration fo 10% of his portfolio towards one stock, and his average holding period for one stock was about 4 years. His buying guidlines were that he typically bought stocks tha were around 1/2-2/3 of book value. During this period intangible assets weren't as large on the balance sheet as they are today. Intangible assets and Goodwill sometimes are worth deducting from the balance sheet, however there are circumstances such as Coca-Cola where they are worth more than their market cap due to their extremely strong brand. Schloss would pay up to book value or slightly over, but would never pay 2x book value. He especially looked for "unloved" areas of the market, or Inudstries that are lagginf in p/e when compared to the rest of the market. He would also look for individual companies that had lost a lot of their value, trading near their 3 year low Schloss never bought financial companies because he thought that their balance sheets were difficult to read and prefered simpler balance sheets and financial statements.
When Schloss would buy stocks he never invested the full amount immediatly but averaged in his investment amount. For example if he wanted to dedicate $10,000 to one stock, he would buy $5,000 worth and then over time average the rest of the amount in.

Below are Walter Schloss' 16 Steps to making money on the stock market

o   1. Price is the most important factor to use in relation to value
o   2. Try to establish the value of the company
§  Remember that a share of stock represents a part of the business and is not just a piece of paper
o   3. Use book value as a starting point to try to and establish the value of the enterprise
§  Be sure that debt does not equal 100% of the equity
§  Capital and surplus for the common stock
o   4. Have patience, stocks don’t go up immediately
o   5. Don’t buy on tips or for a quick move
§  Let professionals do that, if they can
§  Don’t sell on bad news
o   6. Don’t be afraid to be a loner but be sure that you are correct in your judgment
§  Can’t be 100% but try to look for weakness in your thinking
§  Buy on a scale and sell on a scale up
o   7. Have the courage of your convictions once you have made a decision
o   8. Have a philosophy of investment and try to follow it
§  Above way is successful
o   9. Don’t be in too much of a hurry to sell
§  Of the stock reaches a price that you think is a fair one, then you can sell but often a stock because a stock goes up 50%, people say sell it and button up your profit
§  Before selling it try to reevaluate the company again and see where the stock sells in relation to its book value
§  Be aware of the high level of the stock market
·         Are yields low and p/e ratios high/ if the market historically high
·         Are people optimistic?
o   10.When buying a stock
§  Helpful to buy near the low of the past few years
·         Stock may go as high as 125 and then decline to 60 and you think it is attractive
·         3 years before the stock sold at 20 which shows there is some vulnerability to it
o   11. Try to buy assets at a discount than to buy earnings
§  Earnings change dramatically in a short time
§  Usually assets change slowly
§  Have to know more about the company in order to buy earnings
o   12. Listen to suggestions from people your respect
§  Doesn’t mean you have to accepts them
§  Remember it’s your money and generally it is harder to keep money than to make it
·         Once you lose a lot of money it is hard to make it back
o   13. Try not to let your emotions affect your judgment
§  Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks
o   14. Remember the work compounding
§  For example if you make 12% a year and reinvest the money back, you will double your money in 6 years, taxes excluded
§  Remember the rule of 72
o   15. Prefer stocks over bonds
§  Bonds will limit your gains and inflation will reduce your purchasing power
16. Be careful of leverage. It can go against you


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