Walter Schlosser's Value Investing Principles

Aug 2, 2024

Replicating Walter Schlosser's Investment Technique

Introduction

  • Webinar titled "Replicating Walter Schlosser's Investment Technique"
  • Walter Schlosser:
    • A notable value investor trained by Benjamin Graham.
    • Managed a small amount of money with limited staff (only his son).
    • Focused on cheap stock patterns without in-depth analysis.
    • Remarkable track record: 15.3% annual return over 45 years.

Background of Walter Schlosser

  • Born in 1916, started as a Wall Street runner at 18.
  • Influenced by Benjamin Graham's book, "Security Analysis".
  • Worked for Graham until his retirement and then established his own partnership in 1955.
  • Achieved exceptional results, gaining recognition from Warren Buffett in the 1980s.

Investment Philosophy

  • Focused on:
    • Buying value stocks.
    • Diversification (60-100 securities in the portfolio).
    • Patience with holdings (average holding period of 4 years).
  • Preferred Book Value over earnings:
    • Believed asset values fluctuate more slowly than earnings.
    • Focused on low price-to-book ratios (preferably below 1).

Key Investment Strategies

  • Buying Guidelines:
    • Buy at half to two-thirds of book value.
    • Look for companies with a long history (15-20 years).
    • Maintain a diversified basket of cheap stocks to manage risk.
  • Average In/Out:
    • Averaged into positions (initial position < full intended investment).
    • Sold gradually (averaging out).

16 Factors Needed to Make Money in the Stock Market

  1. Price is the most important factor in relation to value.
  2. Establish the company's value (a stock represents a part of a business).
  3. Use Book Value as a starting point; avoid high debt-to-equity ratios.
  4. Have patience; stocks don't go up immediately.
  5. Avoid buying on tips for quick moves; let professionals handle it.
  6. Be a loner if necessary; ensure your judgment is correct.
  7. Have the courage of your convictions after making decisions.
  8. Follow an investment philosophy consistently.
  9. Don’t be in a hurry to sell; reassess company value before selling.
  10. Buy near historical lows; assess vulnerability in stock prices.
  11. Buy assets at a discount rather than focusing on earnings.
  12. Listen to respected suggestions, but make your own judgments.
  13. Don’t let emotions (fear/greed) affect investment decisions.
  14. Remember the importance of compounding returns.
  15. Be cautious of bonds and leverage due to inflation impacts.

Investment Process Using Stock Screener

  • Filtering stocks based on Schlosser's criteria:
    • Exclude financials and REITs.
    • Market cap above $50 million.
    • Debt-to-equity ratio below 0.4.
    • Price-to-book ratio under 1.2.
    • Positive net margin (greater than 0).
    • Historical valuation near three-year lows (max 35% above).

Examples of Potential Investments

  • Eastern Company
    • Market cap of $100 million, trading at 1.2 times book value.
    • Positive earnings history despite declining sales.
  • Richardson Electronics
    • High cash reserves and zero long-term debt.
    • Trading at a discount to book value.

Conclusion

  • Emphasizes the value of slow, steady investing in undervalued companies.
  • Encourages a disciplined approach and adherence to personal investment philosophy.
  • Next webinar will cover stock picking strategies similar to Peter Lynch.