SINGAPORE (Apr 23): Most of us have probably never heard of the late Walter Schloss. His name is synonymous with conservative, contrarian and successful investing. Warren Buffett, in his article titled “The Superinvestors of Graham-and-Doddsville”, has praised Schloss as a “superinvestor”. Through­out his career, he maintained a low profile, working alone from a sub-leased closet size space at Tweedy, Brown & Co.

He never attended college and started his career as a runner on Wall Street at the age of 18. Schloss took up a class conducted by Benjamin Graham and, some years later, became his disciple. In 1955, Schloss founded Walter & Edwin Schloss Associates, an investment partnership that has consistently delivered 15.3% returns after fees against the Standard & Poor’s 500’s 10% for 4½ decades.

In this article, we will stand on the shoulders of this giant to see what he saw. We will discuss his philosophy and how Aggregate Asset Management has adopted some of his valuable principles. We will also dissect and backtest his strategy in the Asian markets.

I believe there are two key elements that form the cornerstone of his philosophy. These are the building blocks upon which the investment structure rests upon. The first principle is patience. Patience is a virtue, so they say. Walter Schloss strongly believed in the importance of patience. He once said, “When you buy a depressed company, it’s not going to go up right after you buy it, believe me. It’ll go down. Therefore, you have to wait a while for that thing to go around.”

Unfortunately, most investors lack patience. A Global Investor Study conducted by Schroders Investment Management suggests that many investors lack patience. The tendency towards impatience was shown to be more prominent among young investors. According to the study, investors aged between 18 and 35 expect to get returns in excess of 10.2%, but are willing to hold their stocks for only a short 1½ years.

Mark McCarron, chief investment officer at Wescott Financial advisory group, calculated that, on average, impatience cost the investor 0.79% of returns a year. Compounded over a long period of time, the lost returns are a significant amount.

The second element is awareness. Schloss knew his strengths, weaknesses

and limitations. “I always held 50 to 100 stocks at any given time because it would have been very stressful if one particular stock had turned against me.

“Psychologically, I am just built differently than Warren [Buffett]. I see that there are many people trying to be like Warren, but they should take note that he is not only a good analyst; he is also a good judge of people and businesses. I know my limitations, so I’d rather invest in the way I am most comfortable with.”

This awareness led him to diversify his portfolio. Diver­sification helped him avoid the emotional pitfalls that most investors face. It also helped reduce unsystematic risk in the portfolio.

We will now discuss his strategies, which rest on the bedrock of his core philosophy. Schloss’ main strategy focuses on using real assets because they provide both a margin of safety and some level of predictability. Presumably, the market feels that the company’s prospects are unattractive. Should his investment turn against him, the liquidation value of the company’s assets presents a margin of safety: a classic case of “heads I win; tails I don’t lose much”.

He also recommends that the company’s long-term debt should not be more than the company’s equity. Contrary to momentum strategy, which buys stocks when they are high, Schloss believes that buying stocks that are trading below or near their historic lows is the way to go.

At Aggregate Asset Management, we constructed a similar portfolio in Asia with more than 50 stocks, tested over 20 years. The portfolio produced an annualised return of 24.14% with a Sharpe ratio of 0.71. We have also followed his methods closely by buying assets that are trading at a discount to their value.

Schloss understood the importance of being honest in a financial world that is filled with dishonesty and corruption. “I think, in the first place, that we are honest people. We have tried to prevent our investors from losing money, and we have not tried to make money at their expense.” Honesty is still the best policy.

It is my wish that the reader would have drawn salutary lessons from one of the investment greats.


Oh Aaron is an investment analyst at Singa­pore-based value asset management firm Aggregate Asset Management. For enquiries, please contact us at [email protected]