With assistance from Michael D. Robbins in New York.
BY LAURENCE ARNOLD | BLOOMBERG NEWS
WASHINGTON —Walter Schloss, the money manager who earned accolades from Warren Buffett for the steady returns he achieved by applying lessons learned directly from the father of value investing, Benjamin Graham, died Sunday of leukemia at his home in Manhattan, his son, Edwin, said. He was 95.
From 1955 to 2002, by Schloss’s estimate, his investments returned 16 percent annually on average after fees, compared with 10 percent for the Standard & Poor’s 500 Index. His firm, Walter J. Schloss Associates, became a partnership, Walter & Edwin Schloss Associates, when his son joined him in 1973.
“He was a true fundamentalist,” Edwin Schloss, now retired, said Monday. “He did his fundamental analysis and was very concerned that he was buying something at a discount. Margin of safety was always essential.”
Buffett, another Graham disciple, called Schloss a “superinvestor” in a 1984 speech at Columbia Business School. He saluted Schloss as “one of the good guys of Wall Street” in his 2006 letter to shareholders of his Berkshire Hathaway.
“Following a strategy that involved no real risk — defined as permanent loss of capital — Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500,” wrote Buffett, whose stewardship of Berkshire Hathaway has made him one of the world’s richest men and most emulated investors. “It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success.”
To Buffett, Schloss’s record disproved the theory of an efficient market — one that, at any given moment, assigns a reasonably accurate price to a stock. If companies weren’t routinely overvalued and undervalued, Buffett reasoned, long-term results like Schloss’s couldn’t be achieved except through inside information.
Schloss began working on Wall Street in 1935 as a securities-delivery “runner” at Carl M. Loeb & Co. He said Armand Erpf, the partner in charge of the statistical department, recommended that he read “Security Analysis” by Graham and David Dodd, published a year earlier. The book became a classic in the field. The firm then paid for Schloss to take two courses with Graham sponsored by the New York Stock Exchange Institute.
The Schloss theory of investing, passed from father to son, involved minimal contact with analysts and company management and maximum scrutiny of financial statements, with particular attention to footnotes.
“The Schlosses would rather trust their own analysis and their longstanding commitment to buying cheap stocks,” Bruce Greenwald, Judd Kahn, Paul Sonkin and Michael van Biema wrote in “Value Investing: From Graham to Buffett and Beyond,” their 2001 book.
“This approach,” the authors wrote, “leads them to focus almost exclusively on the published financial statements that public firms must produce each quarter. They start by looking at the balance sheet. Can they buy the company for less than the value of the assets, net of all debt? If so, the stock is a candidate for purchase.”
An example was copper company Asarco. The Schlosses bought shares in 1999 as the stock bottomed out around $13. In November of that year, Grupo Mexico bought Asarco for $2.25 billion in cash and assumed debt, paying almost $30 per share.
“Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down,” Schloss said at a 1998 conference sponsored by Grant’s Interest Rate Observer. “And that’s really the history of Ben Graham.”
Edwin Schloss said he figured his father’s investing philosophy and longevity were related: “A lot of money managers today worry about quarterly comparisons in earnings. They’re up biting their fingernails until 5 in the morning. My dad never worried about quarterly comparisons. He slept well.”
Walter Jerome Schloss was born Aug. 28, 1916, in New York City, according to “Marquis Who’s Who in Finance and Business.”
He enlisted in the Army on Dec. 8, 1941, the day after the surprise Japanese attack on Pearl Harbor. Trained in code and assigned to the U.S. Signal Service Co., based at the Pentagon, he stayed in touch with Graham, who was looking for a securities analyst just as Schloss was finishing his four years of duty. Schloss joined Graham-Newman in 1946.
Schloss first met Buffett at an annual meeting of wholesaler Marshall Wells, which drew both investors because it was trading at a discount to net working capital, according to a 2008 article in Forbes magazine. When Buffett joined Graham-Newman, he and Schloss shared an office.
While Buffett became a star inside the firm, Schloss was “pigeonholed as a journeyman employee who would never rise to partnership,” Alice Schroeder, a Bloomberg News columnist, wrote in her 2009 biography, “The Snowball: Warren Buffett and the Business of Life.”
Schloss left Graham-Newman in 1955 and, with $100,000 from an initial 19 investors, began buying stocks on his own.
His wife, Louise, died in 2000. They also had a daughter, Stephanie. In 2001, Schloss married the former Ann Pearson.
With assistance from Michael D. Robbins in New York.