Lesson 2 of 7
Schloss: cheap, many and patient
Walter Schloss bought statistically cheap stocks from the numbers alone and held over a hundred at once. Here is why that asks so little of forecasts.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Walter Schloss bought stocks selling well below their value to a private owner, working from published manuals and annual reports.
- He held many positions at once, often over a hundred, rather than concentrating in his best few ideas.
- Owning many small positions spreads company-specific risk, though not the risk that cheap stocks share as a group.
Buffett described Schloss's method in "The Superinvestors of Graham-and-Doddsville": buy stocks that are cheap against the numbers in their own filings, and hold many of them at once. Neither part needs a forecast.
What one complete loss costs, at two portfolio widths
- 50 positions at 2% each2 points
- 10 positions at 10% each10 points
Cheap against what a private owner would pay
Buffett's essay describes a man with no inside connections who worked from the manuals and the annual reports, and little else. Schloss bought stocks priced well below what the business was worth to a private owner, in the tradition Graham and Dodd set out (Schloss himself worked at Graham-Newman). He was not forecasting where a business was going. He was measuring where its price sat against what a buyer of the whole business would pay for it.
No calls to management
Working from the manuals and the annual reports, and little else, means the filed record is all the method uses. That removes a whole category of judgment, whether an executive's story about the future is worth believing, from the decision. It also scales. A filed balance sheet can be read for hundreds of companies in the time a handful of meetings takes.
Many positions, not a few convictions
Schloss applied the cheapness test widely and held what passed, often more than a hundred names. No single position was allowed to matter enough to sink the portfolio if the arithmetic that picked it turned out wrong.
What the method asks of you
Cheap can stay cheap for a long time, and a filter run this wide will hold names that go nowhere for years alongside the ones that work. The discipline is patience across many positions, not conviction in a few. Schloss's bet was that a wide list bought well below value would work out on average. Buffett's essay reports his record; it is one investor's history, not a rule. Width spreads company risk, not the shared risk of owning only cheap stocks, which tend to fall together.
Check yourself
In Schloss's method, a stock counted as cheap when its price was low against what?
- Next year's forecast earnings
- What the business was worth to a private owner
- Its price a year earlier
Show the answer
Answer: B.
Schloss compared price with what a private buyer would pay for the whole business, in the Graham and Dodd tradition.Why did Schloss hold so many positions at once?
- To match an index fund's weights
- So that one wrong pick could not do much damage to the portfolio
- Because his fund had to hold a minimum number of names by law
Show the answer
Answer: B.
Buffett's account describes a wide, diversified list. At 2 percent a position, one complete loss costs 2 points instead of 10.In Buffett's account, what did Schloss work from?
- Conversations with company management
- Published manuals and annual reports
- Analyst forecasts of future earnings
Show the answer
Answer: B.
Buffett's essay describes a man with no inside connections who worked from the manuals and the annual reports, and little else.Sources
- Buffett, "The Superinvestors of Graham-and-Doddsville," Hermes, Columbia Business School, 1984, describing Walter Schloss and Tweedy, Browne.
- Graham, The Intelligent Investor, revised edition 1973, chapter 15: the enterprising investor, buying below what a private owner would pay.
What this leaves out
- The 50-position and 10-position portfolios are illustrative, not any fund's real holdings.
- Schloss's own multi-decade record cannot be retro-tested here: this product's fundamentals archive runs ten years.
- Cheap by these numbers says nothing about how long a stock stays cheap.
- Nothing here is advice about any security.