In the pantheon of value investors, perched prominently among the all-time greats is Walter Schloss. Schloss never went to college, working his way up from a position as a runner that he was hired to in 1934 at the age of 18. He took two classes from value investing guru Benjamin Graham, and then ultimately worked for Graham at the Graham-Newman Partnership. Schloss would go on to champion the value investing approach of Graham through his own firm which he founded in 1955.
When Schloss and his son finally opted to close their firm in 2001, believing that there weren't any cheap stocks left to buy, the company had averaged returns of 15.3 percent over the 46 year period, beating the S&P by almost 5 percent. Warren Buffett said the following about Schloss:
"He knows how to identify securities that sell at considerably less than their value to a private owner: And that's all he does. He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him."
The Schloss Screen
Schloss had a simple set of criteria for stocks that he would purchase, and it's in line with many of the basic precepts of value investing. Companies that Schloss sought out fell into the following categories:
1. Book value per share was lower than share price. This meant that the underlying value of the company (book value is the accounting value of a company after its paid its debts) is coming at a discount.
2. No debt. Or at least very little. This should be self-explanatory.
3. High levels of insider ownership. A company that has a large portion of its shares tied up with company insiders is one where management can hypothetically be trusted to look out for shareholders. Because management are the shareholders.
4. Stock is reaching new lows. Stocks that are hitting new lows are coming at the cheapest possible price (gulp, one hopes). Buying stocks near these lows means you're getting the best possible value.
Schloss often broke with value investing principles in other ways, most notably in holding a much larger portfolio of stocks than most value investors would recommend (Schloss sometimes owned more than 100 stocks). However, the basics of this screen remain rooted in the same values long preached by Graham, Dodd, Buffett, and others. Schloss focused on getting stocks at their cheapest, that have greater core value than their price, and that are being run by people with a stake in the company's success.
Schloss himself has opted to drop out of the investing game because he couldn't find enough stocks to strike his fancy, so it's worth noting that past success for Schloss doesn't in any way guarantee that similar investments in today's atmosphere will produce strong returns. However, there are still some companies that appear to fit within the parameters set forth Schloss.