15 tips from a legendary value investor

A money manager whom Warren Buffett himself identified as a ‘Superinvestor’, Walter Schloss is not a name that will be immediately familiar to many readers. Yet the share fund he managed returned on average 16% per annum over a period of 28 years – smashing the average market return.

Although deceased now, Columbia University keeps an archive of many of his publications, including this letter from 1994 about how to make money in the market. I have paraphrased the most important points for readers:

Factors needed to make money in the stock market

  • Price is the most important factor to use in relation to value.
  • Establish the value of the company – remember that a share is part of a business and not just a piece of paper.
  • Use book value as a starting point for valuing the enterprise. Avoid companies where debt = 100% of equity. Some companies like G8 Education Ltd (ASX: GEM) have a negative book value, and would not be suitable for disciples of this method of investing.
  • Have patience, stocks don’t go up immediately.
  • Don’t buy on tips or for a quick move. Let the professionals do that if they can. Don’t sell on bad news.
  • Don’t be afraid to be a loner, but be sure that you are correct in your judgement. You can’t be 100% certain, but look for weaknesses in your thinking.
  • Have courage in your convictions once you have made a decision.
  • Have a philosophy of investment and try to follow it.
  • Don’t hurry to sell. Revalue the company again to see how it sells in comparison to its book value, and in comparison to the wider market.
  • It is helpful to buy near the low of the past few years. A stock may go as high as 125 and decline to 60 and you think it is attractive. 3 years before it sold at 20 which shows there is some vulnerability to it. Vocus Group Ltd (ASX: VOC), Brambles Limited (ASX: BXB), and Flight Centre Travel Group Ltd (ASX: FLT) are good examples of companies trading at 3 year lows.
  • Try to buy assets at a discount rather than buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
  • Listen to suggestions from people you respect. This doesn’t mean you have to accept them.
  • Try not to let emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
  • Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
  • Be careful of leverage. It can go against you.

Foolish Takeaway

This is a very particular style of investing that will not suit every reader. Mr Schloss would buy any old business, as long as everybody else hated it and it was priced at a discount to its assets. His typical period of holding was around 4 years. This is different to the kind of investing we encourage at, but much of the advice is identical – be patient, don’t buy hot tips or for a quick move, don’t let emotion cloud your judgement.

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Motley Fool contributor Sean O'Neill owns shares of Flight Centre Travel Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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