Walter Schloss’ rules to make money in the stock market

Walter Schloss was a highly regarded value investor from the United States known for his simple yet effective approach to value investing.

Born in New York City in 1916, Schloss began his investment career in the 1930s as a runner on Wall Street. He went on to work for legendary value investor Benjamin Graham before starting his own investment partnership in 1955.

Schloss was a disciple of Graham’s value investing philosophy, which emphasised buying stocks at a significant discount to their intrinsic value.

He was known for finding undervalued stocks through meticulous research and his willingness to invest in companies out of favour with other investors.

Throughout his career, Schloss achieved impressive returns for his investors. From 1955 to 2002, his investment partnership achieved an average annual return of 16%, compared to 10% for the S&P 500 over the same period.

Despite his wealth, Schloss was known for his humility and frugal lifestyle. He continued to work until age 95 and was widely respected in the investment community for his integrity.

Walter Schloss passed away in 2012 at 95, leaving behind a legacy as one of the most successful and respected value investors of all time.

Warren Buffett said Schloss knows how to identify securities that sell at considerably less than their value to a private owner. “And that’s all he does,” he said.

“He owns many more stocks than I do and is far less interested in the underlying nature of the business,” Buffett said.

“I don’t seem to have very much influence on Walter. That is one of his strengths – no one has much influence on him.”

Rules to make money in the stock market

In 1994, Walter & Edwin Schloss Associates provided sixteen factors needed to make money in the stock market.

1. Price is the most important factor to use in relation to value.
2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.
3. Use book value as a starting point to establish the enterprise’s value. Be sure that debt does not equal 100% of the equity (capital and surplus for the common stock).
4. Have patience. Stocks don’t go up immediately.
5. Don’t buy on tips or for a quick move. Let the professionals do that if they can. Don’t sell on bad news.
6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale [down] and sell on a scale-up.
7. Have the courage of your convictions once you decide.
8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.
9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell. But often, because a stock goes up — say 50% — people say sell it and button up your profit. Before selling, try to re-evaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P/E ratios high? Is the stock market historically high? Are people very optimistic etc?
10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as [high] as 125 and then decline to 60, and you think it attractive. Three years before, the stock sold at 20, showing some vulnerability in it.
11. Try to buy assets at a discount than buying 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.
12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember, it’s your money. Generally, it is harder to keep money than make it. Once you lose a lot of money, it is hard to make it back.
13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with purchasing and selling stocks.
14. Remember the word compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in six years; taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.
15. Prefer stocks over bonds. Bonds will limit your gains, and inflation will reduce your purchasing power.
16. Be careful of leverage. It can go against you.