Walter Schloss outperformed the S&P 500 by 600 bps annually over a 47-year career.
600 bps. Per year. Over forty-seven years. The quick math shows that Walter Schloss’s investors made 15 times the S&P 500 over that time period.
Walter Schloss is an outlier among outliers, and yet you’ve probably never heard of him. I know I didn’t hear about him until I entered the money management business and discovered value investing. In my attempt to absorb all I could about real-world investing, while purging my mind of the academic EMH mumbo jumbo, I quickly discovered why I had never heard of Walter Schloss:
He blows the EMH out of the water. The finance academics, for all their great work, need to take time away from their mathematical proofs and spend more time studying the real world.
While I never had the privilege of meeting Walter Schloss, he is my favorite investor. Why? Because he made it look so easy:
- He didn’t care about earnings.
- He rarely spoke to management teams.
- He rarely spoke to sell side analysts.
- He didn’t watch the stock market during the day.
- He never owned a computer.
- He didn’t even go to college!
He took the Pareto principle (the 80/20 rule) to the extreme and focused on only the things that matter. So how the hell did Walter Schloss absolutely dominate the S&P 500 for 47 years? Let’s dig in and find out …
Humble Beginnings: What’s a “Runner”?
Walter Schloss graduated high school in 1934 during the Great Depression and got a job as a “runner” at Loeb Rhoades, a brokerage firm formed just three years prior. What’s a runner? A runner’s job was to deliver securities and paperwork by hand to the various brokers on Wall Street.
Walter Schloss was a Wall Street paperboy.
The next year, Schloss went to a man named Armand Erpf, who was in charge of the statistical department at Loeb Rhoades, and asked if he could get a job in his department. Erpf said no, but recommended that Schloss read a new book called Security Analysis by Ben Graham. Erpf said everything Schloss wanted to know about securities was in that book.
After Schloss read Security Analysis, he wanted more, so he convinced his employer to pay for him to attend Ben Graham’s classes. So, while Schloss worked at Loeb Rhoades during the day, he would take Ben Graham’s classes at night to learn more about Ben Graham’s value investing approach.
Schloss became a disciple of Ben Graham’s, even helping him write part of The Intelligent Investor. Then came the war and Schloss enlisted in the Army for four years, but he stayed in contact with Ben Graham.
This (ahem, networking!) paid off when Schloss got an offer to work for Ben Graham’s partnership upon returning from the war in 1946. Not long after Schloss joined the Graham-Newman partnership, one of Ben Graham’s star students at Columbia joined the firm. His name was Warren Buffett.
Perhaps you’ve heard of Warren Buffett?
So here’s Walter Schloss, a high school graduate and former runner, working side-by-side with Ben Graham and Warren Buffett.
Who says you can only break into Wall Street with a prestigious degree and a high-brow pedigree? If you are ever feeling down about your job prospects in this post-Great Recession world, just think of Walter Schloss as a runner during the Great Depression and recognize how far a little hard work and networking can take you.
Minimalist Investing at Its Finest
You would think a 47-year record of beating the S&P 500 would have a lot written about it, but sadly there is very little to read about Schloss’s investing. Perhaps the reason is that it was so simple that there isn’t much to say about it.
Here’s what we know:
- Schloss followed Ben Graham’s value investing philosophy of comparing price to value. He was a bargain hunter.
- He tried to buy assets rather than earnings, so quarterly conference calls never concerned him.
- He rarely met with management teams because he didn’t think he was that good at interpreting what they were saying. He preferred to let the financial statements do the talking.
- He owned a diversified portfolio.
- He was patient and tried to avoid fear and greed.
- He screened for companies that traded at a discount to book value and that had little or no debt.
Oh yeah, and his typical workday was from 9:30 A.M. to 4:30 P.M. He was at work when the NYSE opened and left just a half hour after close. While it might not be the 4-Hour Work Week, it’s the closest damn thing to it on Wall Street.
Schloss hated stress and tried to avoid it by keeping things simple. His son, who worked for him for many years, said in a Bloomberg article that Schloss “slept well.”
Yeah, no kidding. The guy worked less than 40 hours per week. He didn’t even own a computer with which to follow the stock market, and yet he consistently outperformed.
You’d sleep well too.
What You Can Learn from Walter Schloss: Occam’s Razor
If there is one thing that we can take away from Walter Schloss, it is that the application of Occam’s razor can yield tremendous results.
BusinessDictionary.com defines Occam’s razor as a:
… proposition that assumptions should be reduced to their minimum. Thus, if two assumptions seem to be equally valid, the simpler one should be preferred.
Unless complexity can improve the explanation of something, it is better to proceed toward simpler theories. In today’s world of complex financial models and theories, Schloss stuck with the simple application of value investing that has been around for decades: complex models aren’t an improvement if they don’t produce better results.
When it comes to breaking into Wall Street, many job seekers try to find the “perfect” career path and ask stupid questions in forums like, “I’m a high school senior, what are my chances of getting a job at [insert top hedge fund name here]?” There’s a belief that there is a complicated, step-by-step path to Wall Street.
Let’s apply Occam’s razor and look at how Walter Schloss broke into Wall Street:
He got his foot in the door by working as a nobody. He worked hard and started networking. He networked with a partner at the firm who pointed him in Ben Graham’s direction. He networked with Ben Graham and eventually Warren Buffett. He crushed the S&P 500 for 47 years by simply comparing price to value.
The key is to keep it simple and get out there and network. Quit asking “what are my chances?” in the forums and go meet people. You can do it. Just let the tale of Walter Schloss fuel your motivation if you are ever feeling down about your chances.
Still not convinced? Still think you’re doomed because you don’t have a target school degree? Is my attempt at positive psychology not working? Well, then I think it’s time for blunter therapy from Dr. Denis Leary, who will tell you it’s time to “Shut the …”