This past November, I attended the New York Society of Security Analysts ceremonial opening of the Value Investing Archives. As an avid Benjamin Graham and Warren Buffett disciple, I felt like a kid in a candy store. On hand to commemorate this wonderful event was none other than Walter Schloss. The opportunity to listen of one of Graham's most successful students and practitioners was priceless.
A superinvestor from Graham-and-Doddsville
At 91, Schloss still has one of the sharpest minds in investing. Berkshire Hathaway's (NYSE: BRK-A ) Buffett, Graham's most celebrated disciple, dubbed Schloss a "superinvestor" in his famous essay "The Superinvestors of Graham-and-Doddsville." By his own account, Schloss -- who stopped managing money for others in 2003 -- averaged an annualized rate of return of 16% after fees over five decades, versus approximately 10% for the S&P 500. The significance of these results is extraordinary: $10,000 invested for 50 years at 10% a year will leave you with $1.2 million. At 16% a year, that $10,000 is worth ... $16.7 million!
Seen it all
Schloss has lived through 17 recessions, so he's seen the best of times and the worst of times. His experiences during these recessions -- including the Great Depression, during which he would have been just entering his teens -- naturally made him embrace Graham's margin-of-safety style of investing.
At the NYSAA event, Schloss was very generous with his advice. "The trick, it seems to me, is not to lose," he said, "and the way you make money is to be willing to buy stocks when you feel they're undervalued."
The market will always offer up some undervalued certain securities, but the best time to look for them is when there's panic and fear on Wall Street. Schloss elaborates:
I would suggest that investors be very careful what they buy. I don't like debt (emphasis added), so buy a company that has not much debt. What I usually did was get companies that were having troubles, and the stock market doesn't like trouble. Then you have to have the courage and convictions and buy enough of the stock that would make a difference to you.
In the 30 or so minutes during which Schloss was answering questions, he must have said "I don't like debt" a half-dozen times. You'd expect such an aversion from someone who has endured 17 recessions, including the Great Depression. The repetition lightened the mood, but the message was worth taking seriously: Schloss' aversion to debt is profoundly sound advice.
Too much debt will kill you
Looking at today's market clearly shows what too much debt can do to a business, and to an economy. The prudent use of leverage, as a way to lower a company's cost of capital, can add value to a company. However, when balance sheets are highly levered, the excessive debt can kill you. That's what happened with Long-Term Capital Management. Excessive leverage didn't allow the hedge fund enough time to recover from trading losses that turbulence in the credit market caused, and the fund folded in 2000.
Today's crisis is somewhat different from the LTCM experience, but what hasn't changed is that too much debt can permanently ruin a company, even if the business suffers only from a temporary setback. An otherwise solid business can find itself ruined because of debt payments coming due. Investors in luxury homebuilder WCI Communities (NYSE: WCI ) find themselves waiting to see whether the company can continue to honor its debt covenants during the brutal housing downturn. So far, banks have been generous with payment extensions, in no small part because of board member Carl Icahn, who owns a ton of stock. At some point, the banks will want to get paid regularly and on time, and this can't make shareholders very comfortable.
Don't lose money
So what's Schloss liking these days? In typical fashion, he is big on Superior Industries (NYSE: SUP ) , a wheelmaker that gets 75% of its sales from General Motors (NYSE: GM ) and Ford (NYSE: F ) . Superior has suffered declining earnings for five years, but Schloss likes that it trades at a discount to book value, pays a healthy dividend, and, of course, has no debt. When asked about his conservative investing style, Schloss sums up his thoughts in seven short words: "Well, I don't like to lose money."
His remarks sound obvious; no investor wants to lose money. Unfortunately, most investors sometimes forget that the first goal is to preserve capital and then compound it. Fortunately, we have Walter Schloss to remind us.