I'm convinced there are only three types of people on Wall Street:
1) People who are loud, but very good. (Warren Buffett)
2) People who are loud, but haven't done so well. (Bill Ackman is a recent example)
3) People who make no noise, receive no attention, but become obscenely rich.
Today, I want to talk about number three -- an investor you've never heard of. His name was Walter Schloss.
Now, there was nothing special about Mr. Schloss. In fact, his start on Wall Street began as a runner, moving documents from firm to firm. He was, then, the very definition of a paper pusher.
But Schloss had something few have -- a desire to learn and apply what he knew. He never went to college. Rather, he sought out simple financial training from one night class, and leisurely reading. He leveraged that knowledge, and his interest in investing, to continue further.
Later in life, Schloss would open his own investment partnership, and, over a period spanning 28 years, he would compound his investors' capital at a rate of 16.1% per year. Good? No. That's great. The S&P 500 returned only 8.4% during that time.
In just 28 years, his initial investors would see their original, $100,000 investment turn into $6.5 million after fees.
How he became great
Warren Buffett later wrote that Schloss was able to avoid many of the distractions on Wall Street. "That's one of his strengths: no one has much influence on him."
But there's more to it than that. Schloss had only a handful of principles guiding his investing:
1. He was frugal
Frugal investors tend to be excellent investors, if only because they value money more so than others. Losing money is a disease frugal investors fear like the plague. In fact, it's said that in one year, his fund took in $19 million in management fees, but expenses were only $11,000. How many million-dollar firms out there today have lavish offices and a leased jet? Probably all of them.
2. He held on
While most stocks are held for only a few hours, or even a few seconds, Walter Schloss had patience. His average holding period was four years. Four years. That's not a long time -- think back to how the years between your freshman and senior years flew by. But, by Wall Street standards, it's an eternity.
3. He rarely spoke to insiders
Walter Schloss was no fan of speaking to a company's management. Like Ben Graham, he believed management had an incentive to stretch or otherwise cover up the truth behind any business, making it appear better than it actually was.
Today, Wall Street is built on the foundation of access, even though it might not be good for investors. In a study of Wall Street analysts, nearly 40% noted that they had felt pressure to forecast higher earnings for companies so as not to lose access to management. Yet, for all their brown-nosing, analysts are in a preferential position to receive polished information.
4. He bought cheap
Schloss and Warren Buffett worked at the same Wall Street firm under Ben Graham, where the two would patiently look for cheap stocks based on price-to-book ratios. The idea was that if you could buy $1 of assets for $0.50, you didn't have to worry about earnings, so long as they were positive.
Buffett would later turn away, and later dismiss this technique for Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), but Walter Schloss stands as evidence that it is a workable strategy. Studies have shown that it has outperformed in every stock market, from the United States to Germany to France.
5. He bought on the way down
Conviction is easy to fake, and very difficult to have. Schloss never feared buying more of a stock he liked as it dropped in value. Later, he noted that he preferred making initial investments in a plunging stock, "We like to buy stocks on the way down. A lot of people don't like that approach but I'm comfortable buying on the way down."
I don't think it's an accident that Schloss preferred to hold stocks for 4 years, and that he was comfortable buying a stock on the way down. This is a critical advantage. While others are busy buying and selling, Schloss was busy understanding the investments he owned. It allowed him to confidently buy more of a cheaper business he understood well.
The last word
Walter Schloss exemplifies every trait of a good investor. He understood what he knew, and more importantly, what he didn't know. And he had a simple process, one which gave him the confidence to buy stocks that others merely looked over.
If there's one thing that investors can learn from Schloss, it's that investing doesn't have to be hard. In fact, some of the best investors in the world -- Buffett, Munger, and of course, Walter Schloss -- kept it simple. (Not a single investor in the previous sentence has even used a computer to pick stocks. Ponder that.)