Before we dive head down into the factors, you have probably heard of outstanding value investors such as Warren Buffett, Seth Klarman and probably Peter Lynch, but who is Walter Schloss?
Walter Schloss was a legendary value investor who was also under Benjamin Graham’s guidance, along with Warren Buffett.
Amongst the numerous capable investors highlighted in The Superinvestors of Graham-and-Doddsville by Warren Buffett, Schloss’s performance was nothing short of stunning. His partnership’s overall gain (gross and net of fees) has superseded the S&P 500 index by a large margin, consistently beating the index for many years.
How can academics claim that the markets are efficient and perfectly priced when an individual, who did not even go to college, is able to outperform the S&P 500 by a huge margin? In his article on Walter Schloss, Warren Buffett even mentioned that “Maybe it was a good thing for his investors that Walter didn’t go to college”.
If Walter Schloss is not like any other investor, what is his secret to generating such incredible returns?
Many investors think that profitable investing requires complex and advanced technology or strategies. Academics and hedge fund managers employ esoteric algorithms to generate profits by the minute. The answer is surprisingly simple. Like all deep value investors, Schloss pays a great deal of attention to the company’s intrinsic value and the gap between this value and the market price.
However, this might not be easy at all. There are too many psychological mistakes to be made and some people may not be cut out for it.
In this article, we will be discussing the don’ts as advised by the legend himself, Walter Schloss.
3 big mistakes you should never commit
1. Don’t buy on tips for a quick move / Don’t sell on bad news
Yes, we know it’s really tempting when your trusted broker claims to provide you with exclusive inside information about stock ABC that is about to take off.
That is greed tugging against your heart right there.
At this moment, you have forgotten everything about what value means and the system that you have constructed for your investing decisions. Your mind is just fixated on the hope that your information supplier is 100% trustworthy.
You must first be aware of the intentions of your broker. Putting aside illegal activities such as insider information and front-running, the primary objective of your broker is to encourage you to buy and sell. Every transaction you make, regardless of any profits you make, will incur a cost that goes directly into your broker’s pocket.
By taking heed to such too-good-to-be-true tips, your portfolio and wealth will be heading south rapidly over the years.
2. Don’t let your emotions affect your judgement
Fear and greed are the worst emotions in investing.
Emotions is an overwhelmingly dominant force that resides in the majority of us. The role emotions play is extremely important for one’s personal development. It is a very strong motivator that can spur us to be better at what we do.
However, especially in investing, it can also work against us.
Before we go on, you have to be aware that the financial market is an interesting place. It is where a lot of irrationality takes place and emotions take over all rational thinking.
The demand law in Economics tells us that when prices increase, the product is seen to be less attractive as before and hence, buyers reduce the quantity demanded.
In the financial market, an increase in price is often viewed as a signal of increasing desirability and in turn, leads to a greater quantity demanded for the stock. This irrationality motivated by strong emotions is the primary impetus that drives prices away from intrinsic values.
By succumbing to your emotions and letting it go out of control would lead you to bow down before Mr. Market. You will inevitably end up buying high and selling low due to fear and greed.
3. 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 sure. But often people sell just because the stock has risen by a huge amount, say 50%, and they want to secure the profit.
Before selling, reevaluate the company again and observe where the stock is selling with respect to its book value. Notice the current levels of the stock market, are yields low and price to earnings high? Are investors overly optimistic?
Knowing the timing to sell is often a problem value investors have to deal with. While purchasing can be a straightforward affair where you compare the price to intrinsic value, selling is more prone to psychological influences.
To avoid an internal struggle every time you contemplate about selling a company, you should have a firm investment philosophy deeply rooted in your mind. Whenever you are required to make a decision, pause for a moment, revisit your thesis and ask yourself a few questions.
Why is it a difficult decision, are you overcomplicating it?
Does it violate any of your value investing philosophy?
Are you aware of your psychological weaknesses?
Are your emotions playing a larger role in this decision?
With a clear head and a structured thought, we believe that any investor will be able to make the right investment decision most of the time
Performing like Walter Schloss
Like every legendary investor, Walter Schloss has also made his fair share of mistakes. However, what elevated him to be so successful was his discipline, emotional intelligence and the rare ability to admit mistakes. Due to one’s ego, many refuse to admit their mistakes and learn from them. Unfortunately, this is extremely crippling to their performances, not just in investing.
From his experiences and maturity, Walter Schloss shared with us the nuggets of insights he has gained over his 69 years of investing.
If you have enjoyed this article like we did, I encourage you to read the second part of this series where we will share about the things you should be doing to achieve success in value investing.