Walter Schloss Value Investing Strategy

Walter Schloss, a legendary value investor who learned directly from Benjamin Graham, the father of value investing, never graduated from college and was hired as a runner on Wall Street in 1934, at the age of 18. Schloss enrolled in the New York Stock Exchange Institute, where he took courses from Benjamin Graham on how to value businesses, find value stocks, and manage money.

Using the lessons he learned there, Schloss launched his own value investing fund in 1955, with a starting balance of $100,000, eventually growing to manage money for as many as 92 investors. 

For more than 50 years, he earned a 15.3% compounded annual rate of return, turning a $10,000 initial investment into $12,344,268, far outstripping the 10% return offered by the S&P 500 during the same period, which would have resulted in only $1,173,909.

Putting Together a Walter Schloss Value Investing Portfolio

Unlike most professional money managers, Walter Schloss remained faithful to his value investing principles, refusing to deviate from the same formula he learned from Benjamin Graham, even in spite of his friendship with and exposure to Warren Buffett.

Working from a small desk in the offices of Tweedy, Browne & Company, the brokerage firm that handled both Graham’s trades and bought Warren Buffett his shares of Berkshire Hathaway, Schloss sought to acquire as many companies trading at a 1/3 net working capital as possible.  Schloss believed that he would come out ahead due to the benefits of widespread diversification, even though many of the companies he owned were considered unattractive by most of Wall Street due to some underlying problem in the business or with a key supplier.

The Douwe Egberts Coffee Machine at Headquarters

One of the first things I did when my original company became successful was to order a Douwe Egberts coffee machine for the breakroom.  For the uninitiated, Douwe Egberts coffee is the best in the world.  There are no exceptions.  In fact, I was visiting someone in a town called Branson, Missouri several years ago and there was a restaurant that had the perfect cup of coffee.  The waitress took time to go in the back, write down the name of the machine, open it and find the precise blend of coffee inside, and a lot of other data that went above and beyond what I asked (she was tipped very well).

Basically, this has no meaning to anyone except those of you who knew me growing up and realized how much I wanted this machine.  It’s … well, it’s everything that it promised to be and it doesn’t get old.  It’s so amazingly cool to me that all I wanted when I was ten years old, reading Value Line reports in that little wooden library cubical was to have my own office, invest money, and drink gourmet coffee out of gold rimmed china.  I’m there.  Now, It’s just a matter of compounding and seeing how big I can get this empire.

How the Douwe Egberts Coffee Machine System Works
The principle behind the system is that each cup of coffee should be absolutely perfect, brewed in seconds, and taste precisely the same as the 1,000 cups before it and the 1,000 cups after it.  To do this, the coffee itself is brewed in factories by white-gloved scientists roaming around with clipboards, examining every stage of the production process.  The finished coffee is concentrated to an incredible degree and shipped in frozen boxes to distributors, which then take them to restaurants and offices.  The Douwe Egberts system machines reconstitute the coffee based on your desired brew strength inputs, infusing extremely hot water and dispensing the finished cup in a matter of moments.  Thus, there is never any brew time or waiting.  You simply walk up to the machine, press a button, and your perfect cup of coffee is in your hands before you realize what’s happened.

The Machine We Bought and Had Delivered
The specific machine we bought was the Douwe Egberts Cafitesse C60, which allows us to make cappuccinos, espressos, black coffee, and one other drink of our choice.

Cost of the Douwe Egberts Coffee System
Ordinarily, the machines are provided as a result of the volume of coffee ordered by the office or restaurant.  Since our business model is based upon an incredibly low amount of human effort, instead relying on technology to pair up vendors and our customers, we knew there was no way we would consume thousands of cups of coffee so we bought the machine outright and pay for periodic deliveries from a local distributor.  Off the top of my head, I don’t recall how much it cost but it was a couple thousand dollars for the machine alone, then we had to have it hard wired into a water line so it could work effortlessly.  I want to say the coffee itself and supplies are somewhere around $200 or $300 per month.  Again, I don’t remember but I’m fairly certain that’s close.

Burger King Now Uses the Douwe Egberts Coffee System
As a matter of fact, a few years ago, Burger King switched its entire coffee system to Douwe Egberts and its sales in the category have markedly improved according to the releases sent out by corporate.  The guy that setup our machine actually told us that he could match the exact percentage settings if we wanted to replicate the taste by modifying the reconstitution numbers but I actually went a little bit stronger because I like a severe kick to my coffee (not Starbucks black coffee strong, though – that stuff is horrible despite the beans being great).  Recently, though, Burger King switched to Seattle’s Best coffee, meaning I no longer go out of my way to get a cup from there.