Walter Schloss Partnership

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

I’ve written about Walter Schloss and his value investing philosophy in the past.  Tonight, I’m thinking about the lessons someone can glean from studying his career.

[mainbodyad]Alice Schroeder tells us on page 852, in the notes of The Snowball, that in 1951, Walter Schloss was making less than the average secretary working for Benjamin Graham as a 34-year old security analyst.  His annual pay was only $2,600 (or $50 per week) compared to $3,060 for clerical workers.

Walter Schloss had seen a lot of financial hardship in his life.  Schroeder tells us that his grandfather had entrusted his apparel company to a bookkeeper who embezzled all of the money.  His father had established a radio factory with a partner, which burned down under “suspicious circumstances” before selling a single radio, and when he was 13, Walter’s mother lost her inheritance in the crash of 1929.

Later, Graham and Newman treated Warren Buffett like the “golden boy” of the Graham-Newman Corporation.  Schloss, however, had been sidelined as nothing but a worker.  He would never make partner, he would never rise.

Walter Schloss Left Graham-Newman and Started His Own Partnership

Walter Schloss Partnership

Walter Schloss was a legendary value investor who ran an investment partnership that crushed the broader stock market over a nearly 50-year time period. He had the courage to setup his own firm and take an override on profits. Otherwise, he would have stayed where he was - earning less than the average secretary. His is a story of discipline and courage. Image © iStockphoto/Thinkstock

As a result, Walter Schloss left Graham-Newman and setup his own shop in 1955 when he was 39 years old.  He contributed $5,000 of his own money, which represented virtually everything he had to his name and left him nothing upon which to live (in today’s terms, that is $39,600).  At the time, Schloss was married with two children.  He raised $100,000 from a group of partners, or $792,300 in today’s inflation-adjusted terms.

Walter Schloss had a much simpler compensation structure than Warren Buffett did at Buffett Associates, Ltd. Schloss allocated the first 75% to the limited partners and took the remaining 25% for himself.  If there were losses, they had to be made up before he could earn any additional management performance fee.

In 2000, Walter Schloss closed his investment partnership.  He stopped managing money for other people entirely in 2003.  Schloss grew to manage money for 92 partners and for a nearly 50 year period, compounded their money at 15.3% compared to 10% for the S&P 500 by using the value investing philosophy of Benjamin Graham.

The result was, a man who was making less than the average American secretary ended up getting very rich, plus he became a legend in the investing world by doing the work on his desk very well, day in and day out, consistently, year after year.

Walter Schloss kept his life extraordinarily simple.  He worked by the water cooler at Tweedy, Browne & Company, kept his investment ideas on index cards, and never hired a secretary, reportedly because he didn’t want to fill out the payroll forms.  No persian rugs, no huge computer monitors, no gold-plated bathroom faucets … he crushed the stock market for half a century by focusing on value and investing with an eye on the margin of safety.

Lessons from the Career of Walter Schloss

[mainbodyad]Some of the lessons that come to my mind when I contemplate the career of Walter Schloss are:

  • Sometimes you need to know when to strike out on your own or change ships.  Had Walter Schloss continued where he was, he would have been sidelined as a low-paid company man with no respect and died completely unrecognized.  He certainly wouldn’t have anywhere near the wealth he does today.
  • You need the right structure to your company.  Walter Schloss was able to grow his net worth faster, plus make money for those who knew nothing about investing, because he had a compensation system that rewarded performance.
  • Don’t make yourself unhappy.  If the administration of a large fund or company would make you miserable, find a way to build a fortune without being miserable.
  • Unless you truly love your work, don’t become consumed by it.  Schloss reportedly only worked from 9 a.m. to 4:30 p.m. Monday through Friday.  There were no late nights, no weekends spent at the office … his low stress level may explain why he is nearly 100 years old and still alive!