Schloss interview

[matjone]

Oh, it got worse than that.  IIRC, the method picked out only 2 stocks in 2003.  But, the - um - author frequently points out that the method does not result in a diversified portfolio.  He fully expects people to hold more stocks.  ;D

 

However, there were more than 40 stocks that passed the test in the spring of 2009.  So, some patience and a holding period of a few years instead of one would result in a more diversified portfolio.  Many value strategies work well with 3-5+ year holding periods.

 

But Graham's original defensive criteria were a little too strict, produced even fewer stocks, and IIRC had an uneven record in the U.S. soon after they were suggested.     

 

IIRC, a slightly different take on Graham's defensive method was applied with good results in the South African market.  Again, it did suffer from a paucity of picks from time to time.  I don't have the paper that described it close at hand. 

 

To the last question, yes, I've been using methods similar to Graham for many years now.  I tend to be a little more quant than qual (at least compared to most posters here).  But it has served me well.

 

While we're on the topic of Walter, here's a recent article ... How to beat the market, with patience and ugly stocks.  Apologies for the self promotion.

 

Thanks for that link. I have added you to my already too long list of feeds on google reader.  And please don't take  offense about what I said about your article.  I didn't mean to say that you had actually recommended going all in on those 4 stocks.  I was just using it as an example for argument's sake.

[NormR]

Thanks for that link. I have added you to my already too long list of feeds on google reader.  And please don't take  offense about what I said about your article.  I didn't mean to say that you had actually recommended going all in on those 4 stocks.  I was just using it as an example for argument's sake.

 

Oh, no offense taken, it's a very valid point.  I'd be very pleased if all the feedback I got was nearly as good.  :)

[Uccmal]

Norm, you should clarify that this is not back testing.  This is forward testing.  The Graham stocks are chosen at the beginning of a year.  The results are a multi-year tally of year end results for the chosen stocks. 

 

A.

[twacowfca]

Graham approach keeps working, it has never stopped doing so:

http://www.ndir.com/SI/articles/1111.shtml

 

Thanks for posting this, looks like a good place to check for ideas.

 

I have seen a lot of backtests that validate the Graham method.  But it means more to me to see people who have done it with real money.  It's easy to look at an investing strategy and think "I am going to set something like this up and just sit back and let the returns happen."  There are a lot of things you don't think about when you look at a backtest.  Are the stocks liquid enough that the returns would have been possible?  And would you have really followed it even if it was possible?  To achieve the results that are mentioned in this article you would have had to go all in on 4 stocks in fall '08 when all hell was breaking loose.  Not all in on PG and WMT  either, but in stuff like Methanex (MEOH).  I can't see myself doing that.

 

If anyone else on here has a decade or so experience with a  diversified statistical approach like Graham advocated  I would like to hear about your experience with it.

 

Oh, it got worse than that.  IIRC, the method picked out only 2 stocks in 2003.  But, the - um - author frequently points out that the method does not result in a diversified portfolio.  He fully expects people to hold more stocks.  ;D

 

However, there were more than 40 stocks that passed the test in the spring of 2009.  So, some patience and a holding period of a few years instead of one would result in a more diversified portfolio.  Many value strategies work well with 3-5+ year holding periods.

 

But Graham's original defensive criteria were a little too strict, produced even fewer stocks, and IIRC had an uneven record in the U.S. soon after they were suggested.     

 

IIRC, a slightly different take on Graham's defensive method was applied with good results in the South African market.  Again, it did suffer from a paucity of picks from time to time.  I don't have the paper that described it close at hand. 

 

To the last question, yes, I've been using methods similar to Graham for many years now.  I tend to be a little more quant than qual (at least compared to most posters here).  But it has served me well.

 

While we're on the topic of Walter, here's a recent article ... How to beat the market, with patience and ugly stocks.  Apologies for the self promotion.

 

You're too modest, Norm.  Stingy Investor is great -- for novices and old hands.  I ran through all the past and present Ben Graham screen picks and picked out two that I thought were better than average businesses.  They have performed well above the market since their selection.:)

[racemize]

Oh, it got worse than that.  IIRC, the method picked out only 2 stocks in 2003.  But, the - um - author frequently points out that the method does not result in a diversified portfolio.  He fully expects people to hold more stocks.  ;D

 

However, there were more than 40 stocks that passed the test in the spring of 2009.  So, some patience and a holding period of a few years instead of one would result in a more diversified portfolio.  Many value strategies work well with 3-5+ year holding periods.

 

But Graham's original defensive criteria were a little too strict, produced even fewer stocks, and IIRC had an uneven record in the U.S. soon after they were suggested.     

 

IIRC, a slightly different take on Graham's defensive method was applied with good results in the South African market.  Again, it did suffer from a paucity of picks from time to time.  I don't have the paper that described it close at hand. 

 

To the last question, yes, I've been using methods similar to Graham for many years now.  I tend to be a little more quant than qual (at least compared to most posters here).  But it has served me well.

 

While we're on the topic of Walter, here's a recent article ... How to beat the market, with patience and ugly stocks.  Apologies for the self promotion.

 

Thanks for that link. I have added you to my already too long list of feeds on google reader.  And please don't take  offense about what I said about your article.  I didn't mean to say that you had actually recommended going all in on those 4 stocks.  I was just using it as an example for argument's sake.

 

Ok, I failed at finding the rss link, norm or matjone, could you send it to me?

[oddballstocks]

Graham approach keeps working, it has never stopped doing so:

http://www.ndir.com/SI/articles/1111.shtml

 

Thanks for posting this, looks like a good place to check for ideas.

 

I have seen a lot of backtests that validate the Graham method.  But it means more to me to see people who have done it with real money.  It's easy to look at an investing strategy and think "I am going to set something like this up and just sit back and let the returns happen."  There are a lot of things you don't think about when you look at a backtest.  Are the stocks liquid enough that the returns would have been possible?  And would you have really followed it even if it was possible?  To achieve the results that are mentioned in this article you would have had to go all in on 4 stocks in fall '08 when all hell was breaking loose.  Not all in on PG and WMT  either, but in stuff like Methanex (MEOH).  I can't see myself doing that.

 

If anyone else on here has a decade or so experience with a  diversified statistical approach like Graham advocated  I would like to hear about your experience with it.

 

It always saddens me to see Graham reduced to the notion of a statistical approach.  In my reading of Security Analysis I'd say that's the farthest thing from what he advocated.  Even in the famous chapter on net-nets Graham discusses how careful analysis and research needs to be undertaken to avoid the "bad" ones.  Companies where NCAV or book value had been shrinking over the years etc.

 

The truth is to get rich you need to concentrate, but I'd say throw out any idea of doing it in the market.  You need to build a business and pour all of your wealth and time into it.  Look at the Forbes 400 list, how many people on that list are people who sit at home in their slippers reading ValueLine and finding undervalued companies?  Extreme concentration is the path to success.

 

I don't care to be wealthy, or the richest man on the block, and being a minority shareholder seems to suit my personality, so investing is it for me.  What Graham and Schloss really advocate is by starting to fish in pre-selected ponds where the fish are big, slow and easy to catch.  Sure they might be carp and not tuna, but all that matters at the end of the day is return, and now the company you owned to get there..

[NormR]

Norm, you should clarify that this is not back testing.  This is forward testing.  The Graham stocks are chosen at the beginning of a year.  The results are a multi-year tally of year end results for the chosen stocks. 

 

A.

 

Yes, very true, it's a published record to the extent that it's based on articles (published by third parties) rather than AUM over a decade or so.  Also, the rebalance dates are often not based on the calendar year end.

[NormR]

You're too modest, Norm.  Stingy Investor is great -- for novices and old hands.  I ran through all the past and present Ben Graham screen picks and picked out two that I thought were better than average businesses.  They have performed well above the market since their selection.:)

 

Thanks!  I'll try to avoid getting a swelled head - it's already too big.  ;D

[matjone]

It always saddens me to see Graham reduced to the notion of a statistical approach.  In my reading of Security Analysis I'd say that's the farthest thing from what he advocated.  Even in the famous chapter on net-nets Graham discusses how careful analysis and research needs to be undertaken to avoid the "bad" ones.  Companies where NCAV or book value had been shrinking over the years etc.

 

The truth is to get rich you need to concentrate, but I'd say throw out any idea of doing it in the market.  You need to build a business and pour all of your wealth and time into it.  Look at the Forbes 400 list, how many people on that list are people who sit at home in their slippers reading ValueLine and finding undervalued companies?  Extreme concentration is the path to success.

 

I don't care to be wealthy, or the richest man on the block, and being a minority shareholder seems to suit my personality, so investing is it for me.  What Graham and Schloss really advocate is by starting to fish in pre-selected ponds where the fish are big, slow and easy to catch.  Sure they might be carp and not tuna, but all that matters at the end of the day is return, and now the company you owned to get there..

 

I certainly didn't mean to leave the impression that I considered Graham to be some guy who mindlessly followed a formula because he was obviously a lot more than that. He called for a lot of in depth analysis in Security Analysis, but by the end of his life he had changed his tune a little bit.  Take a look at this interview.

 

http://www.sdeklerck.be/wp-content/uploads/2012/05/An-hour-with-Mr.-Graham2.pdf

 

I agree that the Forbes 400 will always be dominated by people who had a spectacular success owning one company.  But I think you would also agree that Schloss would have gotten plenty rich with his method even if he had never started his own firm.

[oddballstocks]

It always saddens me to see Graham reduced to the notion of a statistical approach.  In my reading of Security Analysis I'd say that's the farthest thing from what he advocated.  Even in the famous chapter on net-nets Graham discusses how careful analysis and research needs to be undertaken to avoid the "bad" ones.  Companies where NCAV or book value had been shrinking over the years etc.

 

The truth is to get rich you need to concentrate, but I'd say throw out any idea of doing it in the market.  You need to build a business and pour all of your wealth and time into it.  Look at the Forbes 400 list, how many people on that list are people who sit at home in their slippers reading ValueLine and finding undervalued companies?  Extreme concentration is the path to success.

 

I don't care to be wealthy, or the richest man on the block, and being a minority shareholder seems to suit my personality, so investing is it for me.  What Graham and Schloss really advocate is by starting to fish in pre-selected ponds where the fish are big, slow and easy to catch.  Sure they might be carp and not tuna, but all that matters at the end of the day is return, and now the company you owned to get there..

 

I certainly didn't mean to leave the impression that I considered Graham to be some guy who mindlessly followed a formula because he was obviously a lot more than that. He called for a lot of in depth analysis in Security Analysis, but by the end of his life he had changed his tune a little bit.  Take a look at this interview.

 

http://www.sdeklerck.be/wp-content/uploads/2012/05/An-hour-with-Mr.-Graham2.pdf

 

I agree that the Forbes 400 will always be dominated by people who had a spectacular success owning one company.  But I think you would also agree that Schloss would have gotten plenty rich with his method even if he had never started his own firm.

 

Yeah, buying cheap stocks and being patient is an excellent strategy.  Graham and Schloss used tangible cheapness (assets, earnings) whereas the Buffett crowd veers towards the intangible (undervaluing management, great franchise).

 

Graham did change in his life, but what person in their 80s hasn't lost a bit of that zest and passion they had in their earlier years?  A lot of biographies of Graham support that he'd given up on Security Analysis later in life, it just wasn't interesting to him anymore, women, poetry, and plays were what held his interest.  I prefer his earlier work where he wasn't trying to boil down his thoughts into a simple formula.  Sure the markets are more efficient, but there are always areas where solid analysis can add value.

[txitxo]

 

It always saddens me to see Graham reduced to the notion of a statistical approach.  In my reading of Security Analysis I'd say that's the farthest thing from what he advocated.  Even in the famous chapter on net-nets Graham discusses how careful analysis and research needs to be undertaken to avoid the "bad" ones.  Companies where NCAV or book value had been shrinking over the years etc.

 

The truth is to get rich you need to concentrate, but I'd say throw out any idea of doing it in the market.  You need to build a business and pour all of your wealth and time into it.  Look at the Forbes 400 list, how many people on that list are people who sit at home in their slippers reading ValueLine and finding undervalued companies?  Extreme concentration is the path to success.

 

I don't care to be wealthy, or the richest man on the block, and being a minority shareholder seems to suit my personality, so investing is it for me.  What Graham and Schloss really advocate is by starting to fish in pre-selected ponds where the fish are big, slow and easy to catch.  Sure they might be carp and not tuna, but all that matters at the end of the day is return, and now the company you owned to get there..

 

We have already discussed this issue in another thread (I don't remember which), but a "lazy screen" method does work in practice, however it will never do so well as in theory, you will lose several percentage points because of friction and execution problems. These are a few practical rules:

 

1. You need several screens like those of Graham, so that you can at least have 25-50 stocks in your portfolio at all times. The returns are not homogeneously distributed, some stocks will tank and others will be rockets and you want to be sure you average over enough stocks to reduce the noise, even if diversification costs you in average performance (which it will).

 

2. Many of those things will be small or micro caps, so you cannot be managing lots of money (which is probably the reason why you don't see many people with a public record of investing in that way) When you start moving to larger caps, the overperformance of the screens are much smaller, a few percent of alpha at most. That's why Buffett cannot invest like that. He has to search for much more subtle market inefficiencies. 

 

3. You have to be very disciplined with the buying and selling and careful with spreads and commissions. That is harder to do that it sounds

 

4. You have to buy the whole screen, or select stocks randomly from it, not keep what looks good and throw away what looks bad. I know that here, that sounds like heresy, but value investors do generate their own Mr. Market in some corners of the stock Universe, that's why screens work. 

 

  Investing like that kills the mystics of the solitary investor-warrior, but for most people it would be much cheaper to get their emotional kicks from something else. This is a way of managing money for people who want to spend their life doing things other than reading balance sheets (not that there is anything wrong with it:), which by the way, was Ben Graham's style, he started developing screens in part because he was interested in writing theater, reading classic poetry, chasing women, etc.

 

 

[rijk]

"4. You have to buy the whole screen, or select stocks randomly from it, not keep what looks good and throw away what looks bad. I know that here, that sounds like heresy, but value investors do generate their own Mr. Market in some corners of the stock Universe, that's why screens work."

 

not saying this is scientific evidence, but an interesting current day demonstration of a mechanical net net screen performance that is superior to a hand picked net net strategy would be the 26 net net index performance (+36%) versus the graham ncav bargain portfolio (-4%) (only gurufocus members have access)

http://stocksbelowncav.blogspot.fr/2012/09/cheap-stocks-26-netnet-index-first-year.html

 

the practical challenges of rule 4. above become evident very quickly when looking at the individual picks in the 26 net net index, there are plenty of names that would psychologically be very challenging to pick for the human mind......

 

walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....

 

regards

rijk

 

 

[Kraven]

walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....

 

In my view, the key to Schloss's success was patience.  Embedded in that is ignoring the noise, keeping his head, etc.  His genius wasn't in technical skills or superior analysis.  I say this as one of the world's biggest fans of his.  I owe him a tremendous intellectual debt.  But he would be the first to admit that he wasn't a better securities analyst than many others.  In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did. 

 

His true genius was in patience, time arbitrage to the extreme.  As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish.  I know that many value folks believe that past pricing means nothing.  Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance.  I think that people miss the point.  It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future.  I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis.  Allan Meachum had a great line about this in an article a while back.  He said that each year the price of most stocks will move about 80% from high to low.  I have no idea whether 80% is an accurate number or not, but the gist is very true. 

 

So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome.  That is Schloss's genius.  He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more.  He has said after about 4 years he would think about selling, but he really didn't like to sell.  Most of the selling was probably forced by Edwin.  Walter liked to hold on.  He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear.  Most survive if not thrive and so long as the future looks something like the past, the stock will do ok.

[Uccmal]

walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....

 

In my view, the key to Schloss's success was patience.  Embedded in that is ignoring the noise, keeping his head, etc.  His genius wasn't in technical skills or superior analysis.  I say this as one of the world's biggest fans of his.  I owe him a tremendous intellectual debt.  But he would be the first to admit that he wasn't a better securities analyst than many others.  In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did. 

 

His true genius was in patience, time arbitrage to the extreme.  As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish.  I know that many value folks believe that past pricing means nothing.  Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance.  I think that people miss the point.  It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future.  I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis.  Allan Meachum had a great line about this in an article a while back.  He said that each year the price of most stocks will move about 80% from high to low.  I have no idea whether 80% is an accurate number or not, but the gist is very true. 

 

So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome.  That is Schloss's genius.  He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more.  He has said after about 4 years he would think about selling, but he really didn't like to sell.  Most of the selling was probably forced by Edwin.  Walter liked to hold on.  He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear.  Most survive if not thrive and so long as the future looks something like the past, the stock will do ok.

 

You summed it up very well.  He obviously was very bright but look at some of the people he hung out with.  Many of us wouldn't feel very bright in a room with Buffett, Gates, Graham, K. Graham, and Munger.  Very patient, like Francis Chou. 

[txitxo]

walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....

 

In my view, the key to Schloss's success was patience.  Embedded in that is ignoring the noise, keeping his head, etc.  His genius wasn't in technical skills or superior analysis.  I say this as one of the world's biggest fans of his.  I owe him a tremendous intellectual debt.  But he would be the first to admit that he wasn't a better securities analyst than many others.  In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did. 

 

His true genius was in patience, time arbitrage to the extreme.  As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish.  I know that many value folks believe that past pricing means nothing.  Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance.  I think that people miss the point.  It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future.  I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis.  Allan Meachum had a great line about this in an article a while back.  He said that each year the price of most stocks will move about 80% from high to low.  I have no idea whether 80% is an accurate number or not, but the gist is very true. 

 

So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome.  That is Schloss's genius.  He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more.  He has said after about 4 years he would think about selling, but he really didn't like to sell.  Most of the selling was probably forced by Edwin.  Walter liked to hold on.  He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear.  Most survive if not thrive and so long as the future looks something like the past, the stock will do ok.

 

  Holding longer than a year hurts the performance in the backtesters, but probably not that much in practice, because of friction every time you sell and buy a stock (which may be a high as 5% with micro caps). Another very good idea is looking at deviations from the long term averages of the company. That's better (but more difficult to implement) than setting an overall threshold in P/B or P/E like Graham did in his screens.

[txitxo]

"4. You have to buy the whole screen, or select stocks randomly from it, not keep what looks good and throw away what looks bad. I know that here, that sounds like heresy, but value investors do generate their own Mr. Market in some corners of the stock Universe, that's why screens work."

 

not saying this is scientific evidence, but an interesting current day demonstration of a mechanical net net screen performance that is superior to a hand picked net net strategy would be the 26 net net index performance (+36%) versus the graham ncav bargain portfolio (-4%) (only gurufocus members have access)

http://stocksbelowncav.blogspot.fr/2012/09/cheap-stocks-26-netnet-index-first-year.html

 

the practical challenges of rule 4. above become evident very quickly when looking at the individual picks in the 26 net net index, there are plenty of names that would psychologically be very challenging to pick for the human mind......

 

walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....

 

regards

rijk

 

I have to confess that although I am sure that buying all the stocks in a net-net Graham screen would produce wonderful results, I cannot bring myself to use it. It just is too painful. Most of the outperformance is concentrated in a few stocks ("rockets"), whereas a big fraction of the stocks in the screen do badly. Screens which are based on P/E, P/FCF, P/TBV + financial soundness indicators provide samples which also contain some nasty stuff, but which are more palatable in general.

[twacowfca]

walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....

 

In my view, the key to Schloss's success was patience.  Embedded in that is ignoring the noise, keeping his head, etc.  His genius wasn't in technical skills or superior analysis.  I say this as one of the world's biggest fans of his.  I owe him a tremendous intellectual debt.  But he would be the first to admit that he wasn't a better securities analyst than many others.  In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did. 

 

His true genius was in patience, time arbitrage to the extreme.  As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish.  I know that many value folks believe that past pricing means nothing.  Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance.  I think that people miss the point.  It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future.  I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis.  Allan Meachum had a great line about this in an article a while back.  He said that each year the price of most stocks will move about 80% from high to low.  I have no idea whether 80% is an accurate number or not, but the gist is very true. 

 

So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome.  That is Schloss's genius.  He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more.  He has said after about 4 years he would think about selling, but he really didn't like to sell.  Most of the selling was probably forced by Edwin.  Walter liked to hold on.  He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear.  Most survive if not thrive and so long as the future looks something like the past, the stock will do ok.

 

  Holding longer than a year hurts the performance in the backtesters, but probably not that much in practice, because of friction every time you sell and buy a stock (which may be a high as 5% with micro caps). Another very good idea is looking at deviations from the long term averages of the company. That's better (but more difficult to implement) than setting an overall threshold in P/B or P/E like Graham did in his screens.

 

That makes sense.  Also, a certain low P/B of a company in a crappy industry would not be as meaningful as a similar P/B of a company in a better industry, ceteris paribus.