• OCTOBER 15, 2008

Lessons from Warren Buffett - LVII...

In our previous article, we discussed Buffett's noble intentions of giving away most of his wealth to charitable institutions of his choice. Let us go further down the same letter (2006) and see what other investment wisdom he has on offer.

One super investor's tribute to another
Warren Buffett has reserved a few paragraphs in the letter for the year 2006 for one of his dear friends, Walter Schloss, who in that year was 90 years of age. While we could have conveniently omitted this section from our discussion on Buffett's 2006 letter, we thought otherwise so that we could present before you a living proof of another success story in value investing. And this one is a lot less complicated than the Buffett's.

Buffett describes Schloss as an epitome of minimalism. He did not go to business school. In fact, he did not even attend college. His office had nothing beyond a few file cabinets (four to be precise) and his only associate was his son. His track record however could put even the most sophisticated investment manager to shame. For a period as long as 46 years, Schloss had compounded money at a far greater rate than the benchmark index, S&P 500.


And what was his approach? He followed Graham's technique of buying stocks on the cheap and then selling it when they neared their intrinsic value. Indeed, all it takes to be a successful investor to have the discipline to buy stocks on the cheap and not do anything silly.

Using Schloss' example, Buffett comes down heavily on B-School teachers, who rather than trying to study success stories such as Schloss', still insist on teaching the efficient market theory (EMT) to students. Naturally, these students, when they come out of college, rather unsuccessfully try to outsmart investors like Schloss with theories that have little or no practical value.

Let us hear in Buffett's own words his view on Schloss and the fate of EMT fed students who try to beat him.

The golden words
Buffett says, "Following a strategy that involved no real risk - defined as permanent loss of capital - Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It's particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It's safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance."

He further adds, "Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was "right" (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses - that is, stocks - were useless. Walter meanwhile went on over performing, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it's helpful to have all of your potential competitors be taught that the earth is flat."

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