• OUTLOOK ARENA
  • VIEWS ON NEWS
  • 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.

{spaceads1}

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."

Lessons from Warren Buffett Series - Previous article | Next article | All Articles
Try the Warren Buffett Quiz

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407