The Method: Buying What Nobody Wants

Schloss wrote his entire philosophy on a single sheet of paper. Not a book, not a model — one page, sixteen numbered points, most of them a sentence long.

The heart of it was this: a share is a piece of a business, so work out what the business is worth, then pay considerably less. Not what it might earn if a new strategy succeeds. What it is worth now, on figures already reported, to somebody buying the whole thing.

In practice that meant starting from the balance sheet rather than the story. Schloss looked for companies trading below book value — often well below — with little debt relative to equity, preferably out of favour, frequently near multi-year lows, and usually boring. He wanted a price so low that the assets alone protected him if the earnings never recovered. And where Graham’s famous net-nets could still be found — companies so cheap that the entire operating business came free — he bought those.

Then came the parts that most people skip:

• He owned a lot of them. Roughly a hundred positions, sometimes more. He knew a good number would disappoint, and arranged his affairs so that no single mistake could hurt him.
• He did almost nothing, for years. Turnover was low; holding periods ran to four years and beyond. “Have patience,” ran his rule. “Stocks don’t go up immediately.”
• He didn’t sell on bad news — bad news was usually why the thing was cheap in the first place — and he wasn’t greedy on the way out, selling as price approached his estimate of fair value rather than holding out for the top.
• He avoided leverage entirely. His final rule was a warning about it: borrowed money removes your ability to wait, and waiting was the whole edge.

Buffett described him with genuine affection: “He knows how to identify securities that sell at considerably less than their value to a private owner: and that’s all he does… He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him.”

The Shrewd insight: Schloss wasn’t being paid for insight. He was being paid for discomfort. The market prices comfort dearly and misprices ugliness, and he simply stood on the unpopular side of that trade, repeatedly, for fifty years.

The honest problem: his exact method no longer works

We would be doing you a disservice to stop there, because if you go looking for Graham net-nets among large American companies today, you will find approximately none. Screens are universal, information is instant, and the obvious statistical bargains that littered the 1950s and 1970s were competed away decades ago.

There is a second, subtler problem. Book value meant something precise when a company’s worth sat in factories, inventory and land. Today enormous value sits in things accountants never capitalise — software, brands, networks, research. A modern business can be genuinely cheap while trading at four times book, and a wretched one can look tempting at half of it. Applied mechanically, Schloss’ screen now points you at exactly the wrong companies.

What survives — and it is the important part

Separate the tool from the principle, and the principle is in excellent health:

• Insist on a margin of safety measured in facts, not forecasts. The yardstick can modernise — free cash flow, replacement cost, sum of the parts, net cash on the balance sheet — while the demand stays identical: pay materially less than a private owner would.
• Hunt where the crowd cannot be bothered to look. The inefficiency Schloss farmed has not vanished, it has migrated: to small and micro caps too little for institutions, to out-of-favour cyclicals, to asset-heavy businesses everyone finds dull, and to markets outside the US where genuine below-asset pricing still appears.
• Keep the guardrails. Modest debt, wide diversification, no leverage, low turnover. These are not incidental to the method — they are what let an ordinary person survive being early, which a deep-value investor always is.
• Learn the difference between unloved and dying. This is the one discipline a modern Shrewd must add to his sheet of rules. Cheap, with a sturdy balance sheet, in a business that will still exist in ten years, is an opportunity. Cheap, heavily indebted, and shrinking is a value trap — and no amount of patience rescues it, because the asset value erodes while you wait.

None of which is the hard part. The arithmetic can be taught in an afternoon; a Shrewd could screen for candidates tonight. The hard part is what happens in your stomach when you actually go to buy one — and that is where Schloss was quietly extraordinary.