The Temperament: Catching the Falling Knife

Every deep-value purchase feels, at the moment you make it, like a mistake. That is not a flaw in the strategy. It is the strategy.

Consider what buying a Schloss stock actually involves. The price has fallen for months. The last results were poor. Reputable commentators explain persuasively why the industry is finished. Nobody you respect owns it, and anyone you tell will assume you have missed something obvious. Every human instinct — the ones that kept your ancestors alive by fleeing danger and staying with the herd — is screaming at you to wait for clarity.

But clarity is precisely what you are being paid to do without. By the time the recovery is obvious, the price already reflects it. The bargain and the discomfort are the same object, viewed from two sides.

How he engineered his own detachment

Schloss did not simply happen to be calm. He built a working life that made calm the default, and this is the most practical thing a Shrewd can steal from him.

He refused to meet management — not from rudeness, but because chief executives are, almost by selection, persuasive people, and he did not want a charming hour to overrule a cold page of figures. He worked away from Wall Street’s chatter, in a room with his son, deliberately outside the daily consensus. He owned a hundred positions so that no single holding could frighten him into a poor decision. And he stayed small enough to be nimble, closing the fund rather than deforming the method to accommodate more money.

The Shrewd insight: Willpower is a poor plan. Schloss removed the temptations rather than resisting them — no leverage to force his hand, no management charm to sway him, no position large enough to panic him. Build the environment, and the discipline stops requiring heroism.

Two great investors, two opposite temperaments

Set him beside Phil Fisher and you have the two honest poles of equity investing. Both compounded superbly for decades. They agree on almost nothing about how:

The useful question is not which is superior — the records refuse to settle it — but which one you could actually execute for twenty years. An investor who cannot bear to hold an expensive stock will destroy Fisher’s method with premature selling. An investor who needs to feel respectable will destroy Schloss’ by never buying at all. Knowing which sort you are is worth more than either doctrine.

Why the discount gets so absurd — and why it lasts

It is worth understanding the machinery, because it explains why a careful buyer is paid so well for stepping in. Prices are not set by patient appraisers of value; they are set at the margin by people watching each other. A falling price is itself the news: it produces fear, the fear produces selling, the selling produces a lower price, and around it goes. Your glossary has the term — amplification feedback — and it runs identically in reverse on the way up, which is why bull markets overshoot too. Add the information cascade (one gloomy article begets ten more, each citing the others) and recency bias, and a company can drift into what is best described as a zeitgeist of neglect: not a verdict, just a mood, and one that can persist for years rather than weeks.

Robert Shiller made the academic case for exactly this. His work on excess volatility showed that share prices swing far more violently than the future stream of dividends could ever justify — that markets are moved by feedback and narrative, not solely by fundamentals. For a Shrewd, that is not a complaint about markets. It is the opportunity: if prices detach from value in both directions, then patience on the unloved side is a genuine, repeatable edge.

Which brings us to the point most people get wrong about falling knives. The aim is not to buy rubbish because it is cheap — that is how the strategy earns its scary name. The aim is to buy a business whose quality survives the neglect: sound balance sheet, real earning power, still standing in ten years — while its price is being set by a crowd that has simply stopped looking. Schloss’ balance-sheet discipline is what tells the two apart, and the community is what stops you fooling yourself about which one you are holding.

Where these ideas live

There is a corner of Shrewd’m devoted precisely to this discipline: the Falling Knives board, where members examine businesses the market has given up on and argue about which of them are genuinely broken and which are merely unloved. It is Schloss’ question, asked daily and out loud — and asking it among people who will freely tell you what you have overlooked is a considerable advantage over asking it alone at midnight.

The board has never pretended the strategy is safe on its own, and neither should we. A stock that has fallen a long way can keep falling; the market is sometimes right about the business, not merely fearful about it. Which is exactly why Schloss’ guardrails were never optional decoration — modest position sizes so no single knife can cut deeply, a sturdy balance sheet so time is on your side rather than against it, no borrowed money, and a horizon measured in years. Get those right and you can afford to be early, which a deep-value investor invariably is.

There is a price for everything. The art is knowing when an ugly price has fallen far enough to become an excellent investment — and then having the temperament to act, and the patience not to sell it a year too early.

One last gift before you go — the master’s own checklist: Munger’s 25 Psychological Biases, the complete Psychology of Human Misjudgment compressed to plain sentences on a single companion page. Shrewd investors re-read it before every big decision; bookmark it, and so will you.

— Manlobbi