Who was Walter Schloss?
Walter Schloss (1916–2012) was one of the purest deep-value investors on record, and the man Warren Buffett called "the super investor." He never went to college. He started as a clerk at the brokerage Loeb Rhoades, took Benjamin Graham's investing courses in the 1930s, later worked for Graham, and opened his own partnership in 1955. His son Edwin joined in 1973, and the firm became Walter & Edwin Schloss Associates. Across roughly the 1956-to-2000 stretch the partnership compounded returns near 15.7% a year against about 11.2% for the market — a superb long-run record built over some 45 years of low-fee, low-turnover investing. Buffett later held up Schloss as a case study in his 1984 essay "The Superinvestors of Graham-and-Doddsville."
The deep-value idea
Schloss bought cheapness measured against hard assets. His central test was price below book value per share — book value being what would theoretically be left for shareholders if the company sold everything and paid off every debt. Paying less than book means paying less than that liquidation figure. He hunted among stocks near multi-year lows, on the logic that a beaten-down price is sometimes a broken business and sometimes a sound one caught in a bad mood or a weak sector; the job is to tell the two apart. He preferred companies with little or no debt, wanted managers to own stock alongside shareholders, and stuck to businesses with a long history that he could understand.
Just as telling is how he worked. Schloss famously never visited or even called company management — he thought it clouded his judgment and that executives were rarely candid — and instead made decisions from published figures, annual reports, and Value Line. He spread risk widely, holding as many as 100 names at once, capping any single position near 20%, and weighting each by how sure he was of it. When a sound holding kept falling, he bought more; when one reached roughly a 50% gain, he looked to sell.
What the Schloss Screen looks for
- Current share price below the latest quarterly book value per share — the price-to-book test at the heart of the strategy.
- Current share price within 10% of its 52-week low, to surface beaten-down candidates.
- Long-term debt equal to zero in both the most recent quarter and the most recent fiscal year.
- Insider ownership above the median for the entire database, so management has its own money on the line.
- At least seven years of trading history, in keeping with Schloss's preference for seasoned companies.
- Over-the-counter stocks, ADRs, and the entire financial sector are excluded.
The financial sector is left out on purpose: banks and similar firms carry enormous amounts of debt, which distorts book value and makes the price-to-book comparison close to meaningless. The zero-debt rule, likewise, screens out the young and heavily indebted companies Schloss avoided.
Why it can work
The approach rests on Graham's original insight and on Schloss's own decades of results: buy a diversified basket of stocks priced below their asset value, demand a clean balance sheet, and let time and mean reversion do the work. As Buffett put it, if a business is worth a dollar and you can buy it for forty cents, something good may eventually happen. Screening on published financials keeps the process clear of the storytelling and management spin that trip up other investors — the numbers either clear the bar or they do not.
What to keep in mind
Deep value near new lows is value-trap territory. Some stocks are cheap because they deserve to be, and price-to-book is a weaker signal than it once was: more corporate value now lives in intangibles — brands, software, patents — that never reach the balance sheet, so the cheapest-on-book names skew toward capital-heavy, cyclical, or fading businesses. The demand for exactly zero long-term debt is strict and rules out many otherwise sound firms. And Schloss ran this strategy across dozens of small positions for a reason: diversification was his risk control, so a concentrated version of the screen is far riskier than the way he actually invested. He was blunt that the screen is only a start — the returns came from patient research on each name.
Sources
Warren Buffett, "The Superinvestors of Graham-and-Doddsville," Hermes / Columbia Business School magazine, 1984.
Adam Smith (George Goodman), Supermoney, Random House, 1972 — an early profile of Schloss's methods.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.