Beating the Market | 16 Rules by Walter Schloss, plus 3 more

Johnny HopkinsResearch, Resources, Study, Walter J. Schloss1 Comment

(Image: The Walter Schloss approach to value investing, accessed 14 July 2016,

The good news is that there’s thousands of websites that provide great information for new investors in the stock market. The bad news is that there are thousands more not providing such great information.

If you’re new to stock market investing, here’s three important rules to start with:

Rule # 1 – Turn off the finance channel!

Rule # 2 – Stop reading the finance section of the newspaper.

Rule # 3 – Find a nice quite place in your home where you can think.

Now, you’re on you way to becoming a successful stock market investor.

One of the biggest problems with investing in the stock market is all of the NOISE that surrounds it!

Most of the greatest investors of all time sat quietly in their offices away from Wall Street to avoid all of these distractions.

Now, read this piece from one of the greatest investors of all time, its called Factors Needed to Make Money in The Stock Market. It’s written by a guy called Walter Schloss, and you’ll notice that it’s written on a typewriter, and dated March 10, 1994. Walter Schloss was founder of Walter & Edwin Schloss Associates, and he had an impeccable investing record.

If you’re brand new to investing, and you know nothing or little about finance, what you’ll notice about Walter’s list is that seven of his rules aren’t even finance-related, i.e, you don’t need to know anything about finance.

Non-Finance Related Rules

4. Have patience.  Stocks don’t go up immediately.

5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.

6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.

7. Have the courage of your convictions once you have made a decision.

8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.

12. Listen to suggestions from people you respect.  This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back.

13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

Then there’s the finance specific rules that require a little more knowledge about finance.

Finance Rules

1.  Price is the most important factor to use in relation to value.

2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).

9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high. I[f] the stock market historically high. Are people very optimistic etc?

10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it.

11. Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know how much more about a company if one buys earnings.

14. Remember the word compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

15. Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16. Be careful of leverage. It can go against you.

So how do you learn more about the finance rules?

Not so fast! Before you even think about the finance rules, you need to decide whether you can overcome the human rules. E.g., the reason investors fail to get out-performance in investing is they bail out when their stocks drop by 50%.

So, the question is, if your investment drops by 50%, are you happy to ride it out? The reality is, most investors don’t have the stomach to stay the course when their investment drops by 50%.

So, let’s think about that for a second!

Lets assume you’ve invested $10,000 of your hard earned money in a stock, and it’s now worth just $5,000.

What are you going to do? Not what do you think you’ll do!

If history tells us anything it is found in Walter’s Rule # 13:

13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

History tells us that most human beings have a sickening fear of losing money and as a result will bail-out when their stocks drop significantly in value.

Here’s a great quote by Glenn Greenberg, found in this book, Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors, co-authored by the founder of this website, Tobias Carlisle.

“Investing should only be undertaken by people who are prepared to do intensive research and analysis on their investments.”

“People outside of the investment profession usually don’t have the time to do this, and are far better off with an index fund or finding a competent investment manager— preferably one who employs a focused approach”.

So, if you’re prepared to do the necessary research and analysis you would be well advised to learn more about Walter’s finance rules above.

Walter’s strategy is based on finding a bunch of ‘net net stocks’, but these days its sometimes difficult to find enough of them to make up a diversified portfolio, because they’re typically small and scarce.

History tells us that your next best ‘bet’ is to find a bunch of cheap stocks in a deep value concentrated portfolio, like the ones here at The Acquirer’s Multiple.

Thanks Walter!

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One Comment on “Beating the Market | 16 Rules by Walter Schloss, plus 3 more”

  1. Pingback: The Three Toughest Words In The Investment Business, "I Don't Know" - Chris Browne | Deep Value Stock Screener - The Acquirer's Multiple®

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