Walter & Edwin Schloss Associates, LP. 2°22" 27) °°? ‘62 VANDERBILT AVENUE » NEW VORK.NY 10017 (ara) avonesa SCHOOL UPPE COLUNSE: nefore I begin to talk sbout the subject tell you a little about myself so that you can see where I am comng from and perhaps from this you will understand why I am doing what 1 and my son, Edwin are doing. I have been around a long time and wall Street has changed a lot so here goes Back around 1918, my mother's best friend married very attractive ter, he got de man with no money. (hat else is new?). Shorty. ther a tip from his uncle about lexicen betroleum (wlet else is n In thosedays, you could buy stocks on very little margin, perhaps 5%. He bought as much stock as he could end as it went up he kept buying it. As luck would have it or inside information would have it, vexican Petroleum wac purchased by Narry Sinclair who merged it with his Consoligted Oil. Sinclair wes later involved \in the Veapot Dome scandal. in any case mother's friends husban“took the money he made and hought a seat on the !.¥.Stock Exchanve, He and a friend surchased o lovely 160 acre farm in Ossining “¥ and he and his wife went to live in the sherry Netherlends Hotel. Bece to visit them quite often their son wes close to me in age, I use in the country. As 2 boy of around 10-12 I liked their life style remember this was around 1928) and Neville, the father ha@ 2 eat ois de vivre. jiall Street sounded interest ng and exciting but i instinctively didn't like the gambling pert. About this time arpund 1930, there wes a lottery at the Exchance, Only 2 chances at $500. fora sheyrolet each» Neville in it ond I'm sure be got rid of it as he auburn one of the high flyers of the day end a car mede by GK and didn't need another care. made b: liked the results of the profits in the markets at that time but e the way it Aun aomhline ana instinctivelyWalter & Edwin Schloss Associates, L. P.. (212) 3701088 was made. Then the Depression hit one of the things I'vé learned is to stay with what you like to do rather then do sonething you don't like but think you can make money out of it. anyway, I got a job after graduating from high school im 1934 om“attouner at Loeb Rhoades, now part of Lehman Bros. Z don't know if they have any runners today but they were the men and boys who delivered securities by hand ‘to the various brokers on the street. There was no Centrel Depository then and you worked half a day Saturday because the Bxchange was open until 12 noon, About a month leter I wos promoted to the niers department, then called the cage becouse the stock were there during the day, About 2 year later d Erpé, @ very bright man and the vartner in charge of tical Department which is what it was called then and asked him if I could get into his department. Armand said no but he said there was a new book that recently had come out called Secu ity Analysis" by or: & Do@hand if I studiead the book and learned all that was in it, I wouldn't need to know anything else tock Exchange ran a seri: about securities. The for the work on the stock exchange including accounting and finance and after taking them I was allowed to take a course in “Security nalysis" with Sen Graham. Tt was a great experience and I remember toking 2 different classes with him. ‘he gixty paid for the class semester $10 2 > but perhaps which I think t was $20, In the class was a fellow named Bch Neilbrunn who is the man who crested the Chair in value investing for rrofessor Greenwald sme 50 odd yeors later. Ben was a very simple straightforward man with a brilliant quick mind. He would use current examples of undervalued stocks which made it table for some of the professionals on the street to teke his class.Walter & Edwin Schloss Associates, L.P. (212) avons Ben would like to teke comvanies that apvesred close in the alshabet and compare them stetisticelly. I remember specifically Coca Cola and Colgate Falmolive where he s| owed statistically how al to much cheaper Colgate was than Coke and he compared Dow Chem Distillers Seagran (now Seagrans) in which seagrams was much cheaper. 't look for ‘here was no talk of franchises in those days. Ben didn franchise value or managements. He felt that m,nagement showed up in the price of the stock. If management was good the stock sold at a higher P-1 because its management : as better. Basically went to lose money. He had had a rough time during the Depression and in 1938 to. 1940 when I tock his courses, he was looking for protection on the downside. 7 : Since I liked the way Sen thoughfend I liked the statistical side, I guess I stjll look st stocks with the ides of not losing money. nit whe only problem with this kind of thinking is that you emphasize the srofit potential enough. when a stock goes up to what appears a reasonable price, we sell because the growth in our portfolio is limited. Ip thinking sbout how one should invest, it is important to look at your strengths and weaknesses. If you don't like to lose money and it affects your judgment, don't buy things that can go 4 a great deal, I must say, . have put in 2 stop loss order because if you like a stock and buy it and it goes down, then you should buy more if you can afford to, I find it very difficult to buy a stock that has © up after we stort buying it. asically, we try to buy value as exvressed in the differential what we think its between its price orth. whet we think a company is worth may not be the correct one and this means we have to bok at the risk on the downside,/ Walter & Edwin Schloss Associates, L. P. (212) s70-1088 Ben Grahan didn't visit managements because he thought the figures told the story. Peter Lynch visited literslly thousands of compsnies and di icking. I never felt that we could do this kind a superb job in his of work and would either have to quit after a few years or I'd be dead. I didn't like the alternatives and therefore, went with a more passive approach to investing which may not be as profitab§E but if practiced long enough would allow the compounding to offset the fellow who was running around visiting managements. I also liked the idea of owning a number of stocks. warren Suffett is haypy with owning a few stocks and he if he's Warren but when you aren't, you have to do it s righ the way thet's comfortable for you and I like to sleep nights. hen you are managing the other fellows money, it is importont not to get sick over it. then Ben was operating in the 1930s and there were a lot of companie: selling below their net working capital Sen liked these stocks because they were obviously selling for then they were sorth but in rentt most cases, one co ldn't get control of them and so, since they ble, no one wanted them, Most of these companies were very profit controlled b the founders or their relatives and since the 30s was a poor period for business, the stocks remained depressed. what would bring about a change? 1, T£ the largest controlling stockholder died, the Estate may want to sell control. then the compeny would meke money. « If business got bette was a good exemple of this. The large asset base let many secondary compani earn good money in the war years, the excess profits tax didn't apply to them and the stocks did well. 2 have civen of Graham-Neuman's pen-5nd investne! did vell in those holdangs in 194. i in prospered. in which ¢! years because the businesWalter & Edwin Schloss Associates, L. P. (212) s701888 Grahom-Nevman didn't do too vell sfter the way in that type of security but their stockholgers got rich when G-r distributed ¢ stockholders in 1945 and GEICO became a growth stock. I remember going to Chicago when I worked for Ben in the late 40's and talked to Kr. Bush the President of Diamond 7 Motors (no relation to George) a manufacturers of heavy duty trucks alongside “eck, shite and Autocar. A Mr. Tilt owned 50.1% of the stock and wouldn't sell. are. I asked ne stock sold for 10 an@ had a working capital of $20, a + Bush why anyone would buy their trucks as they were quite exsensive trucks that weren't made by and he said there were people who liked to b the big companies. i guess that may also be true in our business. years leter, the way, when Mr. Silt finally died at age 90, a few stock wes sold at a premium over $20 to lack or white. Rasy washing e and “hriftimart both on the amer. Stock Exchange had an voting and a "8" non voting stock. The companies were eventually sold but it took » long time for these things to occur with 9 lew suit in y, these kinds of situations are hard to the letter case. t 7 find which is ublish ou portfolio, If the stock goes show the world down we may want to buy more. jie certainly don't want to our mistakes. an open end fund, there are problems that a closed-end In running fund doesn't have. Each yeer stavts January 2nd and ends on December 31st. "his means thet if you were fortunate enough to buy a stock at $10 and find it at $20, at the year end, you had » great year with a big unrealized profit but beginning on a new year,you are storting at $20. If at the end of the second year, the stock is at ©15. you have lost 25% THAT Peng, cs money$if thot « + or the re your only holdin of the stockhold at the beginning of the second year, he will be e do this, you investor who bought 4 , ‘happy and may liquidate his holdings. If enough pe ve:Walter & Edwin Schloss Associates, L. P. 52 VANCERBILT AVENUE * NEW YORK NY 1007 (21a) vores won't have 9 compan?. This is and will be a bic problemfor open-end funds. They want more investors but have to recognize the risk, This is why we like to own stocks that we think have downside protection. ‘the trouble is that many might not have too much upside potential. It's a more passive way to invest but it's comfortable for us. If you are investing for vourself, this can be most rewarding but sssume you are invest ‘for others es a vortfolio manager. Your clgints have to understand your approach to investments. If they don't agree with this approach, then they probably shouldn't invest with you en Warren Buffett gave his Fermes talk ebout value in 1984, he talked about the innoculation to value investment. For some people it takes but others don't care for it. Let them so elsewhere for investment management. By setting up Berkshire liathaway, warren has done everything very rationally. 1. By having insurance companies, he is able to use stocks as well as bonds as reserves. Sy hoving large reserves he “oesn't have to pay dividend If Berkshire was only a very profitable manufacturing company with no insurance companies it would have to pay out some dividends. 2. By keeping 211 the earnings, Berkshire can kee» reinvesting their profits and compound their results. By owning growth stocks he is able to incresse tha value of the company. There has never been an investor in other companies who has been as brilliant or as successful as warren. Since, it is in effet a closed-end investment company, darren doesn't have to worry about investors redeeming their shares. Yor example, the narket collepes and Berkshire gees dovn 30%) which it has done several times before, no one can redee their shares. Some investors have 90 of their who net worth in Berkshire. T know a man, an outstanding bridge playe: told me he cashed in his Berkshire stock when icuideted in 1969-70 because he thought he could do better in the stock market.Walter & Edwin Schloss Associates, L.P.. 52 VANDERBILT AVENUE » NEW YORK, NY 10017 (212) s701888 Z€ you are a portfolio manager with a lot of clients and vou own growth stocks such as GEICO or Coca Cols and you are up say 40% for the year, going to you worry that if the market goes down sey 30% your, clients ar be very unhappy even if you write them what great cpmoonies they are. ravin: I remember having @ woman client who about A.*.Jones an early hedge fund. They had done brilliantly for a number of year and each year as around uit back more and more money until 1 year, I guess it anicked and liquidated her h as down 50%. 1962, A+.Jones rivate limited thet time. That is one denger in an open-end fund or a partnership. You can never rest on your success, while closed-end funds can keep on going even if they sell at large discounts from Net Asset Value which they used to do. ly point is that one has to invest in ways that are comfortable for you. I like Sen's analogy that one should buy stocks the way you buy groceries not the way you buy perfume. some kinds of stocks are easier to analyze than others. I agree with warren to keep it simple and not use higher mathematics in your analysis. I'm '§ smused when I see a stock go from say 25 to 20 in 1 day when the e@ out because the company earned 31¢ instead of 35¢. I sew a recent headine in the ijall st Journal (8 ]23)"MCRE INVESTORS TRY FLAYING CONMCDITIES” I've been down in Yall Strect including midtown Zor some 56 years excluding the 4 years in Yorld War 2. Actually the 4 years in the service were good training years in building confidence. “n any case I find that we don't own stocks that we'd never sell. I guess we are kind of a store 'd like to sell them at a hat buys goods for inventory (stocks) and w wait profit within 4 years if possible. ve receive some income while w hich is more than 9 store does but,unfortunetely, we have to wait for someone to come along and make our merchandise go uy in price. We can't do les. nis ourselves by running 5Walter & Edwin Schloss Associates, L.P. (212) 701888 us sleep nigh je invert th to invest this way and we'd say to then, ne like: Not eve it the way that you y and Tt is hard to ch ith our approach. even though there for over 70 years . ne very well but he is very petient. I'm not as vatient but I'd like t your strenwkks ond Know whet you want to do, sses, don't kid yourself, enjoy your work and have high ethical als of x stock market trading scan @ards, Despite all the insid tered financial analyst vas involved. the 1980s, not one c’I thought you might Mike to see what securities Graham-Yewman held some 43 years ago, so I dug up an old report I kept had it “eroxed and have énclosed it for your perusalyAs of January 31,195 As you can see the numbers are tiny compared to today's markets. I find it interesting that of the 62 industrial commpa stocks In the list .. valued at $3,288,000, only 2 stocks Crowley Milner and Lukens steel remain. Douglas Aircraft is part of NeDonnell. xeraft, Todd shipyerds recently emerged from Chapter 11. over 50% of the totel market value is made up by Atlantic Gulf & Jest Indies which was a controlled company and was liquidated by Graham-Newman. You might find it interesting after perusing the list to look up what happened to some of the items Graham-lewman owned. Synce numbers are much larger today and the working capital stocks (net net) have all but disappeared, I can understand why investors are looking elsewhere. You may find my discussion of a company I find undervalued not to your taste but it may offer some protection on the downside which I find interesting. an awful lot of effort was put into finding these stocks end after finding them, you can see how little money was invested in then.Walter & Edwin Schloss Associates, L. P. 2 VANDERBILT AVENUE + NEW YORI NY 10017, ovenber 17, 1993 (i2}a700808 a VALU INVESTING ce: fat kind of stocks do we leck at for investments? ie look for stocks that are depressed. uhy are they depressed? are they selling below book value? Is good will in book value? what hac been the high low over the Have they any cash flow? Have they any net incove? ow have they done over the past 10 year. at is their debt level? het kind of an industry ere they in? ¢ are their prof rgins? How are their competitors doing? Is this co doing poorly compared to its competitors? t 10 years? nnual report,proxies and valueline and qua-terlies. on the downside vs. the upside potential? ers own? e get their ar hat appears to be the ris How much stock do the ii haps a few other items, if the osition. Based on the above factors and figures look satisfactory, we will take an initial @ will watch the action of the stock and decide how much more we may want, It will depend a good deal on price. Generally, we are happy with a 5% holding but we can go up to 10-12% if'we really like it a lot. Cince we own some 60-75 stocks, we have small holdings in a number of securities. One reason for this is that while selling a stock, it goes down so th,t we end of holdings some of its shares. Sometimes when buying a stock it goes up and we don't want to follow it up so we step buying it. On the whole we are allergic to bonds. voday, what has happened? Everyone is now looking for franchises. the key, in my opinion, to successful inv ng is to relate value to price today. Instead of present value many investment managers are relating future value to present price. Since I can't do that, Twill let others de it and stick to what has worked for us.Walter & Edwin Schloss Associates, L. P. Vovenber 17,1993 ta)avoveas nce you undoubtedly like to hear about a current situation, we will use ASARCO as an exemple of a stock we have an interest in. The shares are cur ently selling at ASARCO is old american founded by the Guggenheins,* Bernard Baruch was one of the early owners. Interest ngly enough, during the 1949s, Sen Graham advised Zaruch acific which Ben wrote up on several situations, notably Northern in the Intelligent Investor. In any case, American Svelting was one of the Dow-Jones 30 stocks until it ran into a lot of financial trouble. Dow-Jones dropred it just like it dro ped Internstiompiorvester and Loews before Larry ch wade it such a success, At least these changes show the fluidity of the capitelist system. way ASARCO decided that they had to own some copper mines be the smelting busin s no longer profiteble. They bought the 8 nine from Kennecott after Kennecott wes token over and they ona. To modernize also purchased the Hission Nine both in RCO between 1989 and 1992 spent these mines and other operations A: some $20, a sharo and had a cash flow of $20. a share. They have reduced their dividend from $1.60 a share to .40¢ on about 42 million shores, to reduce their debt but so far haven't been too successful. They have some $873 million ebt compared to a net worth of $1.3 billion {411 copper prices recover? They -have some silver but copper is their the N.I.N. Holding main natural resource, 25% of their stock owns 52 company of Australia but they own some 17: hern er which has a lot of coprer but they are reinvestit eru Cc their Peruvian earnings back into new min nere. “Sarco has been trying to sell their exican capper mine but haven'tWalter & Edwin Schloss Associates, L. P. (212) s701048 RCO'S copper costs are higher than Ehelps bedgés ince the decline in the price of copper but sells below $20 with a $32. book and a .40¢ dividend since conpared to Phelps Dodge s at wit ook of $29., we akeover Cyprus Kines is involved in a ove book value. x and is also selling 411 do the best over the Time will tell which of these companies s but we thoug! co offered us the most beng for the buck or as others might s: at the price, It certainly is no growth stock for growth.