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Home Investing Strategy The Investor Who Defied Warren Buffett (And Won on His Own Terms)

The Investor Who Defied Warren Buffett (And Won on His Own Terms)

Warren Buffett is a widely admired investor.

Many seek to emulate his success, and for good reason.

That’s because, for the last 55 years at the helm of Berkshire Hathaway (NYSE: BRK.A), Buffett has put together one of the best investing track records ever, generating over 20% returns per year in book value.

Given his stature, you can see why many investors will sit up and take notice whenever the Oracle of Omaha speaks.

Well, maybe not everyone.

In particular, there is one investor that did things differently from Buffett.

Ironically, that same investor ranks highly as one of Buffett’s favourite investors.

Buffett’s personal list of superinvestors

In May 1984, Warren Buffett wrote a seminal article entitled “The Superinvestors of Graham and Doddsville” where he highlighted a group of nine investors with super track records spanning over a decade.

Among the group, Buffett chose to add a few words on the certain Walter Schloss:

“Walter has diversified enormously, owning well over 100 stocks currently.

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 doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year.

He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me.

And he does it over and over and over again.

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’s one of his strengths; no one has much influence on him.”

While Buffett penned his admiration, the late Schloss’s investment approach couldn’t be more different than Buffett’s.

The cigar butt approach

Unlike Buffett, Schloss was a disciplined practitioner of “cigar-butt” investing, a classic value investing approach that hones in on unloved shares, looking at the possibility of squeezing one last profit out of the shares.

Using his approach, Schloss would seek companies trading at a discount to book value, with almost no debt, and reasonable insider ownership.

As part of his approach, Schloss chose not to talk to the company’s management team and may have a limited understanding of the underlying operations.

The contrast in Schloss’s investing style does not end there.

He would diversify his portfolio widely, holding 50 to 100 stocks at a time, in direct opposition to Buffett’s favoured concentrated approach.

But while Buffett and Schloss may differ in their investing approach, they share almost similar track records over the long term.

According to Investopedia, Schloss’s was able to score 20% per year returns for 50 years, standing shoulder to shoulder with Buffett when it comes to delivering investment returns over decades.

“Defying” the Oracle

The story does not end here.

The late Schloss was well aware of Buffett’s approach but chose not to follow.

A quote from the book “The Value Investors” by Ronald Chan holds a key comment from Schloss, comparing himself to Buffett:

“I always held 50 to 100 stocks at any given time because it would have been very stressful if one particular stock had turned against me.

Psychologically, I am just built differently than Warren.

I see that there are many people trying to be like Warren, but they should take note that he is not only a good analyst; he is a good judge of people and businesses.

I know my limitations, so I’d rather invest in the way that I am most comfortable with.”

In other words, Schloss innately understood his own psychological limitations compared to Buffett. As such, he chose the investing approach which best suited his own character.

And that, my dear reader, is the insight that we should take to heart.

Get Smart: You are the master of your own ship

Investing is more than just following a set of rules.

The journey to becoming the best investor you can be is all about learning about yourself, including your strengths, your limitations, and your own tendencies forged by your life experiences.

No one person is similar, and each of us has his or her own unique perception of risk and reward.

And when we become self-aware of our own tendencies, we can better fashion an investing approach which best suits us, even if it differs from Buffett’s approach.

Or Schloss, for that matter.

As Schloss has shown, investors can find investing success by following their own interpretation of investing, and not through wholesale imitation of another faraway person’s approach.

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Disclosure: Chin Hui Leong owns shares in Berkshire Hathaway.