OID: How would you summarize your approach?
Edwin Schloss: We try to buy stocks cheap.
OID: Might you be just a tad more descriptive?
Walter Schloss: Each one is different. I don't think you can generalize.
In the old days, Graham had a very good theory--you just buy below working capital and you don't worry too much about the business they're in--don't worry about management, earnings or anything else.
I think it worked until about 1960 and again in the 1973-74 break.
But I think you just have to look at each situation on its own merits and decide whether it's worth more than its asking price.
OID: But everybody's got his/her own bias. For example, Graham would be called a value investor and so would Buffett. But their approaches are very different.
Walter Schloss: Warren wants franchises and good businesses. We do too, but we're not willing to pay for them so we don't buy them. I guess we buy difficult businesses.
As Warren would say, he likes to row downstream and we like to row upstream.
OID: Could you give us an example?
Walter Schloss: The Timken Company. Edwin discovered it for us. We believe it's a good company in a tough business--highly competitive, heavy industry. We own stock in it at a lower price. Timken spent some $450 million on a new steel mill a few years ago and recently announced that they intend to spend up to a billion dollars over the years on additional modernization and development of new techniques in their field.
There are about 30 million shares fully diluted. Roughly 20% of Timken stock is controlled by family members. The stock sells around $35 with a reported book of that amount but they have a big inventory reserve and are the low-cost producer in their field.
The FTC has fined foreign competitors for dumping tapered roller bearings in the United States. Competition is tough and there is no franchise but we think they make an excellent product. As a survivor, they run a tight ship. We think they have a good chance at some point to earn a decent amount on their blood, sweat and tears. You couldn't duplicate their plants for what they carry them for on their books. But there are no guarantees.
OID: In terms of the way you look at a stock, relative to the way Graham looked at a stock or Buffett looks at a stock, how do you look at it differently?
Walter Schloss: Basically, we like to buy assets.
OID: Why assets? Why not earnings?
Walter Schloss: Assets seem to change less than earnings. You could argue that assets are not always worth what they're carried for.
Graham made an argument at one point that inventory was a plus, not a minus. In an inflationary period, having a big inventory might be very helpful. While in a deflationary period, a big inventory would not necessarily be good.
But if you are going to have to liquidate inventory in the next week, that would not be good for you. If you have a nice inventory and business is alright, you benefit from having that inventory. So I don't know. It may be a wash depending on other factors.
How do people value inventory? Fifty percent of what it's carried at? It may be worth more than that. Generally, it's not as good as cash or receivables--we know that. But it may not be as bad as some people say.