Who Is Walter Schloss?

Like Warren Buffett, Walter Schloss too had been taught by Bnjamain Graham in the discipline of value investing. Practicing Graham's teaching Schloss too achived great investing success.

Legendary Value Investor Walter Schloss

Apparently Schloss did not possess formal college degree and had been employed as a runner on the Wall Street in 1934 at the age of 18, and had taken Graham's investment classes at the New York Stock Exchange.

His focus was on book value of stocks rather than on earnings. See what he says in his own words, "Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings."

He joined Graham at 'Graham-Newman Partnership'. In 1955 he left the firm and started his own investment firm, managing the investments of 92 investors.

Schloss achieved a compounded average growth rate (CAGR) of 15.30% for a whopping four and a half decades - maintaining a CAGR over such a long period of time is a Herculean task - as against the S&P 500's 10% for the same period.

Walter Scholl on a Stroll. Source: Bem Graham Institute for Value Investing

Schloss' Teaching:

The 16 golden rules for investing propounded by Walter Scholoss, gleaned from a 1994 lecture he gave:

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).

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 the weaknesses in your thinking. Buy on a scale down 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.

9. Don’t be in too much of a hurry to see. 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 rations high. If the stock market historically high. Are people very optimistic etc?

10. When buying a stock, I find it heldful 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 yeas 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. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

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 inconnection with purchase and sale of stocks.

14. Remember the work 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 stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

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

Walter J. Schloss Source: Wikipedia
Born	August 28, 1916 New York City, U.S.
Died	February 19, 2012 (aged 95) New York City, U.S.
Nationality	United States
Education	No formal college education
Occupation	Investor
Employer	Graham-Newman Partnership
Known for	Manager of Walter & Edwin Schloss Associates

Is Ramco Systems Ltd. a Good Investment Bet?

Prama-Facie Observations:

Ramco Systems’ scrip does not justify inclusion in a value investing portfolio.

Why?

Let us investigate.

Please closely examine the following picture.

Picture Shows Ramco Systems Share's Market Snapshot

Critical Remarks:

1. PE Ratio: Ramco’s PE Ratio is 42.31 whereas the maximum acceptable number is 15 and the best for Indian conditions is 10.
2. P2BV Ratio:  Exceeds the recommended 1.50 times the book value.
3. Distance from 52 week low: On this parameter the scrip is in safety zone – it is not very far away from the 52 week low – a mere 6.28% to be precise.
4. Dividend Yield: Zero percent compared to the recommended five percent asnd above.

In light of the above the scrip shall be rejected.

Profitability Analysis:

Ramco Systems Ltd.				(Rs in Crores [10 million])
Profit and Loss Accounts	Mar ' 16	Mar ' 15	Mar ' 14	Mar ' 13	Mar ' 12
Income
Operating income	262.66	222.97	160.81	169.09	151.82
Expenses
Material consumed	2.1	0.96	2.03	7.67	1.35
Manufacturing expenses	0	0	0	0	0
Personnel expenses	104.26	92.42	74.28	88.83	71.8
Selling expenses	0	0	0	0	0
Adminstrative expenses	81.35	73	61.89	59.03	57.4
Expenses capitalised	0	0	0	0	0
Cost of sales	187.71	166.38	138.19	155.53	130.55
EBDITA	74.95	56.59	22.62	13.56	21.28
Financial expenses	3.57	12.01	11.45	6.05	2.56
Depreciation	45.46	44.45	37.12	32.4	27.34
EBT	25.92	0.13	-25.95	-24.89	-8.62
Other write offs	0	0	0	0	0
Other recurring income	4.6	1.79	6.67	6.08	5.66
PBT	30.52	1.93	-19.28	-18.81	-2.96
Tax charges	6.51	0.38	0	0	0
PAT	24.01	1.56	-19.28	-18.81	-2.96
Non recurring items	0	0	0	0	0
Other non cash adjustments	0	0	0	0	0
Reported net profit	24.01	1.56	-19.28	-18.81	-2.96
Earnigs before appropriation	-57.61	-81.62	-82.27	-63	-44.19
Equity dividend	0	0	0	0	0
Preference dividend	0	0	0	0	0
Dividend tax	0	0	0	0	0
Retained earnings	-57.61	-81.62	-82.27	-63	-44.19
EBDITA % to Sales	28.53%	25.38%	14.07%	8.02%	14.02%
EBT % to Sales	9.87%	0.06%	-16.14%	-14.72%	-5.68%
PAT % to Sales	9.14%	0.70%	-11.99%	-11.12%	-1.95%

Remarks:

1. EBDITA margins are decent even though you can get many excellent companies posting 50% and above EBDITA margins still available at PE Multiples of below 10.
2. The company has suffered losses for three years from financial years (FY) 2012 to 2014. In FY 2014 a marginal profit was made. In FY 2015 somewhat acceptable EBT margins are shown but not good enough. A value investor can only pick a stock that has shown consistent and handsome profits for at least 10 to 15 years.
3. Under the circumstances the scrip does not qualify inclusion in the portfolio with respect to profitability parameter.

Dividends:

In the last five years the company has not paid a penny by way of dividend. Of course it had not made profits and therefore it could not pay. But as far as the investor is concerned he or she is rightfully entitled annual dividend for the investment. After all ‘dividends are rightful wages of investors’.

Actually to be selected for investment a stock should have paid dividends as long as possible without break but at least for fifteen years in the past. Therefore Ramco clearly fails in this test.

Five-year price graph:

Five-year Price Graph of Ramco Systms Share

The graph above shows that the stock price having remained muted for two years suddenly springs-up to life and steeply climbs from Rs.200 to over Rs.1000 apiece.

What to make out from this?

1. Probably on the back of losses the share was languishing at about Rs.200 levels.
2. The moment profits were visible in FY 2013-14 optimists have started showing extreme enthusiasm for the scrip and taken it to the level of Rs.500.
3. During FY 2015-16, the optimists’ enthusiasm has reached a crescendo with the price crossing Rs.1000 mark.
4. In the final analysis optimistic investors seem to have put Ramco in the league of other information technology behemoths and have given Ramco similar PE Multiple.
5. In a remote yet plausible case, perhaps a few strong market players are taking the price up and when they decide to sell, after it has reached a certain level, the fringe players could be awfully stuck.

Final Conclusion:

On account of losses till recently, non payment dividends, lack of proven dividend track record, high PE and P2BV Multiples, zero dividend yield and so on, in the present day Ramco Systems Ltd.’s shares are not justified for inclusion in a value investor’s portfolio. Maybe after a few years the scrip may be revisited and it sustains profits and starts paying dividends and various parameters justify it may be included, but certainly not today.

Important Notice:

Kindly note that this is a very superficial analysis of the company as he results of such a preliminary study do not justify any further investment of time for an in-depth analysis at this stage.

Further Reading:

• It is Far Better to Buy A Wonderful Company at a Fair Price than a Fair Company at Wonderful Price
• What Is Price To Earnings Ratio?
• What is ‘Price to Book Value’?