The chances are, most investors today will never have heard of Walter J Schloss. That’s a pity, as along with Warren Buffett and Charlie Munger he is one of the investing greats.

From 1956 to 1984, Schloss’s firm compounded returns at a 21.3% annual rate after fees. In other words, he turned $1,000 into almost $328,000 for his investors.

Over four and a half decades to 2000, when he closed his fund, Schloss achieved a compound annual return of 15.3%, turning $1,000 into roughly $623,000 after fees.

Buffett himself described Schloss as a ‘super-investor’ due to his ability to spot value stocks. By buying at a low price, when expectations were low, he was able to bide his time until his ideas paid off.

Below are some of his key rules to successful investing.

Rule 1 – Focus on the numbers

Schloss claimed he had no special ability in analysing businesses. He simply looked at asset values rather than earnings and picked stocks trading for less than book value.

His reasoning was asset values fluctuate less than earnings and are less easy to manipulate. Once he had made an investment in a company, he would revisit his thesis regularly in the light of news flow. As long as the numbers still stacked up, he would stick with his holding.

Rule 2 – Don’t talk to management

Today this might seem anathema, with investors and analysts hanging on management’s every word on earnings calls. However, Schloss didn’t trust his ability not to be swayed by smooth-talking managers and avoided contact.

In a sense this comes back to Rule 1. If the numbers stack up, there’s no need to speak with management or listen to conference calls. That said, it’s hard for investors to shut themselves off from the ‘noise’ of the markets today.

Rule 3 – Start small and ‘average in’

Schloss argued the only way to really know a stock was to own it and observe its behaviour. Therefore, he would take a small initial position and add to it gradually using a process of ‘averaging in’.

This means investing the same small amount regularly, to mitigate the effects of market timing. Investing $1,000 at a low price gets you more shares, while investing $1,000 at a high price gets you fewer shares. By investing the same amount of money each time, you are ‘averaging in’ and not overpaying.

Rule 4 – Diversification pays

Today, focused funds are very much in vogue, but Schloss preferred a diversified portfolio of up to 100 stocks. While he accepted not all of them would be winners, his reasoning was the losers wouldn’t weigh too much on performance.

By buying cheaply, he employed the same ‘margin of safety’ approach as Buffett and Munger. Therefore, when his stocks won, they won big, and he owned lots of cheap stocks.

Interestingly, unlike Buffett and Munger, Schloss didn’t rule out particular industries, nor did he dig too deeply into the fundamentals. Instead he relied on spreading his portfolio across a large number of stocks to capture more winners.

Rule 5 – Don’t sell immediately on bad news

Once again, this might seem anathema and it contradicts the old market adage that the first cut is the cheapest. Yet Schloss was resolute in not selling straight away when a company released bad news.

He reasoned the initial reaction was always the worst because every doubter and short-term holder would sell quickly. Statistically speaking, he was on the money because stocks do tend to recover after an initial sell-off. Therefore, if you find your investment thesis no longer holds up, it’s important not to over-react.

Rule 6 – Be mindful of the downside

Something investors commonly overlook is the maths behind investing. If a stock loses 20%, it needs to rise by 25% to get back to your purchase price. If it loses 50%, it needs to double to get back to your purchase price.

Therefore, while he advised not to panic-sell on bad news, Schloss was strict in his sell discipline. If a stock dropped enough to make a full recovery of his investment unlikely, he would exit the holding and move on.

Too often as investors we hold onto losing positions in the hope they will come good. This is due to ‘loss aversion’, which is a classic human emotion in response to falling share prices.

However, holding onto loss-making investments seldom pays off. Also, it represents an opportuity cost as that capital could be redeployed to make money in other investments.