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"What has Worked in Investing"

TSO · 5 · 1854


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Value investors or those interested in going long in equities may want to take a look at this.

What Has Worked in Investing: Studies of Investment Approaches and Characteristics Associated
with Exceptional Returns

It's an old, revised resource item published by Tweedy Browne LLC (one of the most eminent value funds EVER), and I just found it by visiting the website. :D


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di ko talaga ma intindihan to thrifty explain nga:D


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it's a compilation of studies (i.e. research backed-up by hard, statistical evidences) which support tenets of and exceptional returns brought by value investing :)


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^ Precisely.

Hehe, I was bored so I was just scouring the internet and when I found it, I was like, "oh look I should share this". XD

Post Merge: 1314474624
Okay, let's see if I can sum it up.

1. Low P/B, preferably <1
2. Low P/E. Recommended Earnings Yield at least 2x of highest-grade bonds. Low P/E translates to high div. yields and low P/CF
3. Insider Purchases
4. Significant Drops in Market Price (an ode to "reversion to the mean")
5. Small Market Caps

It is mentioned in the section on Graham's net-net strategy that the ideal purchase price is approximately 67% of intrinsic value. However, there is no statement of how much risk is being associated here (discount rate?) so we don't know if this 67% is followed in absolution or if it is relative, considering that US stocks earn considerably less than Philippine stocks.

In page 6, table 4, over a 3Y holding period, stocks trading as much as 1.2 - 1.4 times book value performed better than the SP500 index, which only grew as entry P/B dropped.

Let's see... page 24. Cash Flow is defined as post-tax net income, less minority interests, preferred dividends, employee distributions, with D&A added back. "Most profitable strategy was investment in lowest P/CF quartile", meaning it would be profitable to screen for prospects in the lowest 25% of P/CF figures.

Page 28 attempts to answer the question if low P/CF results in higher risk, which explains the higher returns. Noted in table 26, for companies with low P/CF ratios (which covers a 22Y period from 1968 to 1990), is that the worst 25 months had low P/CF companies losing less than those on the high end, while earning either comparably or better than companies with high P/CF during the good months.

Table 27 basically graded portfolios by a value index, with #1 meaning "Growth-oriented portfolio" and #10 "Value-oriented". In all cases, whether dealing with large caps and small caps, value has performed significantly better than growth did in the 30Y, 20Y, and 10Y period through 2001, and in terms of compounded annual growth rate, too. It has also performed better than the SP500 index and the Russell Indices.

It is mentioned in Page 33 that "high div yields generally outperform those with lower yields", but the best returns come from a combination of high yields and low payout ratios. Exhibit 2 in page 34 show that, from 1990 to 2006, investing in cheaply-priced companies with high earnings retention results in CAGRs above 13%.

Page 35 gives us a bar graph that basically asserts that, on a 27 year period from '70 to '96, cheap companies declined less than the market during troubled times. It counts all down quarters.

As for studies of insider purchases, they assume two things: one, more than one insider bought a company, and two, purchases exceeded sales in same period.

Direct quote from page 37:

In Tweedy, Browne's experience, officers, directors and large shareholders often buy their
own company's stock when it is depressed in relation to the current value which would be
ascribable to the company's assets or its ongoing business in a corporate acquisition, or to
the likely value of the company in the near to intermediate future. Insiders often have
“insight information” — knowledge about new marketing programs, product price
increases, cost cuts, increased order rates, changes in industry conditions, etc. which they
believe will result in an increase in the true underlying value of the company. Other
examples of insider insights are: knowledge of the true value of “hidden assets,” such as the
value of a money-losing subsidiary that a competitor may have offered to buy; or the value
of excess real estate not required in a company's operation; or knowledge of the likely
earning power of the company once heavy non-recurring new product development costs
stop. It is not uncommon to see significant insider buying in companies selling in the stock
market at low price/earnings ratios or at low prices in relation to book value.

It has been Tweedy, Browne's experience that a company will often repurchase its own
shares when its management believes that the shares are worth significantly more than the
stock price. Share repurchases at discounts to underlying value will increase the per share
value of the company for the remaining shareholders. When officers and directors are
significant shareholders, the money which the company uses to buy back its own stock is, to
a significant extent, the officers’ and directors’ own money. In this circumstance, the
repurchase of stock by the company is similar to insider purchases

In page 40, the PDF file reports that a study has concluded that stock returns had a tendency to revert to a mean over very long periods of time (obviously longer than a year). "Current high
investment returns tend to be associated with lower investment returns in the future. Current low investment returns tend to be associated with higher investment returns in the
future. The authors suggest the desirability throughout the world of investment strategies involving the purchase of shares whose prices have declined significantly."

In the conclusion at page 49...

In Tweedy, Browne’s experience, contrary to some proponents of the efficient market
theory, it is possible to invest in publicly traded companies at prices which are significantly
less than the underlying value of the companies' assets or business. Two very plain examples
of undervaluation are: a closed-end mutual fund whose share price is significantly less than
the underlying market value of its investment portfolio, or a company whose shares are
priced at a large discount to the company's cash after the deduction of all liabilities. These
types of easy-to-understand bargains do appear in the stock market recurrently. However,
it cannot be said with certainty that a clear-cut bargain investment will produce excess
investment returns, and it is impossible to predict the pattern, sequence or consistency of
investment returns for a particular bargain investment. It can only be stated with certainty
that many studies have repeatedly shown investment in numerous groups of bargain
securities over very long multi-year periods has produced excess returns.

The managing directors of Tweedy, Browne have always been fascinated by studies which
have examined the correlation between securities possessing a common characteristic, or
combination of characteristics, and investment returns. Unlike science, where two parts
hydrogen and one part oxygen always produce water, the managing directors do not believe
there is an investment formula that always produces an exceptional return over every
period of time. Investment returns, and likely favorable or unfavorable perceptions of
progress on the part of many investors, have tended to vary greatly over periods of time
that are quite long by human standards, but probably too short in terms of statistical
measurement validity. However, as this paper has indicated, there have been recurring and
often interrelated patterns of investment success over very long periods of time, and we
believe that helpful perspective and, occasionally, patience and perseverance, are provided
by an awareness of these patterns.

Tweedy, Browne believes it is likely that many of the investments which will generate
exceptional rates of return in the future, over long measurement periods, will possess one
or several of the characteristics which have previously been associated with exceptional
returns. Tweedy, Browne intends to continue to do its best to keep its clients’ portfolios
and the managing directors’ own portfolios “well stocked” with investments possessing
these characteristics
« Last Edit: Aug 28, 2011, 03:50 AM by TSO »


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