Investing Principles Part I: Identifying Value based on Assets

This describes the first investment approach outlined in the Tweedy Browne Company publication entitled What Has Worked In Investing referenced in yesterday’s blog post.

The net current assets approach was developed and tested by Benjamin Graham between 1930 and 1932 and is described by Tweedy as the “oldest approach to investment in groups of securities with common selection characteristics of which we are aware.”  The technique involves identifying and purchasing those stocks which are “priced at 66% or less of a company’s underlying current assets net of all liabilities.”

This strategy was subsequently examined by a professor at the State University of New York at Binghamton between 1970 and 1983, and the study found that the mean return from net current asset stocks for that period was 29.4% per year versus 11.5% per year for the NYSE-AMEX index.

The second investment strategy outlined is that of purchasing stocks with low price in relation to book value, which was tested by a finance professor at the Yale School of Management for the period between 1967 and 1984. Data showed that stocks with low P/B had “significantly better investment returns over the 18-year period” than those with higher P/B ratios:

low pb

Additional data is provided based on a variety of metrics pertaining to lower P/B companies including market capitalization, consistency of earnings, and price-earnings ratios.