For the next several weeks, our daily blogs will include information from a 1992 publication by the investment firm Tweedy, Browne Company LLC entitled What Has Worked in Investing: Studies of Investment Approaches and Characteristics Associated with Exceptional Returns. The booklet includes data from over fifty studies of share performance woven together with insights based on the firm’s five plus decades of industry experience as to which stock characteristics have provided the best returns over time. Our blogs will provide synopses of various sections of the booklet, which Tweedy says provides “empirical evidence that Benjamin Graham’s principles of investing, first described in 1934 in his book, Security Analysis, continue to serve investors well.”
The introductory section outlines the following basic criteria the firm applies when evaluating shares for purchase:
- Low Price in Relation to Asset Value: Stocks priced at less than book value are “purchased on the assumption that, in time, their market price will reflect at least their stated book value.”
- Low Price in Relation to Earnings: Stocks bought at low price-earnings ratios “afford higher earnings yields” than those purchased at higher P/Es.
- A Significant Pattern of Purchases by One or More Insiders: The contention here is that officers, directors and large shareholders “often buy their own company’s stock when it is depressed in relation to the current value.”
- A Significant Decline in a Stock’s Price: This is often accompanied by a decline in earnings or an earnings disappointment.
- Small Market Capitalization: The firm argues that small-cap companies “are often associated with higher rates of growth and may, due to their size, be more easily acquired by other corporations.”