Tweedy Browne LLC is one the bigger names in value funds. Their premise is simple: you can’t go wrong buying a business cheap. You especially cannot go wrong paying less for the business than it has in cash. Tweedy is more pre-Berkshire Buffett and Graham than it is…say, Munger or Fischer.
They look for ridiculous bargains all around the world. In an ideal setting, they’re buying stocks at less than NCAV. Buying at NCAV means buying a shares of a stock at a lesser value per share than cash, plus inventory, plus accounts receivables minus any and all liabilities. It’s like buying a gas station for $50,000 when it has $100,000 in the vault. No brainer.
Graham’s books are wordy, but the idea is simple – you can make money buying companies for less than they have in current assets.
Over history, Tweedy Browne has decimated the market. Some of it probably has to do with the fact that managers actually invest a significant part of their net worth in the funds they run. Why shouldn’t they? Their Global Value fund is a killer. (No, no – this isn’t an ad. But hey, Tweedy, are you hiring?)
They also have fantastic investing resources page on their website. Here’s a link to a recent publication on the most successful investing strategies.
I’ll let you poke through it at your own pace. They backtested a few strategies and found great data on:
- Return differences based on price-to-book.
- Returns for small caps.
- Returns based on holding periods
- Returns for net-nets (companies I like that trade for less than net current assets)
- Investment returns and consistency
- Historic returns for stocks by P/E
- Returns for historic low price/cash flow stocks
- Buying the worst performing stocks for the previous year.
“Surprise!” is the last thing a value investor wants to hear – boring is better.
At any rate, you’ll find that the results of Tweedy’s data-mining is not surprising: the cheapest stocks post the best returns, regardless of the country in which you buy them, or when you buy them. As a whole, this group outperforms based on any quantitative measure.
If you were to have the balls to manage your money Walter Schloss-style – buying on pure quantitative value – you’d outperform. I’m not sure I have the desire to simply buy stocks because they match a screener. That’s up to you. Joel Greenblatt is all about it.
But the good news is that if you’re investing in the cheapest quartile, quintile, or decile of the market, odds are that you’re going to outperform. This has been observed forever, hence why its part of the Fama-French three factor model indexers like Canadian Couch Potato love.
Even indexers and efficient market sympathizers agree – the best stocks are the cheapest, just like everything else. Take 20 minutes today to look through this paper on quantitative value. It’s worth the read.