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What Has Worked In Investing

What Has Worked In Investing

Tweedy, Browne Company LLC
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Tweedy Browne survey of empirical studies supporting value factors.

Summary

Tweedy, Browne, a value-oriented investment firm with a history going back to the 1920s and a connection to Benjamin Graham, assembled this compilation of academic and practitioner studies on what characteristics have preceded superior stock returns.

The studies are summarised rather than reproduced, and the compilation organises them by characteristic. The categories include low price relative to book value, low price relative to earnings, low price relative to cash flow, high dividend yield, small market capitalisation, low price relative to historical high, insider purchases, share repurchases, and the combination of several of these. For each the firm summarises the studies, the periods and markets covered, and the measured return differences between the cheapest and most expensive groups.

The compilation is a marketing document for a firm that manages money on these principles, which readers should note. It is also useful precisely because it assembles in one place a body of evidence that is otherwise scattered across journals. Its limitation is that it presents studies without engaging the criticisms, particularly the arguments that the value premium reflects risk rather than mispricing, that data mining across many characteristics produces apparent effects, and that several of the documented premia have weakened substantially since the studies were conducted. It should be read as a bibliography with summaries rather than as an argument.

Key takeaways 7

  1. Stocks priced low relative to book value, earnings and cash flow have historically produced higher returns than expensive ones.
  2. The measured return differences appear across multiple countries and multiple periods, which reduces the likelihood of a single-market artefact.
  3. Small capitalisation stocks produced higher returns than large ones over the periods studied.
  4. Insider purchases and company share repurchases have preceded superior returns in the studies compiled.
  5. Combining several cheapness characteristics produced larger measured differences than any single one.
  6. The compilation is a marketing document for a firm managing money on these principles, which readers should weigh.
  7. It presents studies without engaging the criticisms, including that the premia may reflect risk and that several have weakened since.

Who should read it

Value investors who want the empirical studies on cheapness characteristics assembled in one place, read alongside the criticisms it omits.

Where it sits in the reference 2

Styles
Styles

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