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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
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2. Low Price in Relation to Earnings Stocks bought at low price/earnings ratios afford higher earnings yields than stocks bought at higher ratios of price to earnings. The earnings yield is the yield which shareholders would receive if all the earnings were paid out as a dividend. Benjamin Graham recommended investing in companies whose earnings yield was 200% of the yield on AAA bonds. Investing in stocks that are priced low in relation to earnings does not preclude investments in companies whose earnings are expected to grow in the future. To paraphrase Warren Buffett, "value" and "growth" are joined at the hip. A company priced low in relation to earnings, whose earnings are expected to grow, is preferable to a similarly priced company whose earnings are not expected to grow. Price is the key. Included within this broad low price in relation to earnings category are high dividend yields and low prices in relation to cash flow (earnings plus depreciation expense).
3. A Significant Pattern of Purchases by One or More Insiders (Officers and Directors) 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 which 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. Frequently, companies in which we have invested have also purchased their own shares in the open market.
4. A Significant Decline in a Stock's Price A decline in price is often accompanied by a decline in earnings or an earnings disappointment. Reversion to the mean is almost a law of nature with respect to company performance. We have found that, more often than not, companies whose recent performance has been poor tend to perk up and improve.
5. Small Market Capitalization Since our investment process at Tweedy, Browne incorporates the entire universe of publicly traded companies, it is not surprising that our portfolios have held and continue to hold significant numbers of smaller capitalization companies. Most publicly traded companies are small in terms of their market capitalization. Furthermore, these companies are often associated with higher rates of growth and can be more easily acquired by other corporations.
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