TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
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The compound annual return in excess of the market index from the lowest 20% of the stocks, in terms of price/book value, was 8.91%. For each $1,000,000 invested, the low price/book value stocks returned $407,000 more on average than the market index in each four-year period.


The authors point out the investment return reversion which occurred in the periods examined in their study. The average cumulative return for the lowest price/book value stocks in the four years prior to portfolio formation was 25.8 percentage points less than the market index. This group of companies, which had performed so poorly in the stock market, subsequently increased 40.7 percentage points more than the market index in the four years after portfolio formation. The highest price/book value stocks which had excellent investment results in the four years prior to portfolio formation (76.2 percentage points in excess of the market index), subsequently returned 1.3 percentage points less than the market index in the four years after portfolio formation.

Another intriguing aspect of the study was the contrast between the earnings pattern of the companies in the lowest quintile of price/book value (average price/book value equaled .36) and in the highest quintile of price/book value companies (average price/book value equaled 3.42). Table 3 describes the average earnings per share for companies in the lowest and highest quintile of price/book value in the three years prior to selection and the four years subsequent to selection.

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