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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
(continued from preceding
page)
1963 through 1980 Annual Investment Returns for Low versus High Price/Earnings Ratio Stocks According to Market Capitalization within Each Price/Earnings Ratio Category for New York Stock Exchange Listed Companies.
Price/Earnings Ratio Category
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Market 1 (Smallest) 2 3 4 5 (Largest) |
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One million dollars invested in the smallest fifth of the companies listed on the New York Stock Exchange which were priced in the bottom fifth in terms of price/earnings ratios, would have increased to $19,500,000 over the 17-year study period. By comparison $1,000,000 invested in the largest market capitalization stocks with the lowest price/earnings ratios would have increased to $8,107,000 over the same period. During the period, the annual investment returns for the market capitalization weighted and equal weighted NYSE Indexes were 7.68% and 12.12%, respectively. One million dollars invested in the market capitalization weighted and equal weighted NYSE Indexes would have increased to $3,518,000 and $6,992,000 respectively.
Dreman Value Management, L.P., in conjunction with Professor Michael Berry of James Madison University, examined the relationship between market capitalizations, price/earnings ratios and annual investment returns over a 20 1/2-year period ended October 31, 1989. Each year, all companies in the Compustat database (approximately 6,000 companies (during this period) were ranked according to market capitalization and sorted into quintiles. Then, the stocks within each market capitalization quintile were ranked according to price/earnings ratios and sorted into sub-quintiles. The investment return over the following year was calculated for each stock. The average annual investment returns are presented in Table 17.
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