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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
(continued from preceding
page)
Mario Levis, Professor at the School of Management University of Bath, United Kingdom, examined the association between price in relation to earnings and investment returns from April 1961 through March 1985 in Market Size, PE Ratios, Dividend Yield and Share Prices: The UK Evidence. Using the London Share Price Database, the companies for which earnings information was available were ranked according to price/earnings ratios on each April 1 from 1961 through 1985 and sorted into quintiles. The annual investment returns and the cumulative value of £1 million invested throughout the 24-year period in each of the five groups is shown below in Table 20.
Table 20:
Investment Results of U.K. Companies According to Price/Earnings Ratios, April 1961 through March 1985
|
Price/Earnings Ratio Group 1 (Lowest price to earnings ratio) 2 3 4 5 (Highest price to earnings ratio) Market Index: Financial Times - Actuaries All Share Index - Value Weighted |
Investment Return |
of £1 Million invested in April 1961 at March 1985 (Millions) |
David A. Goodman and John W. Peavy III, Finance Professors at Southern Methodist University, described their analysis of investment returns from stocks ranked according to price/earnings ratios within each stock's respective industry in their book, Hyper-Profits, Doubleday & Company, 1985. The authors ranked the stocks in each of more than one hundred industries according to price/earnings ratios within the particular industry itself, and sorted these companies within each industry into five quintiles based on price/earnings ratios. At the end of each year this procedure was repeated. The test period was 1962 through 1980, and 2,600 companies were examined in each of the years. Table 21 shows the annual investment returns for the five groups, and the cumulative return from this approach.
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