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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
 (continued from preceding page)


Are Low Price to Cash Flow Stocks' Higher Returns, as Compared to High Price to Cash Flow Stocks, due to Higher Risk?
In an attempt to examine whether the higher returns of low price to cash flow stocks were due to greater risk, Professors Lakonishok, Vishny and Shleifer measured monthly investment returns in relation to price to cash flow between April 30, 1968 and April 30, 1990 in the 25 worst months for the stock market, and the remaining 88 months in which the stock market declined. In addition, monthly returns were examined in the 25 best months for the stock market and the 122 remaining months in which the stock market increased. The results of this study are shown below in Table 25.

Table 25:
Average One-Month Investment Returns in Relation to Price To Cash Flow in the Worst and Best Stock Market Months, April 30, 1968 through April 30, 1990
                                                                                                         Price/Cash Flow Ratio Decile
                                        (Highest Price/Cash Flow)                            (Lowest Price/Cash Flow)


Worst 25 months
in the stock market
Next worst 88 months
in the stock market
when the stock market
declined
Best 25 months
in the stock market
Next best 122 months
in the stock market
when the stock market
increased


1

(11.8%)






(3.0)



12.1





3.7


2

(11.1%)






(2.8)



12.5





3.9


3

(10.6%)






(2.7)



12.2





4.0


4

 (10.3%)






  (2.4)



  11.9





3.8


5

(9.7%)






(2.3)



11.6





3.9


6

(9.5%)






(2.1)



10.9





3.8


7

(9.0%)






(2.0)



11.2





3.8


8

(8.7)






(1.9)



11.5





3.8


9

(8.8%)






(1.6)



11.9





3.7


10

(9.8%)






(2.0)



13.6





3.8


As Table 25 indicates, the low price to cash flow stocks outperformed the high price to cash flow stocks in the market's worst 25 months, and in the other 88 months when the market declined. In the best 25 months for the market the low price to cash flow stocks also beat the high price to cash flow stocks. The monthly results were similar for both high and low price to cash flow stocks in the remaining 122 months when the stock market increased.

The professors conclude: "Overall, the value strategy [low price to cash flow] appears to do somewhat better than the glamour strategy [high price to cash flow] in all states and significantly better in some states. If anything, the superior performance of the value strategy is skewed toward negative return months rather than positive return months. The evidence [in Table 25] thus shows that the value strategy does not expose investors to greater downside risk."

Page 28 of 42

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