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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
(continued from preceding
page)
Jerome Baesel and Gary Stein from the University of California, Irvine and Canadian Bank of Commerce, respectively, examined the relationship between Canadian stocks listed on the Toronto Stock Exchange and purchased by insiders, and investment returns in "The Value of Information; Inferences From the Profitability of Insider Trading," Journal of Financial and Quantitative Analysis, September 1979. The authors examined insider transactions pertaining to 111 large Toronto Stock Exchange listed industrial firms between January 1968 and December 1972. The sample consisted of 403 trades by officers and directors who were not directors of a Canadian bank. The study did not examine, as a separate category, the investment results from insider purchases of stocks in which the insider buying intensity was greatest. (For example, companies in which three or more insiders had purchased shares, or companies in which the insider purchases significantly increased the insiders' holdings and represented a large amount of money.)
The authors found that insiders who were also directors of a Canadian bank had an average excess return above a risk adjusted market index of 7.8% per year. The excess return for officers and directors who were not also directors of a Canadian bank was 3.8% per year.
Companies that Buy their Own Stock
Fortune Magazine, in "Beating the Market by Buying Back Stock", by Carol Loomis, April 29, 1985, examined the investment returns from a strategy of buying the stock of companies which have repurchased significant amounts of their own common stock. Fortune screened the 1,660 stocks in the Value Line Investment Survey and selected all companies which had purchased significant amounts of their own shares in the 10-year period from 1974 through 1983. (Companies which had purchased a large quantity of stock to eliminate a shareholder who had threatened a takeover were deleted from the sample.) Investments were assumed to have been made on the approximate date of each stock repurchase. The total investment return was measured from each of these dates to the end of 1984, producing a 22.6% average compounded rate of return. The comparable return earned on the Standard & Poor's 500 Stock Index was 14.1 %.
It has been Tweedy, Browne's experience that a company will often repurchase its own shares when its management believes that the shares are worth significantly more than the stock price. Share repurchases at discounts to underlying value will increase the per share value of the company for the remaining shareholders. When officers and directors are significant shareholders, the money which the company uses to buy back its own stock is, to a significant extent, the officers' and directors' own money. In this circumstance, the repurchase of stock by the company is similar to insider purchases.
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