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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
(continued from preceding
page)
Low Price in Relation to Book Value
Roger Ibbotson, Professor in the Practice of Finance at Yale School of Management and President of Ibbotson Associates, Inc, a consulting firm specializing in economics, investments and finance in Decile Portfolios of the New York Stock Exchange, 1967 - 1984, Working Paper, Yale School of Management, 1986, studied the relationship between stock price as a percentage of book value and investment returns. To test this relationship, all stocks listed on the New York Stock Exchange were ranked on December 31 of each year, according to stock price as a percentage of book value, and sorted into deciles. (A decile is 10% of the stocks listed on the New York Stock Exchange.) The compound average annual returns were measured for each decile for the 18-year period, December 31, 1966 through December 31, 1984.
As shown in Table 1 stocks with a low price to book value ratio had significantly better investment returns over the 18-year period than stocks priced high as a percentage of book value.
Table 1:
Stock Price as a Percentage of Book Value, 1967 - 1984
|
1 (Lowest price as % of book value) 2 3 4 5 6 7 8 9 10 (Highest price as % of book value) |
Compound |
VALUE OF $1.00 |
During the above period, December 31, 1966 through December 31, 1984, the compound annual return for the market capitalization weighted NYSE Index was 8.6%.
Werner F.M. DeBondt and Richard H. Thaler, Finance Professors at University of Wisconsin and Cornell University, respectively, examined stock price in relation to book value in "Further Evidence on Investor Overreaction and Stock Market Seasonality", The Journal of Finance, July 1987. All companies listed on the New York and American Stock Exchanges except companies that were part of the S&P 40 Financial Index, were ranked according to stock price in relation to book value and sorted into quintiles, five groups of equal number, on December 31 in each of 1969, 1971, 1973, 1975, 1977 and 1979. The total number of companies in the entire sample ranged between 1,015 and 1,339 on each of the six portfolio formation dates.
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