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


As Table 6 indicates, smaller market capitalization companies at the lowest prices in relation to book value provided the best returns. Table 6 also shows that within every market capitalization category the best returns were provided by stocks with low prices in relation to book value.

In addition, the authors, through a regression analysis, examined the power of the following characteristics to predict future investment returns: market beta, market capitalization, price/earnings ratio, leverage and price to book value percentage. Their conclusion: price to book value "is consistently the most powerful for explaining the cross-section of average stock returns."

Five-Year Holding Period Year-By-Year Investment Returns for Low Price to Book Value Companies as Compared to High Price to Book Value Companies
Josef Lakonishok, Robert W. Vishny and Andrei Shleifer examined the effect of price as a percentage of book value on investment returns in Contrarian Investment, Extrapolation and Risk, Working Paper No. 4360, National Bureau of Economic Research, May 1993. The professors ranked all companies listed on the New York Stock Exchange and the American Stock Exchange according to stock price as a percentage of book value and sorted the companies into deciles. Portfolios were initially formed on April 30, l968, and new portfolios were formed on each subsequent April 30. The study period ended on April 30, 1990. The decile portfolios were held for five years, and the average annual year-by-year investment returns, the average annual five-year returns and the average cumulative total five-year returns were calculated. The investment returns were equal-weighted. The following Table 7 shows the results of the study.

Table 7:
Investment Returns in Relation to Stock Price as a Percentage of Book Value for all New York Stock Exchange and American Stock Exchange Listed Companies, April 1968 through April 1990

                                                                                   Stock Price as a Percentage of Book Value Decile

                                (Highest Price/Book Value)                          (Lowest Price/Book Value)

Holding Period
Following Portfolio
Formation

1st year
2nd year
3rd year
4th year
5th year
Average annual return
over the 5-year period
Cumulative 5-year
total return




1
11.0%
 7.9
10.7
 8.1
 8.8



9.3
56.0




2
11.7%
10.7
13.2
13.3
13.7



12.5
80.2




3
13.5%
14.0
15.5
13.6
16.3



14.6
97.3




4
12.3%
14.5
16.7
16.0
17.5



15.4
104.5




5
13.1%
15.3
16.5
17.0
17.1



15.8
108.2




6
  15.4%
  15.6
  17.2
  16.9
  17.6



  16.6
 115.2




7
15.4%
16.9
19.1
18.8
21.6



18.4
132.0




8
17.0%
16.4
20.7
20.4
20.1



18.9
137.5




9
18.3%
18.2
19.6
21.3
20.6



19.6
144.9




10
17.3%
18.8
20.4
20.7
21.5



19.8
146.2


Page 9 of 42

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