Dear Investor: What Has Worked In Investing is an attempt to share with you our knowledge of historically successful investment characteristics and approaches. Included in this booklet are descriptions of over 50 studies, approximately half of which relate to non-U.S. stocks – Tweedy Browne Company LLC
So begins the the most important collection of studies of value investing in practice contained in one volume ever written.
If you need scientific proof that value investing works as a long term strategy to build wealth then look no further.
Download a free copy this wonderful booklet here and dive straight in 🙂
Every time I dive into it on break or travelling I either learn something new or it helps me to maintain a positive mindset – my psychology if you will – when it comes to value investing.
The robustness of the studies can only come to one conclusion:
Value Investing Works!
How do I know it works?
Well check out this results table of just one study out of over 50 in which Tweedy Browne over 6 months, 1 year, 2 year and 3 year holding periods examined historical returns of stocks of unleveraged companies which were priced low in relation to tangible book value and selling at 66% or less of net current asset value.
The sample included only those companies priced at no more than 140% of tangible book value or no more than 66% of net current asset value in which the debt-to-equity ratio was 20% or less:
Page 7, What Has Worked In Investing
The sharp-eyed among you would have noticed that the results of buying a diversified basket of stocks that were 30% or less of tangible book combined with a debt to equity ratio of 20% works just as well as using Benjamin Graham’s famous net current asset value strategy.
Yeah, Yeah, Yeah Dave, That Study Ended Over 30 Years Ago
Indeed it did so I did what any normal human being would do and started a set of portfolios at the beginning of 2013.
There are 6 portfolios (3 US and 3 UK) and they are simply called The Asset Value Portfolio, The Relatively Unpopular Large Company and Winnowing Of The Stock Guide each conforming to a different set of value investing criteria.
I wanted to test for myself the returns from different value criteria applied to stocks over a 1 year period.
The third quarter results (to September 2013) of these portfolios as well as for the FTSE 100 and S&P 500 are below:
Table of Third Quarter Results For The Portfolios
What These Value Investing Results Really Mean
Small cap stocks by their very nature are more than likely to be selling for 30% or less than their mid or large cap counterparts. They are treated like the kid at school from the rough neighbourhood by the market. Scorned, unloved and most of all ignored.
But there are small cap stocks today selling for less than the cash they have in their bank account that are on low burn rates. There are small cap stocks selling for 50% or less than their tangible book that have posted positive (if volatile) earnings over the last 5 years.
What these value investing results really means is that if investors want to achieve outperformance, then small cap stocks are where it’s at baby.
But expect volatility and your nerves to be tested: just look at how the US Asset Value Portfolio made 45% in the third quarter alone and returned -1.79% in the second quarter and 1.43% in the first quarter severely under-performing the market for the first six months of 2013.
Can you handle watching the value of your portfolio decrease and underperform the market and still stick with a strategy?
What Has Worked In Investing is as valid now as when it was first made public (1992) and although my testing has another 3 weeks to run until the end of 2013 it’s clear that something has worked.
All those scientific studies, however old they may be has given me the confidence to stick with it through the painful times of severe under-performance and by sharing these tests and I hope you can engender positive psychology for yourself by remembering that these tests have been going on for decades and come to only one conclusion, that value investing just works:
The underlying principles of sound investment should not alter from decade to decade.