“Old - Value” school

Luc Allaeys 19 Aug 2011

One of the remains of the Graham-Newman era (except Warren Buffet himself ) is Tweedy, Browne Company LLC. Founded in 1920, Buffets favorites’ stockbroker, was located at 52 Wall Street, in the same building as Ben Graham had once worked. Even Walter Schloss was sub-renting some space in their tiny office and running his partnership from behind a battered desk in a small room. They diversified to arbitrage, workouts, etc., all in the tradition of the Graham-Newman days, before becoming an investment company and a professional money manager.

It was Tom Knapp who joined Tweedy, Brown in 1958 and brought the Graham philosophy along.

The companies credo was and still is basic value investing in the Graham-Newman tradition.

It manages over 13 billion $ in separate accounts for both private customers and institutions as in different managed funds, all value-based.

Since 1993 their Global Value Fund has outperformed their benchmark (MSCI) and resulted in an annual return before taxes of 10.05% (07/31/2011).

Christopher Brown was also the author of "The little book of value investing" and the paper "What has worked in investing". Both must-reads for the Value-oriented investor.

Their methods are simple and straightforward and are still used as of today;

Undervalued stocks have empirically been proven to be low risk, and produced attractive long-term rates of return. Before purchase, a stock must have one or more of the following characteristics;

  • Low price to asset value, although Grahams net nets are hard to find (66% of net current asset value)
  • Low price to book value (preferably with a low <20% Debt to Equity)
  • Low price to earnings (keep in mind that value and growth should go together!)
  • Low price to cash flow.
  • Stocks with low price to dividend yield.
  • A significant pattern of purchases by one or more insiders (managers and directors)
  • A significant decline in price (reversion to the mean is almost a law of nature)
  • Small market capitalization (because of their higher rate of growth they're more easily acquired by other corporations)

This analysis was based on different studies made over the years respectively by; Professors Lakonishok,Vishny and Shleifer (Paper: Contrairian Investment,Extrapolation and Risk).

http://research.chicagobooth.edu/economy/research/articles/84.pdf Professors Chan, Lakonishok ( “Value and Growth” ; Financial Analysts journal Feb.2004).

http://www.lsvasset.com/pdf/Value-Review.pdf Professor Mario Levis (“Stock Market Anomalies” ; Dividend Yield study)

They all are still used in conjunction with each other. In fact, the basic idea is simply not to pay too much for investment and in that way create a margin of safety, and this brings us back to Ben Graham.