It is common for investors to read the latest shareholder letters from investment gurus to understand their latest positions and opinions. However, it is often that the real wit and wisdom of the investment gurus are found in old classic shareholder letters. This is one of many in a series of articles where I will extract relevant portions of classic guru shareholder letters and share with readers my views.
Here is the Investment Manager's Report from the annual reports of the Tweedy Browne American Value and Tweedy Browne Global Value Fund in September 1995.
Extracts:
(1) "...we only owned one true technology stock, Digital Equipment Corporation, which rose 20.1% in the past six months. However, our investment in Digital Equipment was based more on signi„cant purchases of the stock by insiders, o‚fficers and directors, than on any great insights we had as to the company's technological position...We actually considered Chase one of the less likely merger candidates among our bank stocks because of its size. However, the proposed merger with Chemical Bank lifted Chase's stock price 74% from March to September...Our experience, which has been reinforced over the past six months, has brought us to the conclusion that it remains impossible for us to predict from where our gains may come. We are content to keep looking for cheap stocks in all capitalization ranges and buy them when we fi„nd them...."
(2) "...The determination of intrinsic value follows two models. The first is statistical...we like to buy stocks selling at two-thirds of net current assets, or stocks selling at one-half of book value when equity is greater than all liabilities, or stocks with fairly reliable earnings that are selling at an earnings yield 50% or greater than the long-term bond yield. And like the insurance company that wants to issue as many policies as it can that meet its criteria to achieve the desired statistical result that such underwriting standards should produce...Another method we employ to determine intrinsic value is the appraisal method. This method is company specifi„c...They track sales of similar businesses, or do discounted cash Â…ow analyses to come up with the value of a business. In this way, intrinsic valuation models can be determined for diÂfferent kinds of businesses..."
(3) "...why are we investing in foreign stocks...We were merely increasing our chances of fi„nding a bargain by opening our horizons to markets that, in total, had a market capitalization as large as the United States. It was like switching from an investment grocery store that had 10,000 items on the shelf to one that had 20,000 items from which to choose..."
Comments:
(1) The long-term repeated success of classical value investors like Benjamin Graham, Walter Schloss and Tweedy Browne continues to puzzle many contemporary investors. By buying a large diversified portfolio of statistically cheap stocks, most have beaten the market over long periods of time.
Tweedy Browne also adds "...In our opinion, what we do is very much a process based on a few investment principles, or models, that have worked for us in the past. No matter where in the world one is investing, in our opinion, it is essential to „first have a set of investment principles to guide you. Here at Tweedy, Browne, we are fortunate in having a set of principles developed by individuals far smarter than we, and proven time and again in academic studies of historical stock market performance..."
(2) In his interview with author Ronald Chan in the book 'The Value Investors: Lessons from the World's Top Fund Managers,' William Browne said he learned from the business valuation model of LBO investors to incorporate companies' corporate structure, business nature, intangible assets into valuation. This is what Tweedy Browne calls the appraisal method: Track sales of similar businesses or DCF.
(3) Tweedy Brown puts forward the case of investing globally. The reason is simple: Fishing from a larger pool reaps better catches.
Further Reading:
Readers interested in applying Tweedy Brown's value investing philosophy though a quantitative screen can read my article, "The Tweedy Browne Stock Screen - Nov. 6 2012."
You can read the complete annual reports here:
http://www.tweedy.com/resources/library_docs/reports/ASA09301995.pdf
http://www.tweedy.com/resources/library_docs/reports/GSA09301995.pdf
Here is the Investment Manager's Report from the annual reports of the Tweedy Browne American Value and Tweedy Browne Global Value Fund in September 1995.
Extracts:
(1) "...we only owned one true technology stock, Digital Equipment Corporation, which rose 20.1% in the past six months. However, our investment in Digital Equipment was based more on signi„cant purchases of the stock by insiders, o‚fficers and directors, than on any great insights we had as to the company's technological position...We actually considered Chase one of the less likely merger candidates among our bank stocks because of its size. However, the proposed merger with Chemical Bank lifted Chase's stock price 74% from March to September...Our experience, which has been reinforced over the past six months, has brought us to the conclusion that it remains impossible for us to predict from where our gains may come. We are content to keep looking for cheap stocks in all capitalization ranges and buy them when we fi„nd them...."
(2) "...The determination of intrinsic value follows two models. The first is statistical...we like to buy stocks selling at two-thirds of net current assets, or stocks selling at one-half of book value when equity is greater than all liabilities, or stocks with fairly reliable earnings that are selling at an earnings yield 50% or greater than the long-term bond yield. And like the insurance company that wants to issue as many policies as it can that meet its criteria to achieve the desired statistical result that such underwriting standards should produce...Another method we employ to determine intrinsic value is the appraisal method. This method is company specifi„c...They track sales of similar businesses, or do discounted cash Â…ow analyses to come up with the value of a business. In this way, intrinsic valuation models can be determined for diÂfferent kinds of businesses..."
(3) "...why are we investing in foreign stocks...We were merely increasing our chances of fi„nding a bargain by opening our horizons to markets that, in total, had a market capitalization as large as the United States. It was like switching from an investment grocery store that had 10,000 items on the shelf to one that had 20,000 items from which to choose..."
Comments:
(1) The long-term repeated success of classical value investors like Benjamin Graham, Walter Schloss and Tweedy Browne continues to puzzle many contemporary investors. By buying a large diversified portfolio of statistically cheap stocks, most have beaten the market over long periods of time.
Tweedy Browne also adds "...In our opinion, what we do is very much a process based on a few investment principles, or models, that have worked for us in the past. No matter where in the world one is investing, in our opinion, it is essential to „first have a set of investment principles to guide you. Here at Tweedy, Browne, we are fortunate in having a set of principles developed by individuals far smarter than we, and proven time and again in academic studies of historical stock market performance..."
(2) In his interview with author Ronald Chan in the book 'The Value Investors: Lessons from the World's Top Fund Managers,' William Browne said he learned from the business valuation model of LBO investors to incorporate companies' corporate structure, business nature, intangible assets into valuation. This is what Tweedy Browne calls the appraisal method: Track sales of similar businesses or DCF.
(3) Tweedy Brown puts forward the case of investing globally. The reason is simple: Fishing from a larger pool reaps better catches.
Further Reading:
Readers interested in applying Tweedy Brown's value investing philosophy though a quantitative screen can read my article, "The Tweedy Browne Stock Screen - Nov. 6 2012."
You can read the complete annual reports here:
http://www.tweedy.com/resources/library_docs/reports/ASA09301995.pdf
http://www.tweedy.com/resources/library_docs/reports/GSA09301995.pdf
