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.
I present to you the Investment Manager's Report from the annual reports of the Tweedy Browne American Value and Tweedy Browne Global Value Fund in March 1995.
Extracts:
(1) "...Most people toiling away in the investment business suffer from a conceit contradicted by the evidence that they can cherry pick the best performing stocks from a portfolio of stocks meeting the same fundamental financial criteria. We do not think you can. In the early 1980s, we had an investor in one of our investment pools who thought he could make just such a selection. Rather than paying us as managers, he redeemed his investment of $100,000 and bought what he believed was the cheapest stock among more than 80 in the portfolio. The company, Lazare Kaplan International, was a diamond wholesaler. At the peak of the diamond market, the market value of its inventory of stones less all liabilities on a per share basis far exceeded the market price of the stock. However, when the bottom fell out of the diamond market, an event few had predicted including us, the value of Lazare Kaplan's inventory plunged and the company was forced into bankruptcy. This was one of the few investments we have owned which suffered this corporate fate..."
(2) "...When a corporation keeps some of its earnings in the business rather than paying all of it out to shareholders as a dividend, the management usually believes that it can earn a good return on the money. In addition, corporations use retained earnings to purchase their own shares in the stock market. When the number of shares outstanding is reduced, all of the company's earnings from its business are spread among a smaller number of remaining shares. This increases the per share earnings and future earnings and dividends for the remaining shareholders. Corporations also use retained earnings to build up cash or pay o their debt. Similar to paying off part of the mortgage on your house, this also builds up corporate net worth for shareholders..."
(3) "...In an industry where most people believe success is based on „finding a guru who can predict the vagaries of the stock market or individual stocks, at Tweedy, we like to think success in investing can be taught and passed down. We strongly believe that good investment results require continuity and the adherence to sound investment principles. We think that after seventy-„five years of doing the same thing, we are unlikely to change now..."
Comments:
(1) It is a repeated call by Tweedy Browne to have a diversified portfolio.
Investors who stubbornly insist on betting on single net-net stocks can read my article, "Analyzing Working Capital - The Key to Successful Investing in Net-Nets," to improve their odds.
(2) Investors tend to focus on managers' operating performance. In actual fact, managers' track record of allocating capital is equally, if not more important.
(3) Most people have lost money in the stock market, not because their investment approach was wrong, but as a result of changing investment philosophies (huge turnover in stock portfolio holdings) every quarter. Consistency and belief matters.
Further Reading:
Readers interested in applying Tweedy Brown's value investing philosophy though a quantitative screen can read my other 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/GAN03311995.pdf
http://www.tweedy.com/resources/library_docs/reports/AAN03311995.pdf
