In the world of value investing, Tweedy Browne (Trades, Portfolio) has a great reputation. The firm was Benjamin Graham's broker and also provided services for Walter Schloss and Warren Buffett (Trades, Portfolio).
Providing services to these individuals guaranteed the company's position in the history of value investing, and today it provides a direct investment management role for investors.
Any interviews or information from Tweedy Browne is always highly informative thanks to the firm's virtually unrivaled understanding of the discipline of value investing.
I always enjoy reading interviews or research reports from the firm as you can see the value bloodline flowing through the analysis. While the company may have moved on from its historical background, value continues to be at the core of everything it does.
Recently, I was combing through the archives of the Graham & Doddsville newsletter and found an interview with the four managing partners of Tweedy Browne at the time, Thomas Shrager, Bob Wyckoff, William Browne and John Spears.
In the interview, Browne discussed how the firm goes about finding its investments and the way it looks at equities. I think it is interesting because it gives real insight into the firm's process and is a distillation of the firm's knowledge of value investing that has been built up over the years.
As you will deduce from the quote below, trying to understand the core business is at the heart of all the company’s analysis. When they know what the business does, and what’s lying under the stock, then the managers move onto the next stage. Its process of looking at companies has been refined over several generations:
“An awful lot of ink has been used in order to find a multitude of ways to expand upon what is a simple idea that when you invest, what you are doing is buying an interest in the business. If you accept that framework and that lens, that will drive everything that you do in terms of analysis or figuring out what the business is worth if you accept the simple concept that the value of the investment is the business and not the price at which the stock is marked at on any given day. It’s that concept and that drives everything else you do; you try to analyze a business. There are lots of good things that flow from that.
My personal point of view is that you accept that investing is not a natural science but rather a social science. So, it’s never purely empirical; what you are trying to do is everything you possibly can to enhance your probabilities of being right more often than being wrong.
By focusing on a business, I think that you have a better chance of being right because a business, like many other things in the world, has a value. Graham originally used a statistical approach looking at net-nets or a liquidation framework. Warren Buffett’s approach may have a longer look into the future, but you are essentially trying to buy the business and figure out what the business is worth.
You can look, as we do, at comparables and in order to improve your chances of being right, there are lots of different things that different people do. One of which, from our perspective, is avoiding highly leveraged business because, at points of strain in an economy, it’s the leverage that takes you down. It all comes from this basic, simple idea: figure out what the business is worth and then see if you can buy into it at a discount. Be diversified – we accept the idea of being diversified, because I think we have a very healthy sense of humility about being able to predict the future. It’s not terribly complicated. I think the more difficult part of it is either you accept it or you don’t.”
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