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Robert Abbott
Robert Abbott
Articles (593)  | Author's Website |

Strategic Value Investing: Ruane and Tweedy, Browne

Bill Ruane received one of the greatest endorsements in investing history, and then justified the endorser’s belief in him

September 09, 2019 | About:

Bill Ruane

It may have been one of the greatest endorsements ever offered in the investment industry, according to Stephen Horan, Robert R. Johnson and Thomas Robinson, the authors of "Strategic Value Investing: Practical Techniques of Leading Value Investors".

When Warren Buffett (Trades, Portfolio) shut down his first venture, the Buffett Limited Partnership in 1969, he didn’t want to leave his investors without an adviser or manager. So, he recommended they invest with Bill Ruane. The two were not strangers, having been classmates in Benjamin Graham’s investment course at Columbia University.

To handle the needs of Buffett’s former investors, Ruane set up the Sequoia Fund in 1970. Clients of both Buffet and Ruane were satisfied, and by 1982 it had to stop taking on new clients. Ruane died in 2005, but Sequoia lives on, following his principles.

In addition to taking on Buffett’s clients, Ruane was also linked to his former classmate because Sequoia had been a very big investor in Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). In fact, it has made up as much as 30% of the Sequoia portfolio. And, that investment made sense in terms beyond loyalty.

Ruane, like Buffett, wanted high-quality stocks, those that dominated their sectors, had strong revenue growth and improving margins. So, he broke with Graham’s practice of buying cigar-butt stocks in hopes they still had one puff left in them. In fact, Ruane was even prepared to buy pricey stocks if he believed the company had excellent management and its business prospects were robust.

If prospects were good, he was willing to allocate a significant portion of his portfolio to individual stocks, as we’ve seen with his Berkshire Hathaway holding. His beliefs about diversification align much more with Buffett’s than with Graham’s. When this book was written (it was published in 2014), the portfolio held about 30 stocks, and in theory, at least, they didn’t want to commit more than 15% of their assets to an individual stock.

Follow-up: Looking at this Morningstar chart of Sequoia performance over the past 10 years (ending Sept. 6, 2019), we see that the fund stumbled in 2015 and has struggled since to reclaim that lost ground:

Strategic Value Investing GuruFocus Sequoia Fund performance

Tweedy, Browne Company

In this profile from "Strategic Value Investing: Practical Techniques of Leading Value Investors", the authors examined a firm rather an individual. That firm was Tweedy Browne Company LLC, which again has roots in Graham and Buffett territory.

While at Graham-Newman, Buffett had worked with Tom Knapp, one of the founders of the predecessor firm to Tweedy Browne. Later, when he wrote a famous article, “The Superinvestors of Graham-and-Doddsville,” Buffett profiled the firm because of its value-investing success. A late partner in the firm, Christopher Browne, wrote “The Little Book of Value Investing” (Browne died in 2009, but his brother William was one of four managing directors when “Strategic Value Investing” was written).

The firm has posted its philosophy: “We do not attempt to be all things to all people, but instead pursue a value-oriented approach to investment management first pioneered by Benjamin Graham.”

One of the themes within that philosophy is “deep value” investing, in which investors look for deeply discounted stocks. However, according to the authors, the leaders at Tweedy Browne see their firm's targets as a hybrid between Graham’s "cigar-butts" and Buffett’s "wonderful companies." The authors of "Strategic Value Investing" quoted managing director Robert Q. Wyckoff on the subject: “Our portfolios today are a mix of high-quality, Buffett-type businesses and Ben Graham-type bargains.”

On the issue of diversification, Tweedy Browne appears to be closer to Graham than Buffett. The authors reported the firm is strictly disciplined and will not invest more than 4% of its portfolio in any one company, or more than 15% in any one industry.

The firm is somewhat unique among leading value investors because of its global investing. It first began looking abroad in 1983 and has since become proficient at international investing. Indeed, Morningstar named it International-Stock Manager of the Year in 2011. It is a cautious global investor, hedging currency exposures to avoid losses when currencies fluctuate.

The firm also believes in holding cash when it can’t find stocks that meet its criteria. At the time this book was written, it was holding 11% of its assets in cash.

Follow-up: Tweedy, Browne has done very well at global investing over the past 10 years, according to this Morningstar chart, handily beating both the index and its peers (category):

Strategic Value Investing GuruFocus Tweedy Browne performance

Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.

Read more here:

Strategic Value Investing: Seth Klarman

Strategic Value Investing: Warren Buffett

Strategic Value Investing: Benjamin Graham

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution." In his book, "Big Macs & Our Pensions: Who Gets McDonald's Profits?" he looks at the ownership of McDonald’s and what it means for middle-class retirement income.

Visit Robert Abbott's Website

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Wescileppi - 1 week ago    Report SPAM

Oh yes, like a stragetic investment in Valeant!!!!!!

Robert Abbott
Robert Abbott premium member - 1 week ago

Thanks, Wescileppi

As Rupert Hargeaves pointed out in a recent article, "Learning From Sequoia's Valeant Disaster", "At one point, as much as 36% of Sequoia's portfolio was invested in Valeant. This positioning didn't raise many eyebrows at the time because the fund had a history of taking significant positions in its favorite companies. However, when Valeant blew up in 2015 and the stock lost around 90% of its value, Sequoia's value plunged almost 50% from peak to trough, erasing three years of gains."

Patagonia - 1 week ago    Report SPAM
Tweedy Browne (Trades, Portfolio) have significantly trailed the US indices for the past 10 years. They usually get compared to the world indices but the performance relative to US index funds is something to note.

Robert Abbott
Robert Abbott premium member - 1 week ago

Thanks, Patagonia!

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