Tweedy, Browne Company - Simple Lessons on Value Investing

Founded in 1920, Tweedy, Browne Company is a value investing firm famously featured in the “Super Investors of Graham & Doddsville” paper by Warren Buffett in 1984. Built on Graham’s principles, Christopher H. Browne has laid out his wisdom in his wonderful 2007 book, “The Little Book of Value Investing”. Here’s some of it’s key takeaways paraphrased.

Buy Stocks Like Steaks… On Sale

Value investing is easy to describe, even if it’s not always easy to execute in practice. It consists of buying securities for less than their intrinsic worth – of buying them on the basis of their underlying business value, as distinct from what is happening at the superficial level of the stock market. Since the game is about price and value – that is, paying less than what you are getting – it is not surprising that value investors tend toward beaten-down securities whose prices have been falling. They are the mirror image of momentum investors, who get excited as prices rise. Buy stocks like you would groceries – when they are on sale.

In the stock market, there is the irresistible excitement and lure of the hot stocks everyone is talking about at cocktail parties – the ones that are the darlings of the talking heads on cable stock market shows that tell us what we must own.

One of the curiosities of value investing, given the successful examples of Graham, Buffett and numerous other practitioners (including Tweedy, Browne), is why it’s practiced so infrequently. It is the hesitation of the many that creates the opportunity for the few. Normally, most people tend to look at things they buy with an eye on the value they get for the price they pay. Except in the stock market. The time to buy stocks is when they are on sale, not when they are flying high and everyone wants to own them. Stocks of good companies on sale reap the highest returns.

Buy When The Insiders Buy

Senior management and directors are usually the first to know that operations are improving and earnings may be rising. If they begin to buy stocks in the open market, it is a safe bet that things are getting better. The regulation that benefits us is the one that requires all transactions be reported within two business days. This allows us to invest our money very close to the same time that the people running the company decide to invest theirs. Insider buying of stocks selling at low multiples of earnings or below asset value is even better.

You guessed it, stocks with high valuations and insider selling tend to underperform by a wide margin.

There is another way that corporate insiders can send a signal that better times may be ahead. When the board of directors decides to buy back its stock in the open market, it may well be a sign that they believe the shares are undervalued and do not adequately reflect the future prospects for growth. If they are correct and are buying the shares at a discount to what they are worth, then per share value for their shareholders increases. However, if buybacks are done at inflated prices without a margin of safety, it’s better to remain in the sidelines.

New Lows

Back in the old days, Christopher H. Browne and others in the business needed to do an incredible amount of work looking for cheap undervalued stocks. Extremely tedious, page-by-page flipping through the monthly Standard & Poor’s Directory of Corporations or other physical publications, looking for cigar butts.

Some of the physical copies of old school stock publications have apparently become expensive collectors items. Unless you’re overburdened with cash, I’d recommend you put the money to compound instead.

Today’s information age is completely different. In terms of stock screening evolution, we’ve moved from the equivalent of cars using cranks to push-start buttons. Despite information being at your fingertip, the basic value investing principles still apply. We start our search by looking at stocks that have gone down, not up. Just as ads for a supermarket will tell you what’s on sale this week, online screeners and newsletters will tell you which stocks have hit new lows. But these price drops alone are never enough, it’s just a starting point. The reason we look at what’s on sale is because of the core principal of margin of safety, which we never want to stray away from.

“Adhering to the principles of intrinsic value and margin of safety results in an investment policy that runs counter to the general market psychology, and seeks to reduce the decision to purchase or sell securities to a discipline rather than an art.”

Shameless Cloning

A savvy store owner will visit competitors to see what they stock on their shelves, what is selling well in their location, and what seems to be worthless inventory. As we build our inventory of value opportunities, we can observe what other value investors are doing. An easy place to start is looking at Superinvestors via Dataroma. Additionally, once you find an investor who’s modus operandi is close to your own, sign up to their newsletters and read their letters to fund shareholders.

The above is a screenshot of the beginning of the list. Many of the names mentioned are published authors as well.

Whether screening financial databases or watching what other smart investors are buying, you are looking for clues to hidden value. With more than 40,000 publicly traded companies in the world, it is impossible to investigate each one. That’s why you need to operate with tried and tested value investing principles to find what you’re looking for.

-IGTSKasimir

Ignore The Street

Intelligent Investing Since 2019

Tweedy, Browne Company – Simple Lessons on Value Investing

Buy Stocks Like Steaks… On Sale

Buy When The Insiders Buy

New Lows

Shameless Cloning

Further Reading