tweedy brown

8/2/2019 Tweedy Brown

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Tweed and Brown mostly invest in companies which are trading below their book value: At April

7, 1994, approximately 48% of your money was invested in 89 stocks, which were valued in the stock

market at much less than book value. The weighted average stock price in relation to book value for

these holdings was 72% of book value, a 28% discount. By comparison, according to Euro Equities,

the average European stock is priced at 290% of book value. The Standard & Poor's 500 Stock Index

(the ""S&P 500'')is 320% of book value. In our global database, less than 2% of the 5,777 companies

throughout the world with a market value in excess of $100 million are priced at less than 72% of

book value.

Tweedy and Brown invest in companies with earnings yield approximately twice the yield on AAA

rated bonds: At April 7, 1994, about 36% of your money was invested in 50 stocks, which were

priced low in relation to earnings. The weighted average price/earnings multiple for these stocks was

10x current year earnings. If all of these companies were to pay out 100% of their earnings to us as a

dividend, the earnings yield would be 10%. We get part of this earnings yield paid out to us as a

dividend, and the remaining part builds up for us within the companies while we sleep. In addition to

being undervalued in relation to earnings, our holdings are inexpensive in relation to most other

public companies in Europe and the United States. According to Euro Equities, the average European

stock is 21.6x earnings, which is an earnings yield of 4.6%. The S&P 500 is 21x earnings, which is an

earnings yield of 4.8%. In our global database, less than 8% of the 5,777 companies throughout the

world with a market value in excess of $100 million are priced at under 10x earnings.

Charles Ellis, a financial author and a partner in Greenwich Associates, a leading .nancial services

consulting .rm, believes market timing is futile. He determined that in the period between 1982 and

1990, if an investor was out of the market for the ten best days, we repeat, days, the investor's

annual rate of return would have been reduced from 18% to 12%. Now, the average investor is not

trying to avoid the ten best days, but the ten worst days. Either way, picking the ten best or worst

days out of 2,500 is an odds play no one will win. As Charles Schwab's mutual fund newsletter states:

""The lesson: once you're in, stay in. Don't try to time the market, because no one knows when the

best days will come.''

Not in favour of investing in growth companies: While we are not opposed to owning growth stocks,

we see several pitfalls. More often than not, the higher growth rate is already re.ected in the stock

price; i.e., the stock market has already discounted the future growth in earnings thereby increasing

investor risk if the company is unable to achieve the investment community's expectations. This has

happened on numerous occasions in the past. Few, if any, businesses grow forever. By this we mean

companies that can sustain high growth rates over long periods of time. While certain businesses

can grow rapidly in their early stages, the task of compounding an ever larger sales and earnings

base eventually leads to a slower growth rate. In our estimation, the di.culty of .nding very many

great businesses, at reasonable prices, which are likely to sustain fairly high earnings growth rates

over a long period of time is demonstrated by the holdings of Berkshire Hathaway, the company

managed by Warren Bu ett, one of this century's most successful investors. Warren Bu ett's ability

to invest in good businesses which generate cash earnings and earnings growth has produced

outstanding results for his shareholders. However, just nine stocks make up the vast majority of the

value of Berkshire Hathaway's equity holdings. In our opinion, this small number of signi cant

holdings re ects the lack of true, long-term growth stock opportunities.


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What is value investing: Broadly stated, value investing involves buying stocks at a low ratio of price-

to-book value on the assumption that in time the assets will be worth at least their stated book

value, or a low price/earnings ratio. If a stock is purchased at a price/earnings ratio of 8, the investor

would enjoy a return of 12.5% if all the earnings were paid out. This is the earnings yield of a stock. If

the earnings yield exceeds the long-term performance of the S&P 500 (LT performance of US market

was 10%, 3 % real growth, 3% inflation and 4% dividend yield) , one should expect to ultimately

outperform the stock market. If the company is also able to grow its earnings and/or reinvest the

earnings to produce future earnings growth in excess of 10%, there is additional profit potential.

Growth investing requires concentration and value investing requires broad diversification: Unlike

growth stock investing, which may require a high degree of concentration given the small number of

truly great businesses, value investing requires broad diversification. We cannot determine, on a

stock by- stock basis, when a company will go from being undervalued to being fairly valued.

Historical data will provide averages but the stock-by-stock variations can be dramatic.

Key strategies: We have learned that stocks ranked by financial fundamentals, such as market price

as a percent of book value, price earnings ratios and market price to cash flow, form a bell curve.

Most stocks fall in the middle. A small percentage are at either extreme, and those stocks at the

cheapest extreme have tended over long periods of time to produce the best rates of return. We

discussed this in our September 30, 1994 Semi-Annual Report in reference to What Has Worked in

Investing, our compilation of 44 academic studies on fundamental .nancial characteristics of stocks

that have produced superior returns.

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.

The characteristics that have produced the best returns in the stock market are at the extremes

the cheapest 10% to 20% of all stocks ranked on the basis of price-to-book value, price-to-earnings,

and price-to-cash flow ratios. Other areas of high return are stocks that have performed poorly in

the last three to five years, stocks in which officers and directors are buying shares, and small

capitalization companies.

Moreover, we often find that smaller companies are easier to analyze because they are often in only

one business rather than having numerous divisions in a myriad of sometimes unrelated businesses.

We do not make macroeconomic predictions. Our macroeconomic view is based on the theory of

reversion to the mean. By this we mean that if things are really bad, they will eventually get better;

and if they are really great, they will eventually get worse. In the meantime, when things are really

bad, stocks often get cheap. When things get better, stocks generally go up and we can make money

Our investment process is not merely putting round pegs into round holes and square pegs into

square holes by only buying stocks in the bottom 10% of stocks ranked on price-to-book value or

their price/earnings ratios. Sometimes we even buy better businesses, the kinds of companies

others call growth stocks to justify owning them at higher price/earnings ratios. These candidates

often appear on our screens as having high returns on capital and above-average earnings growth

rates, yet are selling at relatively low price/earnings ratios or low price-to-book value ratios. We also


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use insider trading reports for stocks in the U.S., Canada and the United Kingdom for indications of

potential value. Officers, directors and principal shareholders in public companies are required to file

reports of purchases and sales of shares in their companies. We can now track patterns of buying by

company officials over time rather than merely seeing what buys or sells were reported the previous

day. We can call up a company on our system and get a printout of all insider transactions for

whatever time period we choose. Insider purchases are usually made because the person sitting in

the board room or at the management meetings thinks the business is improving and the stock will

go up. We call it a sort of company specific leading economic indicator. Combining insider purchases

with low price/earnings or low price/ book value criteria may provide even better performance. We

think it may be like finding a spouse who is good looking, intelligent, personable, kind and rich all

rolled into one.

(slowly accepted that need to look beyond book value) However, there is also value in consumer

franchises and businesses that have some degree of control over their markets or the pricing of their

products. The most obvious example was in televison stations in the late 1970s. When Jim Clark

joined us in 1976, he came from an investment firm that owned television stations. Before his

arrival, we never invested in companies that owned televison stations because they had no tangible

book value. Jim taught us that they had franchise value instead. TV stations are a semimonopoly

such as the CBS affiliate in Miami or Chicago. Moreover, stations change hands rather frequently and

at fairly consistent multiples of cash flow. It is actually easier to determine the value of a TV station

than it is a manufacturing company selling at one-half of book value that is not earning a reasonable

return on its capital.

We continued to buy stocks with low price/earnings (P/E) ratios and low price-to-book value

ratios, but had added stocks with low price-to-enterprise value ratios. Many of our value brethren

only buy a slice of the value menu. Some only buy low P/E stocks, which leads to a portfolio of

aluminum companies, auto companies and other typically cyclical businesses. Over time this strategy

has performed well. In some cases because of the amount of assets under management, it has been

their only alternative. Other value managers have migrated to buying only betterbusinesses at

reasonable prices. Our menu is more diverse. In 1998, the better business managers performed

better. Some years, the not-so- good businesses but cheap-on-book or earnings guys do better,

but not in 1998. We are a combination of several value biases.

We believe that the downside of our approach to investment management is underperformance,

not the risk of permanent capital loss. We do not own air ball stocks that can dissolve overnight

such as what is available in the Internet arena. We also do not invest such a great percentage of our

assets in any one issue so that if we are wrong and the company goes bellyup we have significantly

impaired our net worth.

Investing is not difficult when you take the time to think about a few basic principles of success and

stick with them. Sticking with them is sometimes difficult because even the best ones do not work

every year. Maintaining a long-term perspective is key. It is also easier if you invest for the long term.

Money managers who turn their portfolios over two and three times a year must have a harder time

adhering to investment principles because they are attempting to beat the market in every time

period they are measured, be it quarterly or annually. Trying to determine which group of stocks will

perform best in every quarter or even every year is well beyond our capabilities.


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Warren Buffett said, Value and growth are joined at the hip. It is merely a function of price. We

like growth stocks and we own a number of them. The difference is that they are real businesses

with real products and real earnings. While some may characterize them as old economy stocks, in

our estimation they are far less risky than the technology start-ups and dot-com stocks of the new

economy. In a recent research report from Sanford Bernstein & Company, a comparison was made

between the pharmaceutical sector and the technology sector of the stock market. Long term, bothsectors have achieved approximately the same rate of growth. However, the major pharmaceutical

companies have a much greater rate of survivorship than do the companies in the technology sector.

As with Internet retailers, small biotech companies with a narrow research focus are very risky. In ourestimation, picking winners is like playing the lottery.

Our second approach is to buy stocks that are statistically cheap based on tangible book value or

earnings yield but may not be strong compounders of their intrinsic value. However, these

companies could be worth considerably more to a competitor than their stock price may suggest.

We call these stocks bobbers because their stock price can range from highly undervalued to more

fairly valued relative to the price a strategic buyer of the entire company might pay. We do not

presume we will own the bobbers for long periods of time; only until their stock price reflects

something closer to their intrinsic, private market value. We do hope we will own keepers for long

periods of time with the expectation that their value will increase as the company grows.

Successful investing becomes much more quantitative than qualitative. That is what schemas will do.

They will permit the manager to take a universe of stocks and quantitatively screen out those issues

that do not fit the schema and, thus, should not be researched. The schema will also provide

a list of stocks that should be researched because they fit some or all of the criteria. The more

criteria an individual stock meets, the easier it is to analyze. If a company is analyzed from the

perspective of a schema, it either fits or it does not. Facts tend not to be bent to produce a desired

result. If a stock does not fit, it is difficult to make a case for buying it. If you need a house with four

bedrooms, one with three bedrooms will not do no matter what. However, money managers are

expected to only let winners into their portfolios. Even the best schemas will let a real dog in from

time to time. As we have said, we accept this. Not every stock we buy goes up the next day. Some

occasionally never go up, while others take longer than we would like. How many times has an

advisor met with a client and gone through the following dialogue: Mr. Jones, your portfolio was up

40% last year as compared to a stock market gain of 30%. Yeah, but why did you own Kmart? It

went down last year. Ever wonder why so many portfolios have such high turnover rates?

Quantitative investment strategies are for the most part shunned by the investment community.

After all, why are we paying these money managers? We want our managers to be smart, to be able

to predict if the market will go up or down, and which companies will do well. Anybody can feed a

set of criteria into a database of stocks and let the computer pick the holdings. No creative brilliance

there. We are at a loss to understand this aversion to quantitative investment approaches since the

most widely employed one is the index fund, which we have said beats 75% to 85% of the money

managers. Moreover, the benchmarks used to measure manager performance are nearly all

quantitative. Part of the problem relates to the fact that a quantitative approach loses some of the

time. The market has outperformed us approximately 35% of the years we have been managing

money. These periods of underperformance may be more than either the client or the manager can

tolerate. The client may begin to question the validity of the strategy, and the manager may react by

tweaking the criteria. Consistency is key to successful investing.

It takes time to get comfortable with an investment approach. It is only human nature to worry

about losing money. We have been doing what we do for so long and have been rewarded so

handsomely, that we do not think we will ever change. This may account for what some may


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perceive as a lack of hunger. We do not worry as much about how we invest. If the market drops

200 points on a given day, we do not equate this with a milewide asteroid heading for Manhattan.

We typically buy at 60% or less of what we calculate to be the stocks intrinsic value and re-evaluate

the position as it approaches its intrinsic value. If its intrinsic value appears to be growing at an

above-average rate, say 15%, we might keep it at that point for taxpayers; otherwise it is sold andthe proceeds reinvested in a more attractive bargain.

Lesson in history is better than MBA: We often think that investment managers would be better

served to get a degree in history rather than an MBA.

We sometimes think that history is a better major than finance for a college student hoping to

pursue a career in money management. History has a nasty way of repeating itself. History also

teaches us the ebb and flow of economic tides. The U.S. Dollar rises and the U.S. Dollar falls. Good,

cheap stocks generally rise with time. Why lose the rise in the price of your stocks to a currency

fluctuation that you may not be able to predict? Some of our peers say they will hedge the currency

opportunistically. This means they will hedge when they think a particular currency is about to fall.

In our opinion, this is no different than predicting when the S&P 500 or the Dow Jones Industrial

Average is about to fall, except that it is far more complex.

Speed is also important because, on average, stocks that are in the lower tier of value do not staythere. We want to research and buy them while they are there, before they go up. In the managementof time, it is important to know what is worth knowing and what is not.

Value investors sleep sound sleep:Value money managers tend not to burnout. High turnover,growth and momentum money managers lead much more stressful lives. They do not have aninvestment schema to fall back on for comfort when stock prices are moving against them. They also

feel compelled to know every last bit of information about the stocks they own: the latest earningsinformation, who is buying, and who is selling the stock on Wall Street. Physical stamina tends topeak at a fairly early age, as many Olympic athletes have learned when they become has-beens intheir late twenties. Fortunately, investing requires mental stamina, and that seems to hold up muchlonger. This may be Gods way of compensating us for a decline in our physical abilities. Our friend,Walter Schloss, is now eightyone years old, and his investment record spans forty-three years with nosign of diminishing returns. He is the Energizer man of the investment world: he just keeps goingand going and going. We hope we can, too. As long as our marbles are intact, age can bring theadded benefit of experience, which is both intellectual and emotional. Hopefully, we are better able torecognize investment ideas that do not work and thus not waste our time going down some dead-endpath, and are better able to cope with the agita which usually accompanies a bear market.

Never accept a client whom you feel will take your substantial time: We told our reporterfriend that the only thing different about our attitude towards work is that we have a lower tolerancefor unpleasant clients. Fortunately, we do not think we have any such clients now, but if a potentialnew client came along who we suspected might take up an unreasonable amount of our time,we would be reluctant to take them on. This is not complacency; it is common sense. We want tomaximize the time we can devote to research and money management.

As securities analysts, we believe our job is part detective and part reporter. As detectives, we look

for clues that may lead us to investment opportunities. As reporters, we gather facts by reading

reports and filings, and by talking to people who may be knowledgeable about a specific company.

We then consider this information in the context of our particular investment schema and decide

whether a company fits or not. The fact gathering and investigation we do is generally limited todetermining if a company has the fundamental financial characteristics of stocks that we buy.


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It is not unlike buying a new house. If you were in the market for a house, presumably you would

make up a list of your requirements; four bedrooms, three bathrooms, a family room, a certain

location, etc., etc. If a house does not meet your needs, there is no point in looking at it. If you need

four bedrooms for the kids, you would probably keep looking rather than say: We like this three

bedroom house and maybe we could make the kids double up. We do the same thing when looking

at stocks. Our requirements, or criteria, are what psychologists call schemas. Schemas determinehow we will interpret financial information. In essence we are scripted to reject companies like

Netscape, which has no book value and minimal earnings, but h as the supposed prospects to

revolutionize some field of technology. We will react positively to a Pharmacia & Upjohn which,

when we bought it, had the lowest price-to-sales ratio in the industry, and a new CEO

who spent approximately $4 million of his own savings to buy stock in the company.

On internet bubble:There is a lot of talk lately about a new paradigm for stock valuations.

One needs a new paradigm to rationally justify the valuations of stocks that soar merely by virtue of

the fact that someone has added .com to the end of their name. A lot of money has been made in

most of these issues and a lot of people are sorry they have missed out on all the fun. We even hear

the occasional complaint asking why we have not invested in these new technologies.

Some people may even be thinking that our time has passed, and that we are not open to new ideasand avenues of profit in the stock market. It is true we do not go mountain biking on the weekends

to train for the rigors of stock investing on Monday mornings. Of course we have not heard

that Warren Buffett has enrolled in karate classes either, and he seems to do okay. New ideas come

and go, and it has been our experience that when they go, a lot of money is usually lost. We do not

enjoy risk and we do not enjoy losing money. If history tells us that investing in new paradigms at sky

high prices eventually leads to big losses, we pass. We are perfectly happy with our performance

over the past three years, five years and thirty years. And after thirty years in this business doing the

same thing, we are still players in the game. We see little reason to apologize and no reason to

change our stripes. What is forgotten is that not everyone can get out if and when the game ends.

There will be just as many shares outstanding and someone will own them when the day of

eckoning comes.Many analysts and money managers bought Internet stocks and made a lot ofmoney. However, we think they may be confusing luck with skill. That is often the case with

investment fads that work for a period of time.

Cannot time market: While some money managers may think they can time the stock markets or

segments of the stock markets, we have a much lower opinion of our prognosticating abilities. In

fact, we readily accept the fact we cannot forecast stock markets. Sorry, but if that is what you are

looking for, you have invested in the wrong Funds. We know one manager whose employer

measures his performance against the relevant benchmark weekly. Consequently, this individual is

primarily concerned with whether his stocks are up at every point in time, and he trades in and out

of stocks depending on very short term price movements. We wonder if there is any time left for

basic stock research. For our part, we do not even take credit for coming up with the investmentprinciples that have produced rather good results over time. That credit goes foremost to Ben

Graham, who in the 1930s was the first to articulate the principles of value investing, and who such

great investors as Warren Buffett and Walter Schloss credit with much of their success.

On emerging markets: Fortunately, we do not invest in emerging markets except to a tiny extent.

In 1998, the Morgan Stanley Capital International Emerging Markets Free Index was down 27.5%.

Generally, we do not invest in emerging markets because the financial disclosure is often poor, the

stocks are growth stocks trading at high multiples, and we cannot hedge the currency back into the

dollar at any reasonable rate. The collapse of the Russian stock market last summer was especially

dramatic and acute. In the two or three years prior, the Russian stock market had increased five-

fold. In a much shorter period of time, it dropped 80%. During its rise, there was talk of a new


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paradigm, and many investors were lured in as they observed the profits being made. It was a great

party. However, the end came so quickly, almost like an earthquake and with similar

results, that probably few were able to avoid the crash. We never profited from the rise of the

Russian market, but we also never had to give it all back as so many investors did.

InAre Short-Term Performance and Value Investing MutuallyExclusive?, Eugene Shahan analyzedthe investment performance of seven money managers, about whom Warren Buffett wrote in his

article, The SuperInvestors of Graham and Doddsville. Over long periods of time, the seven

managers significantly outperformed the market as measured by the Dow Jones Industrial Average

(the DJIA) or the Standard & Poors 500 Stock Index (the S&P 500) by between 7.7% to 16.5%

annually. (The goal of most institutional money managers is to outperform the market by 2% to

3%.) However, for periods ranging from 13 years to 28 years, this group of managers

underperformed the market between 7.7% to 42% of the years. Six of the seven investment

managers underperformed the market between 28% to 42% of the years. In todays environment,

they would have lost many of their clients during their periods of underperformance. Longer term, it

would have been the wrong decision to fire any of these money managers. In examining the seven

long-term investment records, unfavorable investment results as compared to either index did notpredict the future favourable comparative investment results which occurred, and favorable

investment results in comparison to the DJIA or the S&P 500 were not always followed

by future favorable comparative results. Stretches of consecutive annual underperformance ranged

from one to six years. Mr. Shahan concluded Unfortunately, there is no way to distinguish between

a poor threeyear stretch for a manager who will do well over 15 years, from a poor threeyear

stretch for a manager who will continue to do poorly. Nor is there any reason to believe that a

manager who does well from the outset cannot continue to do well, and consistently.

Bubbles: In past letters, we have half jokingly said that a course in history may be a better requirement

for someone in the money management business than a course in finance. Bubbles occur only every

10 or 20 years, which is a good thing and a bad thing. It is good that they occur infrequently becauseusually a great deal of money is lost when the bubble bursts. It is bad because memories are shortand when the next one begins to inflate, many investors will either say, Its different this time, orsimply have no recollection of the last one. Unfortunately, the pattern of bubbles is strikingly similarthroughout history. Bubbles seem to begin with some new technology that is predicted torevolutionize the way we do things. This time it was the Internet, but in years past it has beenbiotechnology, or computers, television and radio, electricity, cars, railroads, etc., etc. Each time thenew technology did have a significant impact on the way we live or do business, and each timeinvestors urge to participate led to significant losses. Traditional business valuation models aredeemed irrelevant because we are in uncharted waters. The Internet marked the dawn of something sonew and vastly enormous that only visionaries could appreciate its potential. The lure of great richesand quick profits can prove to be irresistible to many investors, who become blinded, if only

temporarily, to the realities of sound investment principles. Investors do not arrive at the conclusion tojump on board new investment themes in a vacuum, but are encouraged by the success of otherswho got in early, or by those who would dupe them for their own advantage, and by the general air ofeuphoria that surrounds all bubbles. As each new Internet IPO soared on the first day of trading, thebelief that all Internet IPOs would soar became an accepted investment principle. Those whostayed on the sidelines were dumb and just did not get it. Questioning the business strategy ofDrugStore.com, PetStore.com, eToys or Priceline.com was seen as a sign of ignorance notintelligence. The fact that almost none of these companies ever made a profit was irrelevant. Newmethods of valuing these enterprises were invented because the old methods did not apply. This wasnew technology, so it was perfectly okay to have a new way of valuing iteyeballs, page views andtraffic. Unfortunately, eventually a company has to generate cash to stay in business. You can onlyburn cash until you run out of cash, or to quote Ben Franklin, Always taking out of the meal tub, and

never putting in, soon comes to the bottom. This is what began to happen to the e-commerce


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companies in the first quarter of 2000. As companies began to fail, access to additional cash for theones still in business disappeared, and a domino effect of business failures was underway.Today, the e-commerce revolution is but a dull, albeit unpleasant, memory. Even the so-called bluechips ofthe Internet have suffered.

Problem with growth companies: In the April 2, 2001 issue of The Wall Street Journal, author ChrisZook, a partner at the consulting firm Bain & Company, wrote an article,Amazons Core Problem.In this article, Mr. Zook reports on a study his firm made of more than 2,000 companies worldwide... in order to understand the odds and drivers of profitable growth. He writes, What we found wasshocking. Only one in ten companies achieved true sustained, profitable growthdefined as 5.5%average annual revenue and income growth (adjusted for inflation) and earning the cost of capitalover the past 10 years. Most Internet-related businesses would be eliminated from the profitablegrower category because of the lack of profits. Mr. Zook goes on to define the three commonpitfalls that companies encounter in the pursuit of growth and where Amazon.com has failed in thisregard. The first is a failure to define the companys true core business. Companies that define theircore too broadly make misplaced investments ... that drain energy and weaken the core.Certainly Amazon has done this with investments in failing Internet companies and in offering

products beyond its recognized core ofbooks and music. Amazon has failed Mr. Zooks second testof strengthening its core to the fullest before expanding. Mr. Zook defines Amazons core business asinformation products, which has an estimated total market of $300 billion of sales per year, ascompared to Amazons $2.8 billion of sales last year. Finally, Amazon did not anticipate thechallenges of movements away from the core. The continuing lack of profitability, a stock price thathas nosedived and now layoffs are proof that something is not working. We used to joke whenAmazon was trading in the $60 per share range, that when the stock hit $10, it would be bought byWalmart for its expertise in on-line retailing. With Amazons market cap below $6 billion andWalmarts above $230 billion, that does not seem so farfetched any longer.

Of the 500 companies in the original Standard & Poors 500 Index in 1957, only 74 remained on thelist in 1998, and only 12 outperformed the Index over that period.

Rules to avoid the worst of the bear market: Avoiding the worst of a bear market only requirescommon sense. Bear markets eventually end and it is possible to recoup your losses (and thensome) in the ensuing recovery, if you have invested sensibly in the first place. First rule: avoidleverage. There is nothing worse than having your banker or broker force you to sell out because thereis not enough equity in your brokerage account. If you are forced out of the market, you cannotparticipate on the way back up. Second rule: avoid speculative stocks that have risen dramatically forreasons based more on hype than fundamentals. When a bear market comes, it is usually hardest onthe fad stocks. Look at all the now moribund technology, telecom and Internet stocks. Hopingthey will all come back is like hoping you win the power ball lottery. Not impossible, but highlyunlikely. Third rule: dont listen to all the stock market pundits. If all those pundits really knew whatthe market was going to do, why would they give that information away for free? If we had such

divine knowledge, we would just bet the ranch and reap the rewards. Let the others figure it out forthemselves.

When to sell: Stocks are sold infrequently, but when we do sell, its generally for one of the followingthree reasons. 1) The price has reached our estimate of intrinsic value and the futureprospects are uncertain. 2) In what we call the pigs feeding at the trough sell discipline, a moreattractive (cheaper) pig nudges a less attractive (more expensive) pig away from the trough.3) We identify a mistake in our valuation analysis or we receive new information so that the stocksprice is no longer at a discount from its intrinsic value.

Tips to budding analyst: The answer to this question could go on for pages. However, here is asampling of some of the lessons we have learned over decades.


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Develop a handful of durable models for your business and lifeconstantly re-examine,tweak, and refine the models.

Dissect behavioral biases and exploit them. Think of a company in the context of its competitors, not just as a stand-alone entitylook to

the future as well as the current snapshot. Spend your time and analysis on higher-probability activities and continue to be humble about

what is knowable and doable. Be intellectually honestconfront the challenges of your business head onspeak the simple

truth and it will generally be well received.

Equity returns occur often in concentrated burstsyou must be in to wintry to stay as fullyinvested as possible.

Revel in the risk-reducing and return-enhancing advantages of diversification and themathematics of skewness.

Pay close attention to the behavior of knowledgeable company insiders. Make the government a very limited partner in your business.


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Personal observation:

Tweedy brown in 1994 invested almost half of his funds assets in stocks with below book value and

it declined to c17% by 2002, by which time he started investing more in what he call better

businesses which trade at high multiple. But even in 2002 almost half of the funds were invested instocks with PE ratio less than 14x

tweedy brown

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