Tweedy Browne – Unlike A Fruit Fly We Are All Blessed With The Ability To Take A Longer Term Perspective

One of the best resources available to value investors are the shareholder letters from Tweedy Browne. Tweedy Browne is one of the longest serving value investing firms in the United States and was founded in 1920 by Forrest Berwind “Bill” Tweedy.Asset Management Fees Face A New Headwind

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Tweedy Browne

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When Bill Tweedy founded his firm, he concentrated in a niche market on Wall Street where he would have little or no competition. This niche was the market for closely held and inactively traded securities. At the time, he found that there were a number of companies with perhaps 50 to 150 shareholders, but no real market for their shares. Bill would attend the Annual Shareholders’ Meetings of these companies, copy down the shareholder registry, and send postcards to each of the shareholders. He hoped to find buyers and sellers within this group and act as their broker.

As of March 31, 2017, the firm managed approximately $17.5 billion for individuals, institutions, partnerships, off-shore funds and four mutual funds of a registered investment company.An Incredibly Powerful Value Investing Framework

While Tweedy Browne have written some of the best articles ever written on how to become a successful value investor there is one piece in their 2014 Semi-Annual Report that describes what it’s like to be a value investor and how you can be successful at value investing.

Here’s an excerpt from that letter:

When you are in the middle of the investment ring waiting for the first punch to be thrown, the tension can be enormous and it can be hard to hear yourself think over the roar of the crowd. As Mike Tyson said when talking about how he approached a fight, “Everyone has a plan ’til you get punched in the mouth.” Making matters worse, there is an accumulating body of knowledge in the fields of behavioral economics and behavioral finance indicating that we are not well wired to be rational and objective when it comes to decisions in economics and investing. In our estimation, these factors elevate the chances of getting caught up in what we term the “buy high, sell low syndrome.”

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Fear is a powerful motivator, and managing it is a stress-inducing challenge, even for the “pros.” Contributing to this daunting challenge is the enormous emphasis on short-term results. Without commenting on any other dimension of the hedge fund world, we find the enormous emphasis in the media on the hedge fund world’s October results odd, if not bizarre. What does any one month’s return mean? What is the predictive value of one month’s results?

At Tweedy, Browne, most of our energy is concentrated around a three-to-five-year time horizon, asking ourselves where a company is likely to be over that time frame. We know all of our clients don’t think that way, and some operate with shorter time horizons, but we believe we have a better opportunity of earning higher rates of return by “arbitraging” a longer time horizon even though it may mean forgoing some short-term returns. We believe it is a more sensible way to manage your money and our money, and improves our odds in doing so. As we write this letter on October 20, if you were a fruit fly which has an expected adult life of two weeks, you just went through a financial “hell” for your entire adult life in the past several weeks. Fortunately, we are all blessed with the ability to take a longer perspective.Tweedy Browne – Focus On The Knowable While Protecting Mightily Against The Unknowable

What is needed is a plan or, better said, some tools to help us keep that perspective. We don’t know the particular facts and considerations for each and every one of our shareholders, so there is no “one size fits all” recommendation we could offer. However, we do believe there are some tools that can be helpful in making broad investment decisions and trying to look beyond the headlines to the trendlines.

  1. Extend the time horizon of your thinking – investing is a marathon, not a sprint.
  2. Don’t put money in the financial markets that you are going to need to meet a financial obligation in the next 12-18 months. Returns over a short period of time, in our judgment, carry with them a high degree of randomness.
  3. Be clear on your goals and reasons for investing.
  4. If you have retained someone to make investment decisions for you, make the effort to understand their investment process. “It shouldn’t be that hard.”
  5. Remember that behind every stock price there is a business. At Tweedy, Browne, we own fractional interests in businesses and our focus is on the valuation of the business and how the business is doing. If the business does well and we are able to buy it right, the investment on average will do well.
  6. Don’t rely on an investment process dependent on “intuition.” The process should have a timeless and universal logic to it.
  7. Value Investing Is Not Dead, But It Is Harder

We are taking the liberty of quoting from the recent Berkshire Hathaway annual report, with full credit to Warren Buffett and Charlie Munger, because it encapsulates and illustrates the bulk of the investment common sense needed for good financial health, and probably says far more clearly and concisely what we have just spent several pages trying to say:

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

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When Charlie Munger and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

Article by Johnny Hopkins, The Acquirer's Multiple

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The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”