BACK TO THE BOUTIQUE INVESTOR BLOG Learned Lessons from Over a Century of Value Investing Bob Wyckoff MANAGING DIRECTOR Bob Wyckoff, managing director of Tweedy, Browne Company draws on the wisdom of great investors over the last century as his company recently celebrated its 100th anniversary. The past can inform the future. We can all learn by revisiting two extended periods when value stocks underperformed on a huge scale and compare them with the current era when disruptive tech stocks have, once again, been outperforming value. The Nifty Fifty The first period (when value stocks underperformed growth stocks on a huge scale) can be highlighted in the years leading up to 1972 when an extended bull market had taken a group of growth securities to extraordinary levels. They were iconic companies known as the “Nifty Fifty” and included technology companies of that era such as IBM, Texas Instruments, and Xerox as well as a host of other companies including Walt Disney, Coca-Cola, and McDonald’s, which had been considered “one-decision” stocks that did not fall in stock price. But in the following two years, many of them lost two-thirds of their value. When thinking about today, it is also interesting to note the collapse of the Nifty Fifty happened amid rising inflation and an oil shock caused by the Arab oil embargo. The Dotcom Darlings The second period occurred in the years leading up to 2000, when a group of so-called “dot.com darlings” such as Cisco, Sun Microsystems, and Microsoft, several of which had achieved extraordinary price/earnings valuations of 100X earnings or more, then crashed even more spectacularly, brought down by the weight of excessive valuations. The Fabulous FAANGS + Microsoft (FANMAG) Over the last decade, we have had another group of innovative companies that have captured the imaginations of investors, and with the help of zero interest rate policies, helped lead equity markets to all-time highs. What Happens Next Growth investing always feels better, easier. Value investing requires the ability to look wrong for a while. Over the last decade, value investing did not prove to be as profitable as paying up for technology stocks. Articles in the financial press even reported, not that long ago, that value was dead, dying, or at the very least compromised. But we believe that if you look at the metrics differently—if you focus not just on price-to-book value, but instead on earnings-based enterprise multiples—then you see a different story. While value metrics such as price-to-book have performed poorly, value-oriented companies with low enterprise multiples have performed better. Looking back over the last 50 years, the resurgence of value should be reassured. And while it’s hard to know for sure, we believe we could be in the midst of that resurgence today, as rising inflation and the prospect of higher interest rates, once again, appear to be wreaking havoc with highly valued, speculative growth stocks. So, Lesson #1 is that price matters. Don’t give up on value investing. Stay on the Bus! If the past is indeed prologue, this time is not different, but simply a normal period of underperformance for an investment approach that has handily beaten its growth counterpart for much of the last century, albeit in a very lumpy manner. (Of course, past performance is no guarantee of future results.) Lesson #2 is simple enough: Don’t forget Lesson #1. A list containing all recommendations made by Tweedy, Browne Company LLC within the previous 12 months is available upon request. It should not be assumed that all recommendations made in the past have been profitable or that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Tweedy, Browne Company LLC’s 100-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment adviser. The firm registered as an investment adviser with the SEC in 1975 and ceased operations as a broker-dealer in 2014. This article contains opinions and statements on investment techniques, economics, market conditions, and other matters. There is no guarantee that these opinions and statements will prove to be correct, and some of them are inherently speculative. None of them should be relied upon as statements of fact. Any discussion of sectors, industries, or securities herein is informational and should not be perceived as investment recommendations. Securities discussed herein were not necessarily held in any accounts managed by Tweedy, Browne. Current and future portfolio holdings are subject to risk. The securities of small, less well-known companies may be more volatile than those of larger companies. In addition, investing in foreign securities involves additional risks beyond the risks of investing in securities of U.S. markets. These risks include economic and political considerations not typically found in U.S. markets, including currency fluctuation, political uncertainty, and different financial and accounting standards, regulatory environments, and overall market and economic factors. Force majeure events such as pandemics and natural disasters are likely to increase the risks inherent in investments and could have a broad negative impact on the world economy and business activity in general. Value investing involves the risk that the market will not recognize a security’s intrinsic value for a long time, or that a security thought to be undervalued may actually be appropriately priced when purchased. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return. Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return. Price/book (or P/B) ratio is a valuation measure calculated by dividing the market price of a company’s outstanding stock by its book value (total assets of a company less liabilities) and then adjusting for the number of shares outstanding. Stocks with negative book values are usually excluded from this calculation. Price/earnings (or P/E) ratio is a valuation measure that compares the company’s closing stock price and its trailing 12-month earnings per share. The Managing Directors and employees of Tweedy, Browne Company LLC may have a financial interest in the securities mentioned herein because, where consistent with the Firm’s Code of Ethics, the Managing Directors and employees may own these securities in their personal securities trading accounts or through their ownership of various pooled vehicles that own these securities. Past performance is no guarantee of future results.