In November 2000, Christopher Browne, a partner at Tweedy Browne and a scholar of
Value Investing, gave a speech to Columbia Graduate students.
The piece “Value Investing and Behavioral Finance” provided insight into money
management and finding value in equities. While his presentation was before the
recession we experienced in 2008, the report touches on the market period from the
early 1870s until 2000 which includes the great depression, the market crash of 1987
and other points of larger volatility such as 1973 and 1997.
We are highlighting a few points of the presentation that pertain to value investing,
judging money managers, and general market research.
Browne talks about risk aversion and investors seeking to have their asset allocation
include fixed income. However, from 1926 through the early 1990s, the real rate return
of stocks outperformed bonds by 6%. He also points out the statistics for rolling periods:
- “From 1871 to 1992, stocks beat bonds in 80% of the rolling 10-year periods. In rolling 30-year periods…stocks won over bonds 100% of the time.”
Browne, a longtime student of value investing, rationalizes why value equities not only
outperform the market, but typically tend to outperform growth equities as well:
- “Value stocks outperform the market by exploiting the sub-optimal behavior of investors.”
- “Growth stock investing may be more a philosophy of buying what is popular. Value investing is more a philosophy of buying what is out of favor.”
As mentioned in the portfolio manager letter, behavioral investing can have costly
effects on portfolios and Browne quotes “Lakonishok, Schleifer and Vishny” echoing the same sentiment:
- “Putting excessive weight on recent past history, as opposed to a rational prior, is a common judgment error in psychological experiments and not just in the stock market.”
On selecting a money manager, Browne concedes that there are a few questions that
are rarely asked that are better criteria for making a decision. We thought two were
especially important:
- Can you understand their investment philosophy?
- What does the manager do with his or her own money?
