Tweedy, Browne: Two Illustrative Choices for Investment Performance
by Luis Cote
November 13th, 2015
Photo Credit: Tony Webster
Small investors are often confronted with the basic question of how to best allocate their financial resources. Depending on the investor’s time-horizon and risk tolerance, there are two salient choices: start an enterprise or fund a portfolio.
The report “Different Perspectives on Investment Performance,” by Tweedy, Browne Global Value Fund, offers a very straightforward answer to this dilemma.
Tweedy, Browne Company LLC is an investment firm turning 95 years old this year. Tweedy, Browne’s managing directors and partners have always adhered to value-investing principles as laid out by Benjamin Graham and David Dodd. Tweedy, Browne’s value-oriented strategy has always been focused on pursuing a diversified portfolio with equal interests in controlled and non-controlled businesses.
Almost a decade ago, Tweedy, Browne began offering a long-term strategy for portfolios focused in companies around the world that have better than average dividend yields, solid dividend-paying record, and valuations with an adequate margin of safety. This fund is now known as the Worldwide High Dividend Yield Value Fund.
The firm recently published a report looking into the year-to-year percentage change of investment returns for the Fund. Started in 1993, it's had an excellent long-term record, outperforming indices by a wide margin. However, the returns have been lumpy, with several years of underachievement intermingled with periods of overachievement. Despite the jolts along the way, a general pattern clearly emerges. This pattern is comprised of numerous positive smaller time periods in which a successful long-term investment track record is delineated. Value investing, as with any intercontinental journey, involves many take offs, landings, detours and occasional turbulence. The most important lesson drawn form this report is that no matter how well prepared you are for this journey, knowing how to emotionally handle times of turbulence, as well as tailwind periods, will be vital in achieving long-term investment success.
The chart below shows the comparative growth of $10,000 invested in the TBGV Fund and MSCI EAFE Index over 22 years. Tweedy, Browne's performance has been very good, as those who signed up to receive free net net stock picks are well aware of.
Successful entrepreneurs are constantly celebrated in news media and social platforms. The many accolades and rewards reaped by their success inspire others to follow in the path of entrepreneurship. However, is this the optimal decision for small investors?
Several studies point out that the overwhelming majority of all startups shut down quickly or offer dismal returns on investment. According to research by Shikhar Ghosh of Harvard Business School, 50 to 90 percent of new enterprises fail to stay in business after five years. In addition, 70 to 80 percent of all new businesses are unsuccessful in delivering any meaningful return on investment.
The systemic bias in the news media that lionizes elite entrepreneurs and headlines only the most catastrophic business failures highly distorts the real probabilities of business survival. Consequently, the majority of investors in new enterprises relies more on emotional cues and also attempts to launch their businesses without undertaking sufficient planning or research.
So which choice is more exhilarating? Is it the shot at rubbing elbows with the likes of Elon Musk and Mark Zuckerberg? Or spending the afternoon playing bridge with a white-haired gentleman in a tweed jacket? For a lot of people, the idea of expecting outsized rewards for bearing outsized risks doesn’t bother them. However, there are also people who are strongly averse to financial loss. They would rather patiently wait for the opportunity to buy a one-dollar business at a discount for, say, forty cents.
Unfortunately, waiting patiently is neither exciting nor does it reward our limbic brain. And so even though the answer to which long-term investing choice is more successful should be quite clear, conspicuity is clouded by human psychology.
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