WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTINGThe mean return from net current asset stocks for the 13-year period was 29.4% per yearversus 11.5% per year for the NYSE-AMEX Index. One million dollars invested in the netcurrent asset portfolio on December 31, 1970 would have increased to $25,497,300 byDecember 31, 1983. By comparison, $1,000,000 invested in the NYSE-AMEX Indexwould have increased to $3,729,600 on December 31, 1983. The net current assetportfolio's exceptional performance over the entire 13 years was not consistent over smallersubsets of time within the 13-year period. For the three-year period, December 31, 1970through December 31, 1973, which represents 23% of the 13-year study period, the meanannual return from the net current asset portfolio was .6% per year as compared to 4.6%per year for the NYSE-AMEX Index.The study also examined the investment results from the net current asset companies whichoperated at a loss (about one-third of the entire sample of companies) as compared to theinvestment results of the net current asset companies which operated profitably. Thecompanies operating at a loss had slightly higher investment returns than the companieswith positive earnings: 31.3% per year for the unprofitable companies versus 28.9% peryear for the profitable companies.Further research by Tweedy, Browne has indicated that companies satisfying the net currentasset criterion have not only enjoyed good common stock performance over time but alsohave often been priced at significant discounts to “real world” estimates of the specific valuethat stockholders would probably receive in an actual sale or liquidation of the entirecorporation. Net current asset value ascribes no value to a company's real estate andequipment, nor is any going concern value ascribed to prospective earning power from acompany’s sales base. When liquidation value appraisals are made, the estimated “haircut”on accounts receivable and inventory is often recouped or exceeded by the estimated valueof a company’s real estate and equipment. It is not uncommon to see informed investors,such as a company's own officers and directors or other corporations, accumulate the sharesof a company priced in the stock market at less than 66% of net current asset value. Thecompany itself is frequently a buyer of its own shares.Common characteristics associated with stocks selling at less than 66% of net current assetvalue are low price/earnings ratios, low price/sales ratios and low price in relation to“normal” earnings; i.e., what the company would earn if it earned the average return onequity for a given industry or the average net income margin on sales for such industry.Current earnings are often depressed in relation to prior earnings. The stock price has oftendeclined significantly from prior price levels, causing a shrinkage in a company’s marketcapitalization.Note: Investors should bear in mind that Ben Graham’s “66% of net current asset”criterion, which is discussed in several places in this paper, is a rather extreme quantitativevalue-based methodology that should not be confused with Tweedy, Browne’s current criteriaof investing in businesses trading in the stock market at approximately 2/3rds or less of2