WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTINGDuring the 18-year period shown in Table 15, the compound annual returns for the marketcapitalization weighted NYSE and U.S. Treasury bills were 8.6% and 7.4%, respectively.In Tweedy, Browne’s experience, stocks selling at low prices in relation to earnings arealso often significantly undervalued in relation to specific appraisals of the value thatshareholders would receive in a sale of the entire company, based upon valuations of similarbusinesses in corporate transactions. Companies with low price/earnings ratios are alsofrequently priced at low price-to-book value ratios relative to other companies in thesame industry.Stocks of companies selling at low price/earnings ratios often have above-average cashdividend yields. Additionally, the remaining part of earnings after the payment of cashdividends, i.e., retained earnings, are reinvested in the business for the benefit of theshareholders. Retained earnings increase the net assets, or stockholders’ equity, of acompany. The increase in stockholders' equity from retained earnings often equates to aspecific increase in the true corporate value of a company, especially when the retainedearnings result in a similar increase in a company's cash or a decrease in its debt.Reinvestment of retained earnings in business assets and projects which earn high returnscan increase true corporate value by amounts exceeding the actual retained earnings. Acompany with a low price/earnings ratio, by definition, must provide the investor witheither an above-average cash dividend yield, or an above-average retained earnings yield, orboth. Similar to stocks selling at low prices in relation to net current asset value and bookvalue, the shares of a company with a low price/earnings ratio are often accumulated by theofficers and directors, or by the company itself. The company’s stock price has frequentlydeclined significantly.Benjamin Graham’s Low Price/Earnings Ratio Stock Selection CriteriaHenry Oppenheimer, in “A Test of Ben Graham's Stock Selection Criteria,” FinancialAnalysts Journal, September/October 1984, examined the investment performance ofthe low price/earnings ratio stock selection criteria developed by Benjamin Graham.Benjamin Graham's stock selection criteria called for the purchase of securities of companiesin which the earnings yield (i.e., the reciprocal of the price/earnings ratio) was at leasttwice the AAA bond yield, and the company's total debt (i.e., current liabilities and longtermdebt) was less than its book value. Graham also advised that each security which metthe selection criteria be held for either two years, or until 50% price appreciation occurred,whichever came first.17