WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTINGquartile, which produced a 4.37% compound annual return in local currencies (and 5.63%in U.S. dollars). The comparable return over the January 31, 1970 through December 31,1989 period for the Morgan Stanley Capital International World Index (MSCI WorldIndex) was 12.45% in local currencies (and 13.58% in U.S. dollars).In Tweedy, Browne's experience, stocks selling at low prices in relation to cash flow arealso often priced low in relation to book value and earnings, and often have high dividendyields. Business people in certain fields, such as the newspaper, cable television,broadcasting, and book and magazine publishing fields, frequently describe valuations ofdebt-free businesses in these fields in terms of multiples of pre-tax operating cash flow (pretaxincome from the business itself before the deduction of depreciation). Stocks selling atlow prices in relation to cash flow, especially in comparison to other companies in the sameindustry, are frequently undervalued relative to the price which shareholders would receiveif the entire company were sold.For companies domiciled outside the United States, Tweedy, Browne has frequentlyobserved depreciation policies that result in larger depreciation expenses, and lowerearnings, than would be the case if the same company prepared its financial statements inaccordance with U.S. generally accepted accounting principles. The Swiss company,Nestle, for example, reports as an asset on its balance sheet the estimated current cost toreplace its property, plant and equipment. This is a significantly larger figure than thehistorical cost figure which would be required under U.S. generally accepted accountingprinciples (“GAAP”), and results in higher depreciation charges versus U.S. GAAP.Cash flow analysis and comparison to companies in the same industry will frequentlysuggest “hidden value” in the form of understated earnings and/or assets that have beenwritten off to amounts which are significantly less than true realizable values.Five-Year Holding Period Year-by-Year Investment Returns for Low Price-to-CashFlow Companies as Compared to High Price-to-Cash Flow CompaniesJosef Lakonishok, Robert W. Vishny and Andrei Shleifer examined the effect of price/cashflow ratios on investment returns in “Contrarian Investment, Extrapolation and Risk,”Working Paper No. 4360, National Bureau of Economic Research, May 1993. Theprofessors ranked all companies listed on the NYSE and the AMEX according to price/cashflow of ratios and sorted the companies into deciles. Portfolios were initially formed onApril 30, 1968, and new portfolios were formed on each subsequent April 30. The studyperiod ended on April 30, 1990. The decile portfolios were held for five years, and theaverage annual year-by-year investment returns, the average annual five-year returns andthe average cumulative total five-year returns were calculated. The investment returnswere equal-weighted. Table 24 on the following page shows the results of the study.25