WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTINGA subsequent paper, interestingly co-authored by Burton G. Malkiel, the PrincetonProfessor and author of A Random Walk Down Wall Street, which argues against theefficacy of actively managed investment strategies in favor of index funds, investigatedwhether the predictable return advantages associated with contrarian strategies set forth inprevious empirical studies was persistent and exploitable by investment managers. In thisstudy published in The Journal of Economics and Statistics (May 1997) entitled, “ThePredictability of Stock Returns: A Cross-Sectional Simulation,” Zsuzsanna Fluck (New YorkUniversity), Burton G. Malkiel (Princeton) and Richard E. Quandt (Princeton) examinedthe performance of 1,000 large-company stocks ranked by price/earnings ratios and priceto-bookvalue ratios from 1979 through 1995, and confirmed the findings of the previousLakonishok, Shleifer and Vishny study, “Contrarian Investment, Extrapolation and Risk,”finding that,On a sample of large companies that is free from selection bias, we have concluded thatthe superior performance of contrarian strategies, documented by earlier studies is notsimply an artifact of selection bias. We have also found that the result is robust withrespect to transaction costs.The papers by Fluck, Malkiel and Quandt, and by Lakonishok, Shliefer and Vishny, togetherwith similar studies described in the “Assets Bought Cheap” and “Earnings Bought Cheap”sections of What Has Worked In Investing demonstrate that, at the extreme, investorsovervalue and undervalue individual stocks, and that the best returns come from buyingstocks at the extreme end of the value spectrum.Sincerely,TWEEDY, BROWNE COMPANY LLCWilliam H. BrowneThomas H. ShragerJohn D. SpearsRobert Q. Wyckoff, Jr.Managing Directorsiv