The prince of value
Christopher Browne traces his investing approach directly back to Warren Buffett's guru, Ben Graham. Guess what? It still works.
NEW YORK (Money Magazine) -- If there's such a thing as an aristocracy of American investing, Christopher Browne is a full member.
He's one of five managing directors of Tweedy Browne, a firm co-founded by his father, who brokered stock trades for Benjamin Graham, the creator of modern securities analysis.
Later, when Graham's most illustrious pupil, Warren Buffett, wanted to take a controlling interest in a then sleepy textile company called Berkshire Hathaway, Tweedy Browne bought the stock.
Given this lineage, it's hardly a surprise that Browne would become a spokesman for Graham's and Buffett's investing philosophy.
Tweedy Browne's three mutual funds are pure examples of value investing - buying out-of-favor stocks on the cheap - and Browne has written what may be the most easily digested book on the topic, "The Little Book of Value Investing."
Even Browne was surprised, however, when his approach led to a confrontation with one of the richest men in Canada. Tweedy Browne's value-hunting research into Canadian publisher Hollinger eventually led to the conviction this past July of its chairman, Lord Conrad Black, on mail fraud and other charges. (Black plans to appeal.)
Graham's buy-cheap discipline kept value funds, including Tweedy Browne's, out of tech stocks during the dotcom bubble; and while value funds have lagged lately, they still have the best five-year return of the major investing styles.
In a recent chat with managing editor Eric Schurenberg, Browne explained why.
Q. In your book, you say value investing has produced better results than any other strategy. That's a strong statement.
A. Don't take my word for it. There are plenty of academic studies confirming that if you buy stocks that are undervalued by simple metrics like low price/earnings and price/book ratios and you are patient, you'll beat other strategies in the long run.
Q. Is that all you need, low P/E and P/B?
A. The essence of Graham's methodology is to buy businesses below their intrinsic value, giving yourself a big margin of safety. We're like bankers looking at loan collateral.
We ask, What's the business worth? What have similar companies sold for? Does that price make sense? And can we buy the stock for a lot less?
Q. Problem is, cheap stocks can stay cheap.
A. A stock may take a week to rise to its true value, or five years, or it may never. But more often than not it does. A few years back we bought into Central Newspapers, which was controlled by a Pulliam family trust, Dan Quayle's family.
A trust provision prevented the company from being sold unless the trust got voting control of the acquiring entity. People said, "It's dead money. The family can't sell."
But we said, "It's cheap. What's our downside?"
Turns out, there was a little clause that let the family ignore that control provision if the papers' existence was threatened. We didn't even know it was there. But in less than a year, some of the family wanted out and claimed the Internet threatened the papers' existence. They sold to Gannett for a handsome price.
Q. Nobel laureate William Sharpe says that for a strategy to beat the market in the long run, it'd have to exploit a consistent flaw in how investors price stocks. Does value do that?
A. Most people want to own sexy, fast-growing stocks. But as Buffett says, you pay a dear price for a cheery consensus. As a value investor, you hold your nose sometimes and buy a boring stock because it's cheap. Then you have to be patient.
That's hard for a lot of people in my business. It's like they're afraid some client or boss will say, "Hey, you haven't made a trade in five months! What are we paying you for? "
They're type A personalities. Value investors are type B - not excitable, non-egotistical.
Q. Would a type B challenge Lord Black?
A. Value investing had a lot to do with it. When we dug into Hollinger's finances, we were outraged. We decided to pursue it.
Q. Are you type B enough to own financial stocks today?
A. Yes, but ours have very limited subprime exposure: PNC Financial, U.S. Bancorp and Lloyds. The first yields nearly 4%, the second over 5%. Lloyds is takeover-able. Once people realize there's not a warehouse full of subprime out back, the stocks will rebound.
Q. Would you ever buy a growth stock?
A. At a reasonable price - absolutely. I just want to sleep at night. Personally, I always keep two years' worth of expenses in cash. No matter what happens in the markets, I'll always have food.
Q. Are you worried about something you're not telling us?
A. No, no. Inflation is 2%; we're at practically full employment. I don't think things are so bad. I just like a margin of safety.
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