What Has Worked in Investing

As I've said in past postings, I'm not a fan of Efficient Market Hypothesis. I have a great deal of respect for the scholars, such as Eugene Fama, who came up with the theory, but I believe it doesn't explain what happens in the real world. I have yet to see the investment returns of any of these scholars.

While I believe markets are efficient when it comes to arbitrage opportunities, in the sense that prices adjust quickly to eliminate arbitrage, I don't believe that everything that is known about a company is priced into the stock. I believe that stock prices are influenced by the irrational actions of the market participants.

I also believe, with the right investment approach, one can beat the market, as evidenced by the students of Benjamin Graham, such as Warren Buffett, and several others. They have proven that they can and do beat the market over the long term, despite the claims of EMH.

An interesting booklet titled "What Has Worked in Investing" is available at Tweedy, Browne, an investment firm that follows the principles of Benjamin Graham.

This booklet describes 44 academic studies of certain investment criteria that have produced high rates of return. In the 44 studies exceptional returns were found for stocks with one or more of the following investment characteristics: low stock price in relation to book value, net current assets, earnings, cash flow, dividends or previous share price; small market capitalization; and a significant pattern of stock purchases by one or more insiders (officers and directors), or by the company itself. The study periods ranged from 1 to 55 years; indicated annual returns ranged from 12.1% to 49.6% and indicated annual returns in excess of the market index used in the studies ranged from 2.7% to 33.5% for the various characteristics and historical periods that were examined. Approximately one-half of the studies examined in the booklet focused on U.S. stocks and the balance focused on mature foreign stock markets. Many of the investment characteristics explained in this booklet, which are "value" oriented characteristics, have been the core of Tweedy, Browne's investment philosophy and stock selection decision making process since 1959, and are the basis for the management of their funds.

Some of these studies show similar results to the studies found in David Dreman's book Contrarian Investment Strategies in the Next Generation. Dreman also follows the principles of Benjamin Graham.

I'm sure you'll find this booklet very interesting reading.