The Culture of Value Investing From Ben Graham’s & Warren Buffett’s Former Brokerage Firm


CONSUELO MACK: This week on WEALTHTRACK, the
current culture of value investing from Ben Graham’s and Warren Buffett’s former brokerage
firm. A WEALTHTRACK exclusive with Tweedy Browne’s
Will Browne and John Spears is next on Consuelo Mack WEALTHTRACK. Hello and welcome to this edition of WEALTHTRACK,
I’m Consuelo Mack. Wall Street is haunted by the ghosts of brokerage
firms past. In my career alone multiple firms including
established names such as Dean Witter, Kidder Peabody, PaineWebber and Smith Barney were
thriving independents. No more! Even the Merrill Lynch name is being gradually
erased by parent company Bank of America. There is one old line firm still standing
however, with an impeccable investment pedigree that is carrying on its deep- rooted value
traditions. It is Tweedy, Browne which was founded in
1920, had offices in the same Wall Street building as Benjamin Graham’s firm, and
became his broker. Graham, of course, is considered to be the
father of value investing, having authored “The Intelligent Investor,” recognized
as the definitive book on value investing which Warren Buffett, a lifetime student of
Graham’s, calls “…the best book about investing ever written. “ In fact, Tweedy Browne also became Warren
Buffett’s broker and helped him quietly acquire shares of Berkshire Hathaway in the
1960s. Buffett writes favorably about the firm’s
approach and track record in his famous essay, “The Superinvestors of Graham-and-Doddsville”
which is included in a revised edition of “The Intelligent Investor”. In a WEALTHTRACK exclusive we are joined by
two of Tweedy Browne’s long time portfolio managers. William Browne is Portfolio Manager, Managing
Director and Member of the Investment Committee, has been with the firm since 1978, and is
a member of the Browne family. A committed value investor, he is on the Executive
Advisory Board of the Heilbrunn Center for Graham and Dodd Investing at Columbia University. John Spears is also a Portfolio Manager and
Investment Committee Member, and joined the firm in 1974. Although they are both traditional long-term
value investors there is nothing old fashioned about their performance. The flagship Tweedy Browne Global Value Fund
which they have co-managed since its 1993 inception was named Morningstar International
Fund Manager of the Year in both 2000 and 2011. It carries 5-star and Bronze medalist ratings
and is ranked in the top two percent of its Foreign Large Value Category for the last
five years, top one percent for past 15 year period, and top six percent for the past 20. It has also beaten the market and its peers
since inception. Buffett’s partner Charlie Munger once described
Tweedy Browne as “..absolute descendants of Ben Graham… they are like Buddhists or
Tibetan monks who absolutely bought into the catechism.” I asked Browne and Spears if they agreed with
that characterization. JOHN SPEARS: I think that’s accurate with
a little bit of a caveat that we continued to evolve and learn things from other people,
especially from Warren Buffett and Charlie Munger, but in my case, I’ve read the 1934
edition of Security Analysis and 1936 edition. Just he’s a fabulous writer, a brilliant
man, and we owe him a lot. CONSUELO MACK: So how would you describe,
Will, your style of value investing? WILLIAM BROWNE: Well, what I would add to
what John said is to some extent it surprises me. I think that whether the people honestly believe
it or not, there’s still a tendency to reduce this whole idea of value investing down to
a couple of simple quantitative metrics. I guess the popular phrase today is factors,
price to book, P/E. I think that that is really a very incomplete definition of what this
process is about, and the process really derives from … we refer to it in our firm as Graham’s
big idea, and that is – I think most people are familiar with it – when you buy a share
of stock, you’re buying a fractional interest in a business. If you accept that framework, then that’s
going to drive everything that you do every day when you come to the office. The mantra around our office is “think like
an owner.” Put the ownership hat on and ask yourself,
there’s a share of stock trading out there. It’s a business. What’s it worth? Try and find some reasonable parameters for
estimating that value. Then you look into the marketplace and say,
“Have we got a spread?” Because the idea of still buying something
for less than what’s it worth, I think is a good idea. As we all know, businesses have become more
asset light, and we all know that Warren has evolved over the years. He’s buying good businesses. I think a lot of what we do are also good
businesses. It’s quite a broad mix. The best thing you can do is buy into a very
good business at a very attractive price. Capture the spread and then keep the compound
and be able to stay with it for a long, long period of time so that you don’t have to
pay off your silent partner, who is the tax man, when you sell. CONSUELO MACK: My understanding is, given
what Will just said as well, that there’s been an evolution at Tweedy, Browne. Can you describe the evolution of your value
investing approach? JOHN SPEARS: In terms of the evolution, I’d
say that if you go back to 1974 or 1975, well, the economy was different. There were more manufacturing businesses,
and you could find companies sometimes selling below their current assets less all liabilities,
and you’d buy that at two thirds. It’s a Ben Graham formula, and you get the
property, plant and equipment for free, and we had a number of those, but we also had
things based on earnings power like Binney & Smith, the crayon company, or on business
valuation, what a competitor might pay for that kind of business or timberland or oil
and gas businesses where you’d get a valuation framework for valuing that kind of a business. But as time moved on, those net current asset
stocks became extinct, but the basic idea was still, what’s something really worth? If intrinsic value is $100 a share, and you
can buy it at 50, you’ve got two to one almost like collateral coverage, and you’ve
got the prospect for 100 percent gain if the 50 goes to what it’s worth. But being influenced by Buffett and Munger
and seeing the importance of free cash flow and compounding of the business, definitely
we’ve evolved, but we still buy things that are very cheap on the numbers and then other
things that were cheap on the numbers when we bought them generally, and they compound. We hold onto them. CONSUELO MACK: When I look at some of the
top holdings in the Global Value Fund, for instance, they’re well-known names, Roche,
Nestlé, Diageo, Heineken, Novartis, Zurich Insurance, Total. So, what do they all have in common? JOHN SPEARS: Most of those companies have
a great deal of stability in their income, a great deal of stability in their demand,
and they typically have products that are number one or number two in their marketplace. So, they have strong competitive advantages
and generally are in a higher return on capital than most businesses. As a result, they have most of their earnings
in cash, and they can that to buy other companies or buy back their own stock or pay a nice
dividend and have some growth. Now that isn’t all of our companies we own. We own some average businesses that we might
have bought at seven times earnings and enterprise value to earnings before interest and tax
of eight or seven or even five times and some below tangible book value which is rare, but
there are some out there, especially when you’re shopping aisle of prospective opportunities
is global. CONSUELO MACK: Berkshire Hathaway, one of
your largest holding, or I guess it’s the largest holding in the Value Fund the last
time I looked. WILLIAM BROWNE: It had good management. It’s done well. CONSUELO MACK: Right. Well, it’s lagged the market, the stock
has for the last ten years. It’s done so a couple of times. Buffett says he expects Berkshire’s stock
to perform about the same as the S&P in the future, maybe a little bit better. What’s your view, number one, of Berkshire
Hathaway? Which one of you wants to respond first? JOHN SPEARS: I think it’s a very good, solid
holding. It reminds me a little bit of a quotation
from Benjamin Graham. Benjamin Graham, when talking about the definition
of investing said investment operations, one, that upon thorough research and analysis promises
safety of principal and “a satisfactory return.” CONSUELO MACK: Satisfactory. JOHN SPEARS: He didn’t say a market-beating
return. He didn’t say an alpha, and I think Berkshire
Hathaway is one where, okay, you ended up in a ten-year period. You did a little bit worse than the S&P 500,
but you’re still up probably 200-some percent, maybe 300, and it’s a very diversified holding. The basic ideas from the management of buying
back the stock when it’s way below their estimate of intrinsic value and again sitting
with it and not paying taxes because you think it’s going to compound is good. WILLIAM BROWNE: To me it’s a better index
fund than the index, a far better index fund than the index because you’ve had a person
in there picking good businesses to put into his index. I don’t think anybody could question that
he hasn’t been prudent and thoughtful about how he’s used his capital. CONSUELO MACK: Stock buybacks. There was an interesting statistic I saw recently
that the S&P 500 would be 20 percent lower than it is today were it not for stock buybacks. Your view on the importance of stock buybacks
to compounded growth rates in the businesses that you own. JOHN SPEARS: I think if the stock is cheap,
it’s wonderful when they’re buying back stock. If the stock’s at ten times earnings, so
you’ve got a ten percent earnings yield if the company paid out all of its earnings
as a dividend. Well if they had enough cash to buy back ten
percent of the shares outstanding, because your earnings per share go up ten percent
as a result of that move. You can have just tremendous increases in
per-share wealth and earnings and intrinsic value if a company is buying back at cheap
prices. Now a lot of … CONSUELO MACK: That’s key. JOHN SPEARS: A lot of the buybacks I don’t
think strike us as cheap. Many of them seem to be buying back enough
shares to offset the dilution from stock option exercise. CONSUELO MACK: What do you worry about with
stock buybacks? WILLIAM BROWNE: Well, one of the things that
I do think about is that I sometimes wonder how different the average manager in a business
is from the average investor. Buy high. They don’t sell low, but they don’t buy. I think that people by and large, and behavioral
finance has I think provided a lot of data on this, we’re not well wired to make unemotional,
disciplined decisions. Stock’s going up. They feel good. They want to move up, and there’s pressure,
and they do it. When the market swings the other way, there’s
a tendency to hunker down. I’m not going to buy it. I’m going to conserve my cash. I’m going to be careful. I’ve often thought that paying dividends
is a far better test of a company’s commitment, because I think there’s much more hesitancy
to cut a dividend than there is to suspend the buybacks. CONSUELO MACK: What company, John, exemplifies
your style of investing, your approach to investing in your portfolios? Is there one that stands out? JOHN SPEARS: One that stands out? No. I’d say we own 95 stocks. So, it’s a mixture of different kinds of
valuations. You can have oil and gas companies, timber
companies, advertising agencies that basically have almost no tangible net assets. You can have banks. We own a bank right now that’s at 70 percent
of tangible book value. CONSUELO MACK: Which is which bank? JOHN SPEARS: Standard Charter. Recently the CEO of the company bought 140,000
shares, and five other insiders also bought stock. It’s at ten times earnings, but the company
used to earn 15 percent return on equity. If they get back there, we’d be buying it
at around five times earnings. So that’s just one. That’s one. WILLIAM BROWNE: I’m reminded when I was
… JOHN SPEARS: It’s a basket approach. WILLIAM BROWNE: When I was growing up, I would
sit around sometimes when my parents had folks over, and my father having been in the business,
someone would say, “Howard, give me a stock,” and he’d look at them and say, “Save your
money.” I used to think for a long time he’s just
kind of an unfriendly guy, but the root of that response is it’s not one stock, and
I don’t want to give somebody one stock. It’s a portfolio that’s built with these
characteristics that earns that return. Any one of those can blow up in your face,
but the probabilities are if you own a portfolio of those, lots of those, on average you’re
going to be a winner as opposed to a loser, but you don’t know which one is going to
be the loser, and the last thing he ever wanted to do was give a friend a loser. So, the last thing we really want to do is
go on the air and give you a loser. CONSUELO MACK: What have you learned from
your blowups? I mean were there blowups for instance in
the financial crisis which of course happened to a lot of value managers? They underestimated what was going on in the
financial crisis. So, lessons learned from the financial crisis
or from any of your blowups? WILLIAM BROWNE: Then we’re going to sound
like there’s a lack of humility. I think we were fortunate because we didn’t
like the leverage in many of the financial companies … CONSUELO MACK: Financials. WILLIAM BROWNE: … prior to the blowup, and
we didn’t like the funding on a lot of those companies, so we had reduced our holdings
in that area, and that worked well. We were fortunate in that regard. CONSUELO MACK: Even an insurer like AIG. I don’t know if that was in your portfolio. WILLIAM BROWNE: We didn’t own AIG. CONSUELO MACK: You didn’t own it. WILLIAM BROWNE: No. We didn’t own AIG. We didn’t understand CDS. We didn’t understand that form of insurance. JOHN SPEARS: We owned it for a while. WILLIAM BROWNE: We got out. JOHN SPEARS: We owned it for a while, but
we got out. CONSUELO MACK: When it started getting into
these derivatives and that kind of stuff. WILLIAM BROWNE: It just didn’t make sense. CONSUELO MACK: So, is that kind of one of
the hallmarks of your approaches? If we don’t understand it, we’re not going
to buy into that business? JOHN SPEARS: I think it’s very hard to get
deeply inside any financial company. You do the best you can. You look at a bank. You look at the tier one capital ratio and
things like that and how they reserve for loans and other things, but I think you got
to take into consideration that it’s one of many, many issues and that you’re buying
a group of stocks, a basket of stocks with the advantages of the law of large numbers. CONSUELO MACK: Warren Buffett has been very
generous in his compliments about Jeff Bezos. Berkshire Hathaway has purchased Amazon. What are you doing at Tweedy, Browne? Are you buying any of the FAANGs? Do you own any of them? WILLIAM BROWNE: Well, we have owned Google
for years. CONSUELO MACK: What was it about Google that
attracted you? Again, I don’t think typically that as being
the area that a value investor would have purchased or a business that you would have
become involved with. WILLIAM BROWNE: Well, they dominated search,
and search was clearly an industry, a business that was growing, and they were monetizing
that aspect of their business very nicely. That was a point in time. I can’t remember exactly which year it was. The stock was way down in price. It made no sense. It was so cheap with a good business. JOHN SPEARS: It was 12 times after-tax earnings
is what we were paying, but that assumed you were buying a whole company and subtracting
cash. You were paying yourself back the cash in
the till, and your net price for the earnings power of Google was about 12 times after-tax
earnings, and the earnings were understated because all the moon shot-type things were
losing money, and they were clearly not related to the core business. So, you had that as almost a hidden asset
there. It was growing at about 20 percent a year,
and it looked like it would continue for a while. So, it met some quantitative value standards. I think the analysts valued it at about 12
times pretax, EBIT, earnings before interest and taxes, and we were buying it at about
80 percent of that figure. WILLIAM BROWNE: We should’ve owned more. JOHN SPEARS: We should’ve owned more. Darn. CONSUELO MACK: There is much more firepower
being aimed at analyzing the market. For instance, there are so many more CFAs. There’s so much more money. There’s so much big data analyzing every
stock every which way. Is it getting harder, Will, to do what you
do, actually to find opportunities that are not being found by other money managers? WILLIAM BROWNE: I don’t know whether it’s
getting harder. I would say – and this almost sounds like
a cliché – but I don’t think necessarily that more data brings more judgment, and I
think there is a judgment aspect to all of this, and I do think that there just is this
behavioral aspect to the way people function in markets. All you have to do is look at the stock market
from day to day and walk away saying, was yesterday the efficient market, or is today
the efficient market? I think it’s very hard for most people to
distance themselves from that sort of pressure. CONSUELO MACK: How do you do it? You’re on Wall Street? How do you distance yourself? WILLIAM BROWNE: Well, it’s just what your
antennae are tuned for and what you think is relevant. I do find the news interesting. I don’t want to get into it, but a lot of
what goes on in the world just isn’t relevant to what we’re trying to do from an investment
perspective. I don’t think this is actually a terribly
complicated business. You don’t have to be a scientist. The really smart guys … CONSUELO MACK: Or an astrophysicist. WILLIAM BROWNE: They’re the ones who land
things on the moon or Saturn. Those are the really smart people. I think what you need is a framework to keep
you anchored as close to objectivity as you can possibly get and stay with that. It helps keep your head clear. CONSUELO MACK: John, would you agree? JOHN SPEARS: I would agree. I think that the concept of having two prices,
a stock price and then the value, real world value, net cash or value of the earning power
based on investment banking-type rules of thumb, that’s great. Often with some of these stocks end up with
owner earnings, a good owner earnings yield. You pay ten times earnings for a business. You’re getting a ten percent earnings yield
on your price, and many of our companies when we buy them have that characteristic.. CONSUELO MACK: So, you make it sound so simple. It isn’t, but at any rate you do. WILLIAM BROWNE: That’s why I have no gray
hair. JOHN SPEARS: The concept is inherently simple. WILLIAM BROWNE: It is inherently simple. It really is. JOHN SPEARS: It is. CONSUELO MACK: Will, You Said That You Wouldn’t
Recommend One Stock. You Didn’t want to. As your Dad would say, save. “I’m not going to give you one stock.” However, on WEALTHTRACK, which you knew, we
ask a question of each of our guests if there’s one investment we should all own some of in
a long-term diversified portfolio, what would it be? WILLIAM BROWNE: Other than Tweedy, Browne
funds. CONSUELO MACK: Right. You’re not allowed to recommend your own
cooking. WILLIAM BROWNE: Well, an asset class it’s
equities. No question about equities, and the reason
I say that as opposed to other asset classes is businesses in many ways are organic. They’re comprised of human capital, financial
capital and physical capital, and they’re adaptive, and the idea that your business
… because the world changes. Think back 20 years ago how we all communicated
and where we are today. Businesses have the ability because of the
human capital, the financial capital, the intellectual capital to adapt and evolve,
and that’s one of the nice things about businesses. They’re sort of, if you will, almost living
organisms, and you have a better chance of seeing the real purchasing power of your capital
grow. In doing that, one, you’ve got to extend
your time horizon. You’re better off not looking at the price
of your stocks every day, because it’ll drive you virtually insane, and don’t spend
too much time anchoring on the last piece of news which is what everybody does. Extend your Thinking Out. Try And Put Things Into A Context And Ask
Yourself, Where Are We Likely To Be doing this in five or ten years, remembering why
you’re trying to save some money. CONSUELO MACK: So that’s his response. What’s your response to the question? WILLIAM BROWNE: He’ll contradict me. JOHN SPEARS: No. I mean if I have to. CONSUELO MACK: You have to, John. JOHN SPEARS: Have some Berkshire Hathaway. Put some of that in there. It’s diversified, and they’re certainly
trying to beat the index and hopefully they will. We own a lot of it. CONSUELO MACK: All right, we’ll leave it
there. John Spears, thank you so much for joining
us from Tweedy, Browne, and Will Browne, thank you as well for the two of you joining us. We really appreciate it. JOHN SPEARS: Thank you. Thank you. WILLIAM BROWNE: Thank you, Consuelo. Appreciate the time. JOHN SPEARS: A very interesting interview. Thank you. CONSUELO MACK: At the close of every WEALTHTRACK
we try to give you one suggestion to help you build and protect your wealth over the
long term. This week’s Action Point is: Take a duo
of Buffett biographies on vacation. I have recommended “Buffett: The Making
of an American Capitalist” By Roger Lowenstein several times before. It is a fascinating exploration of Buffett’s
early interest and obsession with investing and making money and his career decisions
until the mid-nineties. The second book, “The Snowball: Warren Buffett
and the Business of Life” by Alice Schroeder is a whole other study of Buffett personally. Although he authorized it, it evidently got
a little too personal for his tastes. Together they give a pretty complete picture
of who this investing master is, and how he has achieved what he has. Next week, great value investor Tom Russo
has been following Warren Buffett’s investment principles since 1984 at his Semper Vic Partners
Funds. Berkshire Hathaway is his largest holding. Does Buffett’s advice still work? In this week’s EXTRA feature guests Will
Browne and John Spears share their techniques to keep fresh and energized over a lifetime
of investing. Please continue to keep us energized and challenged
with your Facebook postings and Tweets and watch us any time on our YouTube channel. Thank you for watching. Have a wonderful Father’s Day weekend. We pay tribute to all Dads past and present. Make the week ahead a profitable and a productive
one.

8 Replies to “The Culture of Value Investing From Ben Graham’s & Warren Buffett’s Former Brokerage Firm

  1. Enjoyed the interview. Though I think most active investors should try to pick great companies rather than focus on cheap metrics and valuation solely. Thats what we try to do for our youtube portfolio.

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