Tuesday, December 06, 2016

Superinvestor Tweedy Browne on Mr. Market's current insanity

From the letter from fall 2016:
"Recently, the Financial Times reported that the value of negative yielding debt had risen to $13.4 trillion, which included some shorter term corporate debt for the first time. While bond managers enjoyed a bonanza, since falling yields mean rising prices (and rising yields mean falling prices), the idea of paying someone to hold your money feels peculiar to many of us since the benefits are hard to discern and the ultimate consequence or reward is not obvious, except to the few who regularly appear on the financial news networks.

Filling in the canvas on this subject, the government of Austria recently sold €2 billion of a seventy-year bond at a yield of 1.53%. If you were to think about this similar to the price/earnings (PE) ratio on a stock, the buyers of these bonds were paying 65 times the annual interest they would earn on the bond. When the bonds mature in 2086, we will not be here to collect, but perhaps our grandchildren will. (What the purchasing power of those euros will be in 2086 is an entirely different question.) The issue was oversubscribed by €5.8 billion, meaning there was more demand than there was supply.
For some interesting historical perspective, compliments of Grant’s Interest Rate Observer, the publication mentioned a Wall Street Journal article from October 1981 describing the difficulty Merrill Lynch had in finding buyers for Bell Telephone bonds, yielding a bit over 17%. So while not a lot has changed in the last couple of years, the world still does have a way of changing dramatically from time to time in an unpredictable and unexpected fashion. This should not be interpreted as a prediction on our part but rather an observation."
Warren Buffett named Tweedy Browne as one of the "Superinvestors of Graham and Doddsville" in 1984. He explained:

"Tom Knapp who also worked at Graham-Newman with me. Tom was a chemistry major at Princeton before the war; when he came back from the war, he was a beach bum. And then one day he read that Dave Dodd was giving a night course in investments at Columbia. Tom took it on a noncredit basis, and he got so interested in the subject from taking that course that he came up and enrolled at Columbia Business School, where he got the MBA degree. He took Dodd’s course again, and took Ben Graham’s course. Incidentally, 35 years later I called Tom to ascertain some of the facts involved here and I found him on the beach again. The only difference is that now he owns the beach!

In 1968, Tom Knapp and Ed Anderson, also a Graham disciple, along with one or two other fellows of similar persuasion, formed Tweedy, Browne Partners, and their investment results appear in Table 2. Tweedy, Browne built that record with very wide diversification. They occasionally bought control of businesses, but the record of the passive investments is equal to the record of the control investments."

See www.superinvesteerders.nl to see how Tweedy Browne has outperformed the market after 1984 as well as before by still doing their own math and not following "Mr. Market" 's lead.

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

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