Notes on What Has Worked in Investing

Tweedy, Brown's booklet What Has Worked In Investing summarizes the results of a number of studies that look at the relation between indications of equity undervaluation and subsequent returns.

The two main takeaways are that different measures of undervaluation are correlated, and that on average, stocks that score highly on any of these measures outperform the market as a whole. Of course, this has been a popular idea ever since Ben Graham's The Intelligent Investor, but these studies provide fairly recent empirical evidence. This result has held not only in the US, but also on other stockmarkets of developed countries.

The indicators covered are:

• price to net asset value, price to book value (assets bought cheap);
• price to earnings (earnings bought cheap);
• dividend yield (because of the correlation to P/E);
• insider buying (buy if insiders buy);
• recent price fluctuation (buy if price has recently declined);
• market capitalization (smaller is better).

It would be interesting to repeat the various analyses that the booklet describes on a current sample of the European stock market.