#xix

In 1992, Tweedy, Browne Company LLC, a well-known value investment firm, published a compilation of 44 research studies entitled, "What Has Worked in Investing." The study found that what has worked is fairly simple: cheap stocks (measured by price-to-book values, price-to-earnings ratios, or dividend yields) reliably outperform expensive ones, and stocks that have underperformed (over three- and five-year periods) subsequently beat those that have lately performed well.

—Seth A. Klarman, The Timeless Wisdom of Graham and Dodd

Investors tend to assume that tomorrow's markets will look very much like today's, and, most of the time, they will. But every once in a while, conventional wisdom is turned on its head, circular reasoning is unraveled, prices revert to the mean, and speculative behavior is exposed as such.

"We have stiven throughout to guard the student against overemphasis upon the superficial and the temporary, [which is] at once the delusion and the nemesis of the world of finance."

they laid out a plan for how investors in any environment might sort through hundreds or even thousands of common stocks, preferred shares, and bonds to identify those worthy of investment

While formulas such as the classic "net working capital" test are necessary to support an investment analysis, value investing is not a paint-by-numbers exercise. Skepticism and judgment are always required.

[6] Graham and Dodd recommended that investors purchase stocks trading for less than two-thirds of "net working capital," defined as working capital less all other liabilities. Many stocks fit this criterion during the Depression years, far fewer today.

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