What Has Worked in Investing
high confidence — compiled with source citation from the investment brain.
What Has Worked in Investing
What Has Worked in Investing
The corpus contains three empirical answers to "what works," and they agree more than they differ: buy at a low price relative to some measure of fundamental value, and favor businesses that earn returns on capital above their cost. The evidence comes from a factor-studies compilation, a practitioner's backtest, and a rating agency's moat census.
Tweedy, Browne: the Graham factors
What Has Worked in Investing (Tweedy, Browne, 1992; revised 2009) compiles "over 50 studies" — "approximately half of which relate to non-U.S. stocks" — and reports that "geography had no influence on the basic conclusion that stocks possessing the characteristics described in this booklet provided the best returns over long periods of time." It frames the whole as "empirical evidence that Benjamin Graham's principles of investing, first described in 1934 in his book, Security Analysis, continue to serve investors well."
The recurring characteristics (each a Graham screen) are: (1) low price relative to asset value — "Stocks priced at less than book value", including discounts to net current assets; (2) low price relative to earnings — "low price/earnings ratios" and low price relative to cash flow; (3) significant insider buying; and (4) a significant prior decline in price, on the reversion-to-the-mean logic that "companies whose recent performance has been poor tend to perk up and improve." See benjamin-graham, security-analysis, and cigar-butt-investing.
Greenblatt: quality + cheap, mechanically
Joel Greenblatt's class notes reduce "what works" to two variables and one formula. The screen ranks companies by earnings yield and return on capital: "If you just stick to buying good companies—ones that have a high return on capital—and to buying those companies only at bargain prices—at prices that give you a high earnings yield—you end up systematically buying many of the good companies that crazy Mr. Market has decided to literally give away."
His backtest makes the claim quantitative: over the seventeen years, owning a portfolio of approximately 30 stocks that had the best combination of a high return on capital and a high earnings yield could have returned 30.8 percent per year, with $11,000 turning into $1 million before taxes and transaction costs. Operationally the two inputs are "normalized" EBIT/enterprise value (the pre-tax earnings yield) and ROIC — EBIT over net working capital plus net equipment. His caution is behavioral, not statistical: the formula does not work every year, and "For the magic formula to work for you, you must believe that it will work and maintain a long-term investment horizon" — echoing mr-market and the quality-vs-statistical-cheap fork.
Morningstar: the moat is the durable edge
Morningstar's 2011 moat research reframes "what works" from price-screening to business quality. The test is quantitative — "the ability of a business to generate ROIC above cost of capital is the primary test of shareholder value creation" — and the rating splits coverage into wide (~10%), narrow (~50%), and none (~40%). The census of five moat sources found "Cost advantage is the most common source of moat, network effect the least common", yet "Fundamentally, the best competitive advantage appears to be intangible assets."
The profitability gap is real: wide-moat firms posted a median trailing ROIC of 13.6% versus 8.3% for narrow-moat firms, and wide-moat firms draw on more sources of competitive advantage than narrow. But the return evidence is the honest caveat — "The results are mixed regarding wide moat versus narrow moat in terms of market returns in recent years." Quality of the business and quality of the investment are not the same thing, which is exactly the moats-versus-price point Marks makes; the moat is necessary context, not a buy signal.
Synthesis
The three sources triangulate on a stable, if unfashionable, conclusion: over long periods, cheap (low price to book, low PE, high earnings yield) and good (high ROIC, durable competitive advantage) are the two edges, and they compound best when combined — Greenblatt's formula is literally cheap-and-good expressed as a screen. The shared caveat is that none of it works every year, so the evidence is a statement about long-horizon expected returns, not a timing system. (See margin-of-safety, quality-vs-statistical-cheap, and relative-valuation-multiples.)
See also
Sources
textbooks/markdown/value-investing-pdfs__What_has_worked_in_investing_1771025950.mdtextbooks/markdown/value-investing-pdfs__Class_Notes_Joel_Greenblatt_1700147828.mdtextbooks/markdown/value-investing-pdfs__Morningstar Economic Moats 2011.md