Have I not seen dwellers on form and favor

Lose all and more by paying too much rent...

- Sonnet 125 by William Shakespeare

TO OUR SHAREHOLDERS:

The quote above was excerpted from Benjamin Graham's address in May of 1958 before the National Federa-tion of Financial Analysts Societies. Graham borrowed from one of Shakespeare's sonnets to express caution re-garding speculative market conditions, which were not unlike those of today. In discussing a shift in the attitudes and viewpoints of security analysts and the stock-buying public towards an emphasis on future expectations, he cautioned that “today's investor is so concerned with anticipating the future that he is already paying handsome-ly for it in advance. Thus, what he has projected with so much study and care may actually happen and still not bring him any profit. If it should fail to materialize to the degree expected, he may, in fact, be faced with a serious tempo-rary and perhaps even permanent loss.” As we look forward to the exciting prospects for AI technologies and the impact they may continue to have on public equity markets, we should not lose sight of Graham's admonition.

Coming on the heels of one of their best performances in two decades and fueled by continued investor optimism for a soft economic landing and avoidance of long-expected inflation and interest rate-driven recession, global equity markets continued to soar into the new calendar year. They finished the fiscal year ending March 31, 2024, near their all-time highs. The S&P 500, MSCI World Index (USD), and MSCI EAFE Index (USD) finished the fiscal year ending March 31 up 29.9%. 25.1% and 15.3%, respectively. In this highly charged, momentum-driven, risk-on environment, the Tweedy, Browne Funds continued to make considerable financial progress but, as one might expect, trailed their benchmark indices, producing returns between 9.74% and 15.35% for the full fiscal year.

The market's advance over the last year is even more impressive when one considers the “wall of worry” that it has had to climb — elevated valuations, stubbornly persistent inflation, the highest interest rates in the last 20 years, the prospect that interest rates could eventually normalize higher than those that prevailed over the last decade, soaring government deficits, and wars in the Ukraine and the Middle East that could possibly spiral out of control.

The equity market's exuberance may appear somewhat understandable, particularly in light of enthusiasm around the prospects for AI-related opportunities; however, the Damocles sword of valuation excess is now hanging over the market and begs the question as to just how much longer this can go on. An editorial in The Economist (March 2nd-8th, 2024 edition) recently pointed out that “the multiple by which profits are scaled up are on average 80% as high as they were during the dot-com mania of the late 1990s and 90% as high as they climbed in 2021 before rock bottom interest rates rose.” The S&P 500, the MSCI World, and MSCI EAFE indexes, as of March 31, traded at 25x, 22x, and 16x trailing twelve-month earnings, respectively. The MSCI World Growth index traded at 32x. Even the MSCI World Value index was trading at a somewhat elevated 16x trailing twelve-month earnings. Despite the market rally broadening somewhat coming into 2024, the returns of the MSCI World Index remain rather concentrated in a group of very highly valued companies. The top 20 contributors (out of 1,465 index constituents as of March 31, 2024) to the MSCI World Index return over the last fiscal year, which as a group constitute 27.6% of the index's total market capitalization, produced a cumulative return of 57.5%, accounting for just over 50% of the Index's total return. As of March 31, these 20 high-performing contributors traded at a weighted average price-earnings multiple of 34x trailing twelve-month earnings. Furthermore, the Shiller cyclically adjusted price-earnings ratio (CAPE) as of March 31 was approximately 34x, a level only exceeded on two other occasions in the history of the return series, which dates back to 1871¹. Only at the height of the dot-com bubble in December 1999 and the post-Covid recovery in October 2021 were the ratios higher. And we should not forget that in the subsequent twelve months after both of those prior highs, the S&P 500 declined 9.1% (December 1999 – December 2000) and 14.6%, respectively (October 2021 – October 2022).

We also take great comfort in the fact that our Fund portfolios consist of a diversified group of small, medium, and larger companies from all over the world that we believe, on the whole, continue to meet our value criteria and have durable competitive advantages, strong balance sheets, and runways of potential future growth. If, and when, the proverbial music in Wall Street's game of musical chairs stops, we remain hopeful that our shareholders will not be left standing.

OUR COLLEAGUE'S PERSONAL ROAD TO DAMASCUS (OMAHA?)

After outperforming growth investing on a cumulative basis spanning well over 40 years, value investing has, without question, suffered a rather surprising comeuppance for at least the last decade. On the heels of another year of dominance by a small group of big and quite familiar US technology stocks, we felt it was important to take a closer look at why value has underperformed and what the future may hold for this once pre-eminent style of investing. But before we get to the why, we thought you would be interested in how one of our younger Investment Committee members decided early in his career to become a dedicated value investor.

Jay Hill remembers taking the CFA exams in the early 2000s in order to prepare for an eventual career in asset management. During his three-year testing ordeal, he painfully experienced the dot-com boom and its eventual bust. The permanent impairment of capital that he experienced in his own rather modest brokerage account left him searching for a better and perhaps more reliable way to invest in publicly traded stocks. In essence, he started down his road to Damascus, seeking the “truth” in investing. He was determined to find a way to get long-term probabilities working in his favor.

While studying for the exams, he found that academics and professionals clearly had different views on how to define value investing or the so-called value factor; however, the empirical evidence unequivocally demonstrated that statistically cheaper stocks had outperformed statistically expensive stocks fairly reliably over long measurement periods. The chart below, which compares the long-term performance of US value and growth equities, illustrates this point. Dating back to 1974, a very similar pattern held for the performance of non-US value and growth equities as represented by the value and growth components of the MSCI EAFE Index.

What was it about this “business-like” discipline that had allowed it to outperform over the longer term? He was curious and wanted answers. While what he discovered is not likely to surprise you, it may provide reassurance that the market, indeed, remains, as Graham contended, a “voting machine in the short term and a weighing machine over the longer term”:

>> Investors are not nearly as rational as modern portfolio therorists originally thought. Behavioralists such as Daniel Kahneman and Amos Tversky discovered empirically that when confronting complex choices, investors often looked for shortcuts that reflected ingrained cognitive biases. This often resulted in irrational overreaction by investors, which sometimes produced actionable mispricings in public equity markets that disciplined, price-sensitive investors could exploit. According to behavioralists, as long as the “disutility of loss remained more than twice the utility of gain” in the eyes of the investors, they were destined to overreact, and bargains could be uncovered in public equity markets. [Note: Daniel Kahneman passed away in late March. His Nobel Prize-winning Prospect Theory and other writings, such as his book, Thinking Fast and Slow, went a long way, in our view, to provide a possible explanation for the success of active investment managers such as Warren Buffett (Trades, Portfolio).]

» Value investing is premised, in large part, on the notion that there are two prices for every share of stock: the price that appears on the exchange on a daily basis and the other price, the price that would accrue to the investor if the business was acquired in an arms-length negotiated transaction. Graham referred to this price as the company's intrinsic value. The relationship between those two prices becomes the value investor's compass. Value investors attempt to buy stocks at a discount to estimated intrinsic value. The elegance of Graham's model was that the bigger the discount, the lower the risk, and the better the return opportunity. The key is carefully and rationally estimating intrinsic value, which is admittedly subjective and fraught with potential error. The holy grail of value investing is to seek to benefit over time from the potential double dip of the elimination of the discount through multiple expansion (stock price accretes to our estimate of intrinsic value) and the underlying growth in our estimate of intrinsic value.

» Buying a stock at a discount to estimated intrinsic value implies a potential “margin of safety.” Benjamin Graham believed a “margin of safety” reduces the need to precisely forecast the future, and thus tends to minimize losses when forecasts are wrong. Value strategies almost invariably prioritize the risk of losing money over the risk of missing an opportunity. Thus, the value style has generally lost less than broad market indices in equity market selloffs. Losing less can often lead to a faster recovery as the make-up math is less daunting. (Of course, value investing involves the risk that the market will not recognize a security's intrinsic value for a long time, or that a security thought to be undervalued may in fact be appropriately priced when purchased.)

» Value investing also postulates that a great business does not always translate into a great investment. This distinction recognizes that the valuation (price) paid for a stock largely influences prospective long-term returns. Value investing prioritizes lower expectation stocks and attempts to distinguish between temporary risks (perhaps a bargain) and permanent risks (perhaps a value trap). Jay never lost sight of the fact that when the dot-com bubble burst in March of 2000, it not only brought down air-ball businesses such as E-toys and Pets.com, but it also resulted in a massive decline, in many good, if not great businesses, such as Cisco Systems (-80%), Microsoft (-44%), Oracle (-69%), Intel (-72%), Lucent (-97%), and Hewlett Packard (-65%) among a host of others. [Note: these declines occurred between February 28, 2000 through December 31, 2002].

» Value investing often requires extending one's time horizon. It almost always means buying into widely acknowledged short-term risks and near-term earnings declines. To non-believers, a value stock may seem risky and perhaps foolish. It usually requires uncanny patience to wait for sentiment to improve, often with no obvious catalyst available to trigger value recognition in the near term other than mean reversion. It also simultaneously requires seemingly contradictory character traits, including stubbornness coupled with flexibility. Ultimately, if investors are willing to look further out for a return, they are likely to face less competition on price, as we believe many investors refuse to look out beyond six to twelve months.

» Most importantly, value investing, more often than not, requires a rare degree of psychological resilience on the part of the investor. The value investor is almost invariably unhappy. When the value investor's opportunity set is likely the most favorable, triggered by broad market sell-offs, fear is pervasive, and the risk of losing money dominates investor psychology. When the opportunity set is likely the least favorable in frothy, broad-based bull markets, optimism is widespread. Even during these apparently pleasant periods, the value investor is selling (often too early) and agonizing over whether and where future returns will be achieved. Simply put, value investing feels uncomfortable. It is contrarian by its very nature. The value investor generally lacks the positive affirmation of positive media coverage, strong buy recommendations, appearance on 52-week high lists, upward-sloping stock prices, celebrity CEOs, and enthusiastic cocktail party banter. However, perhaps the main reason Jay found that value investing works over the longer term is that most people don't have the intestinal fortitude to consistently buy what is out of favor. Buying out-of-favor stocks with low expectations and well-publicized issues, however temporary, requires tenacity and a contradictory mix of conviction and humility that is

often in short supply in the investor community. It almost always requires the ability to look wrong for a while, and a willingness to embrace uncertainty, price volatility, and the recognition that a fair number of individual ideas will lose money. Investing in a universally acknowledged, great business with a positive near-term outlook, purported secular growth, and well-articulated competitive advantages is simply more emotionally comfortable.

Viewed through this lens, value investing's long-term dominance seemed quite plausible, understandable, and perhaps repeatable to Jay. To outperform the crowd, one must be willing to stand apart and behave differently from the crowd. How can one be expected to outperform by buying the stocks most universally loved? Wasn't this the lesson of the “Nifty Fifty” era and the dot-com/TMT (technology, media, telecom) bubble?

We have always understood that no investing style, including value investing, outperforms over all time periods. If value investing always worked, it would, of course, create a greater following and negate the necessary conditions that led to its long-term success. Thus, periods of underperformance are a necessary pre-condition to achieve long-term outperformance. Yet for over ten years now, “valuation indifferent” investing has clearly trumped bargain hunting, leading growth stocks to handily outperform their value brethren. The most visible and universally loved market darlings, companies such as the Magnificent 7, the stocks that emotionally are the easiest to buy, have outperformed over a period of time that has lasted long enough to cause even the most dedicated Ben Graham followers to question the efficacy of value investing.

So why has this occurred? Have global equity markets become permanently dysfunctional due to a decade of zero to negative interest rates? Are investors behaving more rationally, thus eliminating exploitable security mispricings? Will artificial intelligence and large language models help to eradicate cognitive bias in investment decision-making? While we, of course, do not have definitive answers to these provocative questions, we do have some observations.

A well-known value investor, David Einhorn (Trades, Portfolio), recently opined that capital markets have been irreparably damaged by passive investing and are now essentially broken. His response, however, wasn't to abandon value investing but rather to become even more price-sensitive in his approach and to seek out companies that are returning large amounts of capital to shareholders vis-à-vis dividends and share buybacks. For proper price discovery, he no longer wants to remain dependent on what he views as an increasingly irrational investor. He further believes that active value investors are being forced out of business or are in the process of being redeemed, leading to indiscriminate selling of value stocks in order to meet redemptions. If he's right, and you extrapolate what he says into the future, there should inevitably be greater inefficiencies between price and value in value stocks, which, in our humble view, can be exploited by disciplined, price-sensitive investors. Will bonanza-type returns in collapsed value stocks eventually draw investors back into the value camp? Hard to know, but it would not at all be surprising, but rather, quite rational.

As for whether AI technologies will be able to eliminate emotion from investment decision-making, leading to greater pricing efficiency in markets, we take comfort in the fact that they are, at least for now, merely tools in the hands of cognitively biased human decision-makers. We are reminded of the scene in Stanley Kubrick's 2001: A Space Odyssey, when Hal, the spacecraft's supercomputer and co-pilot, remarks to astronaut Dave Bowman, “Just what do you think you're doing, Dave?” It's interesting that, in this case, the astronaut was the rational actor attempting to control an artificially intelligent supercomputer that had gone rogue. Just how rational investors will remain under the influence of powerful large language models remains to be seen. From our humble perspective, the persistence of growth investing's outperformance over the last decade is largely a function of the “age of easy money.” As we mentioned in previous reports, unprecedented amounts of monetary and fiscal largesse by government and regulatory authorities all over the globe helped to take interest rates to the zero bound and even into negative territory in many European countries. For well over a decade, investors were essentially forced further out on the risk curve in an effort to receive some yield on their investments. In an age of rapid technological change and innovation, it became increasingly enticing to bid up the prices of longer-duration growth stocks whose earnings power was expected to endure long into the future. Even at high valuations, these types of securities produced earnings yields that were superior to the nearly zero yield on bonds. Conversely, investors accorded lower valuation multiples to the nearer-term earnings of value stocks despite the earnings yield advantages associated with their lower valuations. As we have said in past letters, we believe the bill has finally come due for the excesses of the last decade plus. Investors now find themselves in an economic environment that consists of persistently stubborn inflation and interest rates that are likely to normalize at levels well above the zero bound of the last decade plus. In such an environment, will investors continue to bid up the prices of high technology shares that increasingly trade at what we believe are exuberant, if not excessive, valuations? If the last year is any indication, perhaps they will. That said, the longer-term performance of value and growth indices since late 2020 suggests instead that we may be in the midst of a material shift in markets, largely driven by the prospect of a more normal interest rate structure. Less risky alternatives now abound in bond and equity markets that provide investors with earnings yields superior to those provided by highly valued growth stocks. As we have contended in numerous commentaries over the last couple of years, in such an environment, we believe price matters again, and we are optimistic about the future for price-sensitive strategies like ours.

PERFORMANCE

As mentioned at the beginning of this letter, the combination of declining inflation rates, prospective multiple interest rate cuts, and a continued relatively robust economic environment fueled a powerful rally over the last fiscal year in global equities, particularly US and Japanese equities. The first half of the year was all about the performance of the Magnificent 7, a well-known group of US-based mega-cap technology-related businesses. In the latter half of the year, the advance broadened somewhat; however, for the most part, global returns remained rather concentrated in technology-related companies. In this momentum-driven bull market, the Tweedy, Browne Funds performed quite well on an absolute basis but, unfortunately, failed to best their respective benchmark indices.

The currency hedged Tweedy, Browne International Value Fund finished the fiscal year ending March 31 up nearly 11%, but this paled in comparison to the return of its hedged benchmark, which was up 22.36%, due partly to the Fund's policy of hedging only its perceived foreign currency exposure. The unhedged International Value Fund II finished the year up 9.74% but underperformed the MSCI EAFE Index in US dollars, which was up 15.32%. As you can see from the index comparisons, it paid to be hedged during the full year, as the US dollar's strength in the first half of the year overcame a poorer performance in the second half of the year, allowing it to finish for the full year ahead of most foreign currencies. The performance of both of our international value funds also suffered from significant under-weightings in Japanese equities, auto-related companies, and European and Japanese bank stocks.

Our two global funds, the currency-hedged Tweedy, Browne Value Fund and the unhedged Tweedy, Browne Worldwide High Dividend Yield Value Fund, thanks in part to their having somewhat more significant US equity exposure, produced modestly better returns for the fiscal year, finishing up 15.35% and 11.40%, respectively, but were still unable to best their benchmark indices. Like its international counterpart, the Tweedy, Browne Value Fund hedges only its perceived foreign currency exposure and is not fully nominally hedged back into the US dollar. The relative underperformance of both the Value Fund and the Worldwide High Dividend Yield Value Fund was in large part a function of their relative underweights in US equities compared to their benchmarks, particularly high multiple, high-performing US technology-related companies.

PORTFOLIO ATTRIBUTION & POSITIONING

Please note that the individual companies discussed herein were held in one or more of the Funds during the fiscal year ending March 31, 2024, but were not necessarily held in all four of the Funds. Please refer to footnote 6 at the end of this letter for each Fund's respective holdings in each of these companies as of March 31, 2024.

Over the past fiscal year, aerospace & defense, financial, oil & gas, machinery, and chemical holdings were instrumental in bolstering the Funds' returns. In addition, interactive media holdings contributed to returns in three of the four funds, with the exception of the Worldwide High Dividend Yield Value Fund, which did not have investments in the group. Notably, some of the better-performing companies in these segments included the French jet engine manufacturer and maintenance company, Safran (XPAR:SAF, Financial); defense contractor and service companies, BAE (LSE:BA., Financial) and Babcock International (BAX, Financial); diversified financial conglomerate, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial); banks such as DBS Group (SGX:D05, Financial) and United Overseas Bank (SGX:U11, Financial) in Singapore, US-based Wells Fargo (WFC, Financial), and National Bank of Canada (TSX:NA, Financial); insurance companies such as SCOR, Zurich Insurance (XSW:ZURN), Munich Re, and National Western Life (NWLI, Financial); French energy giant TotalEnergies (TTE, Financial); Swedish industrial seal company, Trelleborg (OSTO:TREL B, Financial); and interactive media company, Alphabet (Google) (GOOG). Mexican Coke bottler Coca-Cola FEMSA (KOF); Italian industrial and medical gases company, SOL SpA (MIL:SOL); biotech companies Ionis Pharmaceuticals (IONS) and Vertex (VRTX); and the truck rental and self-storage company U-Haul (UHAL) also produced strong returns during the year.

Japan has continued to be among the Funds' top contributors during the past year as underlying economic change continued to unfold, and a more shareholder-friendly attitude has gained momentum amid the Tokyo Stock Exchange's pressure on its listed companies to pay heed to share valuation and shareholder returns. Some of the top contributing Japanese companies to one or more of the Funds' returns included Japanese chemical companies ADEKA (TSE:4401), Kuraray (TSE:3405), and Mitsubishi Gas (TSE:4182); auto parts company Niterra (TSE:5334); industrials such as Taikisha (TSE:1979), Sumitomo Heavy (TSE:6302), and Yamabiko (TSE:6250); and packaging company Fuji Seal (TSE:7864). While the Funds' weightings in Japanese shares have increased over the last several years, the overall weighting in our international value funds is still quite modest relative to Japan's significant weight in the MSCI EAFE Index. Many of the Funds' new purchases in Japan are smaller capitalization industrial companies, where it takes time to build a meaningful position at a disciplined price. In contrast, our two global-oriented funds have closer to a market weight when compared to Japan's weighting in the MSCI World Index, with the Value Fund marginally below the Index and the Worldwide High Dividend Yield Value Fund overweighted versus the Index.

Some of the regions and industry groups in our Funds produced rather disappointing returns during the period. This included a number of food & beverage, professional services, air freight, building products, and healthcare-related holdings in one or more of our Funds' portfolios, such as Diageo (DEO), Heineken (XAMS:HEIA), and Nestlé (XSWX:NESN); French staffing and outsourcing company, Teleperformance (XPAR:TEP); air freight and delivery company, DHL Group (XTER:DHL); the French flooring company, Tarkett (XPAR:TKTT); and the Swiss dental equipment manufacturer, Coltene (XSWX:CLTN). In addition, US-based companies FMC (FMC), Concentrix (CNXC), Paramount (PARA), and Sealed Air (SEE); long-time Swiss pharma holding Roche (XSWX:ROG); and the French-based video game developer, Ubisoft (XPAR:UBI), also detracted from returns during the fiscal year.

With growth slowing in China, the Funds' Asian stocks, for the most part, particularly those based in China, Hong Kong, and for all but the Worldwide Fund, the Philippines, produced disappointing returns. This included poor results in a number of the Funds' Asian holdings in internet retail (International Value, International Value Fund II), interactive media (International Value, International Value II, Value), real estate management and development (International Value Fund, International Value Fund II, Worldwide High Dividend Yield Value Fund), and industrial conglomerate holdings, and included companies that may have been held in one or more funds such as Baidu (BIDU), Alibaba (BABA), Tencent (HKSE:00700), Great Eagle (HKSE:00041), Hang Lung (HKSE:00101), Tai Cheung (HKSE:00088), and Alliance Global (PHS:AGI). The investment landscape in Asia, particularly China, while quite fertile in terms of valuations, remains somewhat challenging and uncertain on the governance front. While we are comfortable with the Funds' current weights (1.1-4.5%) in China and Hong Kong and are confident that the companies the Funds own, as a group, represent a value opportunity, we do not intend to materially add to the Funds' overall allocation to China in the near term.²

In terms of portfolio activity, we remained quite active in managing the Funds' holdings over the last 12 months, establishing many new positions, and adding to a number of others. Ten new holdings were added to the International Value Fund, 7 to the International Value Fund II, 15 to the Value Fund, and 14 to the Worldwide High Dividend Yield Value Fund. In addition, we added to several existing positions in all four Funds as favorable pricing opportunities presented themselves. Some of the more significant new buys in one or more Funds included Aalberts (XAMS:AALB) (Netherlands), an industrial conglomerate that sells mission-critical products across a variety of end markets; Computacenter (LSE:CCC) (UK), a global provider of IT infrastructure services; DB Insurance (XSWX:005830) (Korea), an insurance company; Dentsu Group (TSE:4324) (Japan), a global provider of advertising services; Envista (NVST) (US), a provider of products, equipment, and services to dental professionals; Sealed Air (US), a large provider of packaging solutions; Teleperformance (France), a global provider of business optimization, back office, and call center services; Ubisoft Entertainment (France), a leader in the video gaming industry; and U-Haul (US), a truck and trailer rental and self-storage company. In our view, all of these new additions were purchased at prices that represented significant discounts from our conservative estimates of their underlying intrinsic values, were financially strong, and had attractive runways for potential future growth. On the sell side, we sold or pared back several Fund holdings. The stock prices of these businesses had either reached our estimates of their underlying intrinsic values or had been compromised in some way by declines in our estimates of their underlying intrinsic values and future growth prospects. Or, we may have sold or trimmed positions to make room for new additions or to generate tax losses, which could be used to offset capital gains.

In terms of portfolio positioning, our Funds also remain invested in a diversified group of significantly undervalued smaller, medium, and larger capitalization companies across a host of developed and emerging markets. Many, if not most, in our view, have durable competitive advantages that allow them to have pricing power and the ability over time to potentially produce attractive returns on invested capital. We believe that many, if not most, are financially strong and have strong balance sheets, with many operating in a net cash position. The focus of portfolio activity across all four Funds continues to be in those parts of the global equity market that appear to represent the greatest value, i.e., smaller and medium capitalization equities, non-US equities, and companies where insiders, i.e., c-suite executives and knowledgeable directors, have made material purchases of their company shares.

RETURNING CAPITAL TO SHAREHOLDERS: DIVIDENDS OR SHARE REPURCHASE?

Over the last year, we made a concerted effort to encourage the management of Winpak, which we believe to be one of our Funds' most attractively valued holdings (held in all Funds with the exception of the Worldwide High Dividend Yield Value Fund), to consider initiating a share buyback plan. While the company had a history of paying special dividends from time to time, it had never seriously considered repurchasing its own shares. We believed strongly that their stock was cheap. They had, in our view, excellent prospects for future growth and significant excess net cash on the balance sheet. After an effort on our part to convince them of the efficacy of buying back shares, we are happy to report that at the end of February, Winpak announced its intention to buyback up to 1.95 million shares with the flexibility to increase to 3.25 million shares (5% of shares outstanding) over a twelve-month period. The company also indicated that it could extend the program over multiple years, depending on the company's share price in relation to its intrinsic value as determined by the Board. We think this is intelligent capital allocation. Moreover, we thought you might be interested in why we felt so strongly that, in Winpak's circumstance, it was more advantageous to buy back shares than pay a special dividend. What follows is a very brief lesson in what we believe to be rational and value-enhancing capital allocation.

When a company's Board decides to return capital to shareholders, it has two choices: pay a dividend or repurchase shares. Should non-selling shareholders prefer one over the other? In our opinion, the answer depends almost solely on the price-to-intrinsic value relationship. As Warren Buffett (Trades, Portfolio) famously said about share repurchase, “What is smart at one price is dumb at another.”

If a stock trades at a significant discount to a conservative estimate of intrinsic value, and that value will likely grow in the future, we believe the most impactful form of capital allocation is share repurchase. The reason is simple. Ignoring tax considerations, $1 of dividends paid out to shareholders creates $1 of shareholder value. Conversely, $1 of share repurchase executed well below intrinsic value will create greater than $1 of value for non-selling shareholders, effectively transferring wealth from selling shareholders to remaining shareholders. For example, if a company is trading for $70, but the intrinsic value of the business is $100, then share repurchases are the equivalent of buying $100 of value at $70 for each share repurchased. The net result is an increase in the intrinsic value to above $100 per share for the non-selling shareholders.

In contrast, if a stock trades above a conservative estimate of intrinsic value or the business is in long-term secular decline, we believe dividends are the preferred form of returning capital to shareholders. In this scenario, $1 of share repurchases executed above intrinsic value will create less than $1 dollar of value for non-selling shareholders, effectively reducing shareholder value. For example, if a company is trading for $120 but the intrinsic value of the business is $100, then share repurchases are the equivalent of buying $100 of value at $120 for each share repurchased. The net result is a reduction in intrinsic value to below $100 per share for the non-selling shareholders.

Clearly, the key determinates in the decision to pay a dividend or repurchase shares are the company's stock price, the Board's estimate of its intrinsic value per share, and its future growth prospects. These inputs are dynamic. Stock prices change daily, intrinsic value is subjective, and future growth prospects are hard to predict. A wildly inaccurate estimate of intrinsic value and/or the company's growth prospects could lead to the wrong capital allocation decision. Thus, we believe share repurchases make the most sense when the gap between the company's stock price and the estimate of its intrinsic value is substantial. If the gap is small, dividends are the preferred choice.

Another complicating factor is that for cultural reasons dividends are often viewed by shareholders as sacrosanct (“permanent”) while share repurchase is viewed as “opportunistic.” Thus, even when a Board believes its company's stock price is woefully undervalued, it is often loathe to cut the dividend. In their view, the dividend is analogous to a promise, and cutting it sends a negative signal about a company's future prospects. In our opinion, this behavioral bias towards preserving the dividend at all costs can be a capital allocation mistake. If a dividend-paying stock trades well below a conservative estimate of intrinsic value, and that value is expected to grow over time, we believe shareholder value would be maximized by cutting the dividend and using the money to repurchase shares instead. Sadly, very few public companies' Boards behave in this flexible and rational manner.

THE PASSING OF CHARLES THOMAS MUNGER

You've heard us speak in the past about how our business was built on the shoulders of giants who came before us at Tweedy, Browne, consummate professional investors such as Bill Tweedy, Tom Knapp, Howard Browne, Ed Anderson, Joe Reilly, Chris Browne, and Jim Clark. Back in December, just shy of his 100th birthday, the investment industry sadly lost a giant in the value investment community, Charles Munger. Our profession owes a huge debt of gratitude to this man, who made a unique and invaluable contribution to the world of investing.

Anyone who has owned a share of stock is no doubt familiar with perhaps the greatest investment partnership in history, that of Charlie Munger and Warren Buf fett, whom Financial Times columnist Eric Platt dubbed “the Lennon and McCartney of the investment world.” Charlie and Warren helped to educate multiple generations of investors, and, of course, Warren is still at it. Early in his professional life, Charlie worked as a real estate lawyer and was one of the founding partners of the renowned LA-based law firm Munger, Tolles, & Olsen. Charlie subsequently brought his razor-sharp legal and business acumen into the investment world, helping to build Berkshire Hathaway into the most successful investment conglomerate in history. He is, of course, credited by Warren himself as the architect of today's Berkshire. He is perhaps best known for advising Buffett over the years that it was much wiser to buy wonderful businesses at fair prices than fair businesses at wonderful prices. Such thinking and counsel allowed Berkshire to achieve a size and, scale, and level of tax efficiency that would not have been possible if Warren had only remained dedicated to proverbial “cigar-butt” investments. That said, we would submit that, in our view, Charlie's influence on Warren's approach to investing was in no way a repudiation of Ben Graham. In fact, Charlie is perhaps the shining example of Graham's counsel that “investment is most intelligent when it is most business-like.” While cigar butts were definitely not his thing, we're convinced that he would not quibble with Graham's notion that price matters in investing.

It is also fair to say that Charlie significantly influenced how we approached investment at Tweedy, Browne. In fact, one of our deceased partners, Ed Anderson, got his start in the investment world working as an analyst for Munger's private investment partnership, Wheeler, Munger. Together with Tom Knapp and Howard Browne, Ed helped build the value-based investment framework we still operate under today. In addition, we adopted Charlie's idea of the “too hard file.” From time to time, we run across what appear to be undervalued investment opportunities that, upon further study and reflection, are also found to be fraught with uncertainty and murkiness that challenge our comfort zone. In those circumstances, we simply follow Charlie's advice and set them aside, putting them into what he called the “too hard file.” We are particularly proud of the fact and grateful that our “too hard file” at Tweedy, Browne has grown quite large over the years, more than likely helping protect us from numerous potential investment mistakes. We also learned from Charlie the importance of not overlooking the qualitative considerations in investment decision-making. On more than one occasion, Charlie counseled, “If it can be measured, it will be emphasized.” He went on to advise that it is often the “hard to measure stuff” that is the most important in investment decision-making. Many investors are also quite familiar with Charlie's appreciation of Maslow's Hammer, the concept that “if the only tool you have is a hammer, you tend to see every problem as a nail.” Charlie brought a multi-disciplinary approach to solving problems, often incorporating the laws of physics, mathematical theorems, rules of logic, and statistical probabilities. And finally, and most importantly, if you have read Poor Charlie's Almanack, you know how fond he was of Ben Franklin, particularly his ideas about leading a virtuous life. While values such as hard work, kindness, honesty, and integrity were passed down to us by those who came before us at Tweedy, Browne, we appreciated Charlie's re-affirmation of what it means to lead a life of virtue and purpose. For all this and so much more, thank you, Charlie Munger.

Thank you for your continued confidence and trust.

Sincerely,

Roger R. de Bree, Andrew Ewert, Frank H. Hawrylak, Jay Hill, Thomas H. Shrager, John D. Spears, Robert Q. Wyckoff, Jr.

INVESTMENT COMMITTEE*

* Each member of the Investment Committee is a current investor in one or more of the Funds.

April 2024

Mention of a specific security should not be considered a recommendation to buy or a solicitation to sell that security. Portfolio holdings are subject to change at any time without notice and may not be representative of a Fund's current or future investments.