Tweedy, Browne is money management’s equivalent of the Republican cloth coat: nothing flashy, ever dependable, transcending style. It is an organization that was founded in 1920 to deal in thinly traded stocks, and which in the 1950s realized that more money was to be made in owning such typically undervalued shares than in trading them. The firm began to take in outside funds in 1968, and has grown to now managing over $13 billion.

It did not hurt that one of the firm’s earliest and best clients was Benjamin Graham, co-author in 1934 of the nearbiblical “Security Analysis.” Indeed, the company’s early association with Mr. Graham (and proximity — they moved into office space down the hall from the revered investor) led also to a relationship with Walter Schloss, Warren Buffett, and Tom Knapp, who joined the firm in 1957 and spear-headed its entrée into the investment game. These are formidable value bloodlines.

Christopher Browne is one of three members of the company’s management committee and son of a founder. He has recently written “The Little Book of Value Investing” which lays out the money management disciplines that have been so successful for Tweedy, Browne. In it, he argues the merit of buying “stocks on sale” and answers the obvious question: If value investing is so successful, and so simple, why doesn’t everybody do it? (You’ll have to buy the book.)

We asked him how his firm practices value investing today. He says that Tweedy, Browne eschews a top-down approach, and instead looks for companies that would meet an updated version of Benjamin Graham’s requirements.

That is, they look for companies selling at conservative multiples of enterprise value, with good balance sheets and positive cash flow and earnings prospects. In other words, they are looking for the same kinds of stocks that attract private equity players these days. That is a problem, according to Mr. Browne. Because of the gigantic inflow of funds to private equity shops, solid companies that could satisfy Tweedy, Browne’s criteria are being snapped up. Consequently, he and his associates are struggling to find good investment ideas.

That’s one reason the firm closed to new customers in May of last year. The directors agreed that there were simply not enough good new ideas coming off their screens, and wanted to protect the performance of existing clients. This dedication to clients has paid off; few have ever left the firm, including their very first institutional client, FMC Corporation.

Closing to new accounts might, however, be viewed as problematical for Affiliated Managers Group, which bought 70% of the company in 1997. Though one might expect that AMG would be pushing the firm to expand, they instead evidently allow Tweedy, Browne almost total independence. That handsoff approach has been rewarded with a doubling in the value of AMG’s investment, according to Mr. Browne.

Mr. Browne says the firm may reopen if valuations change, but in the meantime the investment teams in New York and London are having to scramble for good ideas. One source is companies that suffer a “surprise” which knocks the stock’s valuation. For instance, Tweedy, Browne was a buyer of insurance giant AIG in the aftermath of the resignation of embattled chairman Maurice Greenberg. The stock is currently selling at $71, but traded near $50 as the drama played out.

Similarly, the firm bought Bausch & Lomb (BOL $49) after the company halted shipments of its contact lens solution. The stock dropped 15% at the time of the announcement, and traded lower in subsequent months. After selling above $80 several months before the announcement of possible problems, the issue traded as low at $40. Convinced of the strength of the underlying business, Tweedy, Browne took advantage of the plunge.

Such decisions always appear easy in hindsight, but stepping up takes courage born of conviction. Such conviction has surely been tested in recent years. During the tech boom of the late 1990s Tweedy, Browne sat out, unconvinced of the business models of the start-up super-novas, and repelled by the valuations. It could not have been easy, but, astonishingly, the firm did not lose accounts and ultimately, of course, emerged heroes.

Since the 1980s the firm has had to go farther afield to find value. For instance, Korea is a country where valuations are depressed by concerns about regional instability. For example, SK Telecom (SKM $26), the country’s leading cell phone business, is selling at about half the multiple of comparable operations around the world. That excites the Tweedy, Browne crowd, which feels that the risks of aggression from North Korea are exaggerated, and will ultimately be reduced by China’s evergrowing involvement in regional politics.

Citing their view that cheaper stocks are to be found overseas, the company in September changed the name of their American Value Fund to the Value Fund, and eliminated the requirement to invest 80% of the fund’s assets in the U.S. Today about two-thirds of all assets are in international securities.

The firm’s flagship Global Value Fund earned investors 12.57% annualized over the 10 years ending in September, compared to an average return of 7.93% for Morningstar’s World Stock Funds. For five years the firm also outperformed: 12.48% vs. 11.2%

Though the company has been adventurous of this front, they have otherwise stuck to their knitting. They are only invested in equities, and they have not chosen to follow many of their competitors into the hedge fund arena. Mr. Browne is clearly comfortable pursuing his value niche, which he describes in his book as “the stress-free route to investment success”.. So stress-free, in fact, that retirement is not even on the table. “I am doing what I want to do” says Mr. Browne.

Tell us again why there aren’t there more value investors?

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