The paper's findings show that each of the following factors can be critical in separating first-rate from merely mediocre stock market results:

Markets are volatile, as are the prices of individual equities that comprise them. Performance can go up or down 50% or more in a single year and often does. One might think the best bets then are on those which have already had a good run. After all, everybody else is already getting on those bandwagons. They must therefore be headed in the correct direction, right? So, we could buy into stocks that are already up, hoping that more investors will keep piling on just like we did. That may work for awhile, yet sooner or later popular stocks will run out of steam. Per the research in Tweedy Brown and Company's report, in general a person would do better to buy stocks that have fallen in price than ones that have already risen significantly. In one study, for instance, NYSE assets which had performed worst in a prior 5-year period exceeded a market index by 18% over the first 17 months following the portfolio's inception.

A lot of us feel more secure investing in large companies. They just seem more likely to do well and to at least avoid bankruptcy or going out of business. It turns out, though, that smaller publicly traded stocks have better average returns. The Tweedy Brown and Company research indicates that there is an indirect relationship between market capitalization (the price per share times the number of shares outstanding) and annual returns. Thus, the larger the stock's presence in the market , the worse returns it is likely to provide, and vice versa. One study, for example, showed that in the period 1963 to 1980 the smallest decile capitalization NYSE and AMEX stocks performed best, up over 32% a year through that period. Studies of foreign markets showed the same type result: low market capitalization stocks did the best in Japan, Australia, the United Kingdom, France, Canada, and Germany as well as over multiple investing periods. Stock performance of the lowest market capitalization stocks ranged from over 20% to over 80% annually in these overseas markets.

Historically, 40% or more of the return from common stock investing has come from dividends. We tend to discount the value of dividends these days, when many companies do not provide any yield to shareholders and plenty of others have only a tiny dividend. The expectation is that companies that pay little or no dividend are investing their extra funds in good growth prospects. On average, the reality is often different. Upper management in so-called growth companies, that typically omit the dividends or keep them low, may use the additional money (that might have gone to the owners, stockholders) instead to pay themselves larger and larger salaries. They may go on buying binges, taking over smaller companies that have little of real value to contribute to the thus diluted enterprise. Alternatively, they may start other expensive projects that add only modestly if at all to companies' bottom lines. This sort of thing happens enough that companies that provide outsize dividends, without taking on too much debt, average better in overall returns vs. either average stocks or those that provide little or no dividends. One study, that included U.S. as well as foreign stocks over multiple years, found that the average excess over market index returns of stocks with initially the highest quartile dividend payments was about 6% a year.

Book value, a company's assets per share less its liabilities per share, has been found also to be a profitable source of stock valuation. The ratio of price to book value, sometimes shortened to price to book or P/Bk, can suggest how great a bargain a stock is or the opposite. Low price to earnings is a similar measure, but earnings can be more easily fudged. There are generations' worth of research into results for low vs. high price to book value stocks. Enough info is out there that one can probably be safe simply buying low P/Bk assets, compared with average or high price to book stocks, and reliably gain better results accordingly. Often people do not find this to be true. The trick, though, may be first to select for low leverage stocks (those with little debt to equity, for instance, up to D/E of about 0.25) and then to know when to sell a stock bought for its good low P/Bk credentials (i.e. once its price to book value has risen to better than 1.0).

The Tweedy Brown and Company research, though, is clear: low P/Bk kicks butt. In a characteristic study, low price to book value stocks in the S&P 500 Index were compared with the S&P 500 Index itself over the difficult period from April 30,1970 to April 30,1981, a time which included arguably the worst post-World War II market meltdown till 2008. Stocks with P/Bk 0.5 and below provided average annual returns of 20% or better, while the S&P 500 Index averaged only single digit yearly returns. This measure of value is reliable enough, in my view, that when there are few un-leveraged low P/Bk stocks available from which to choose, as is the case these days, it is a sign that the market as a whole has gotten ahead of itself. We may then not be at the end of the game or even quite into the 9th inning, but savvy folks are starting to get restless and are looking toward the exits.

Despite this, I did find 3 stocks in this category that appear worth some of our investment dollars:

Price to cash flow can be defined as the per share price divided by per share earnings net of taxes, preferred stock dividends, employee distributions, reported depreciation on fixed assets for the last known period, and misc. minority interests. That sounds rather complicated, but fortunately it is easy online to find this value, usually written merely as P/CF, on just about any stock in one of the U.S. exchanges. The lower the better, but stocks with P/CF of around 12 or below are generally considered to be in bargain territory. P/CF for stocks in our country tends to be high if over 20. P/CF varies by industry, though, and usually it is best to compare apples with apples and have relatively low P/CF in relation to other companies in the same sector. Nonetheless, there are a number of comprehensive, multi-year studies of P/CF in relation to returns. For example, all NYSE and Amex stocks were assessed in the period April, 1968, to April, 1990, and it was found that stocks in the lowest third by P/CF outperformed those in the highest third by about 8% a year. Annual total returns for stocks in the lowest P/CF decile were about 19%.

Happy New Year, and good investing in 2015.