John Neff on Investing (John Neff) 0 comments

As John Neff's book came up for mention in the Sunday Times today, I thought I would cover his book on investing. I had read his book and I can relate to many parts of his investing philosophy. Maybe others might find his ideas useful too.

John Neff managed the Vanguard Windsor fund for thirty-one years, retiring in 1995. Over these years his fund had an annual compound return of 15%, outperforming the market 22 out of the 31 years. This is a remarkable record given that a large part of this period was during the stagflation years of the 1970s. He also, incidentally, emerged as the choice of many money managers to manage their own money, in several polls (see Money Masters of Our Time.

The book is divided into three sections, where part one is an account of how he came into the fund management business, part two describes his investing philosophy, while the last part is a sort of market journal describing his trades.

John Neff's writing is not a particularly enthralling read, and I myself have not read Parts 1 and 3 in detail. It is Part 2 that I would recommend the reader direct his attention on.

In this part, John Neff introduces his investment philosophy. He is best described as a value investor, and key points of his method resonate with me. His stock picking revolves centrally around picking stocks with low PE, and he explains why: low PE stocks often have mediocre prospects, but occasionally they are misunderstood by the market. In more optimistic times, the revaluation impact is twofold: price rises more than in proportion with earnings growth, because PE valuation is also raised upwards. Secondly, he likes to look regularly through recent losers in search of familiar names that have dropped significantly, say 40 or 50%, from their peak; this is a logical approach since fundamentals of companies with reasonable scale and brand names do not lose their fundamentals easily, and might have been oversold. A third insight is his emphasis on dividend yield; he views this as contributing significantly to total investment return, and also as "free money" since analysts typically peg target prices to earnings which don't change whether dividends are distributed or not; in this respect he differs from Warren Buffett who doesn't mind reinvestment of profits back into the company.

His approach also reminds me of a position trader in some aspects. Firstly, he doesn't believe in excessive diversification; he is ready to concentrate assets in sectors which he believes are ready to explode; one of his favourites seems to be oil plays and he had put up to a quarter of his funds in this sector at times. Secondly, a class of stocks he likes are cyclicals such as mining (commodities). In such stocks PE is less illuminating, accurate research on the state of the market is paramount, and requires the investor to take a clear position on the overall market outlook in terms of demand and supply; Neff's repeated success in buying low and selling high in these stocks does suggest his market instincts. Thirdly, he says that all stocks in his portfolio are for sale at the right price; he does not fall in love with his stocks. In this aspect he appears to be ready to take profits and plough them into other promising stocks, rather than let them run.

If you find that my description of his methods sound interesting to you, you could go borrow his book from one of the National Library outlets.