Investing 101 2.0
Investing 101 2.0
John Neff

John Neff

Type of Investing:

Taken:

John Neff: John Neff was a famed Public Equity Investor, Invest Manager, Philanthropist, and both a Pioneer at Vanguard, as well as a famed member of the “Roundtable” Investment club. He was renowned for taking bets on risky stocks, that turned out to be diamonds in the rough, and widely viewed as the “contrarian” for his investment decisions/thesis. Following his death in June of 2019, he had definitley left a legacy within the business, financial, and investment worlds that could rival the best of the best.

Early Life: John Neff was born in Wauseon, Ohio, on September 13th, 1931. His parents split up, and he spent about 16 years in Corpus Christy, Texas. In his novel, he remembered his father looking to strike it rich in the oil fields. At 17, he moved back to Ohio with his biological father. After moving back to Ohio, he soon joined the Navy and served for two years before beginning his career as a civilian.

Interestingly enough regarding his education, he didn’t attend an ivy league University. In 1955 he graduated from the University of Toledo summa cum laude with a degree in Industrial Marketing, and in 1958 he graduated from Business School at Case Western Reserve University in Cleveland Ohio, with an MBA in Banking and Finance.

Career: His Career Began in 1955, following his graduation in Toledo. He began working as a securities Analyst at National Cities Bank in, Cleveland Ohio, and ended his tenure in 1963. Following his years in Banking, he started working at Wellington Management Company (sub-advisor to the Vanguard group of funds) in 1964, and after three years was appointed as the Windsor Fund Portfolio Manager. Throughout the years up until 19195, he would serve not only as the fund manager of the Windsor fund at wellington, but also the Fund Manager of the Gemini and Gemini ll funds at Vangaurd. Throughourght his time working at Wellington and supporting Vangaurdm the Windsor Portfolio grew from $75 million in net assets to $13.6 billion in December 1995. The Windsor Fund returned an average of 13.7% annually over Mr. Neff's career as the fund manager. During this time he beat the S&P 500 index, which returned an average 10.6%. That means a $10,000 initial investment would have grown to close to half a million by the end. That said Neff’s investment strategy was groundbreaking.

Investment Thesis: Neff Has described his investing style as low price-to-earnings (P/E) methodology. He believed that portfolios should be concentrated on a particular archetype, as opposed to diversified. He was industry agnostic and had a strict formula that he stuck to, in order to identify undervalued firms.

According to his book his investing method is as follows:

  1. Finding Value:
  • Looks for stocks that trade at 40%-60% of the markets average P/E ratio (Price per share/divided by Earning per share

  1. Finding Realistic Growth:
  • Within the bundle of Stocks that trade between 40%-60% of the Martkets average P/E, he would identify Stocks with ESP (Earnings per share growth) between 7%-20%
  1. Would give a better picture of the profitability growth Rate
  2. Usually Younger COmpanies
  3. Asses Long Term Growth:
  • Search for companies within that Bundle, that had Sales growth Rate percentages above 7% for a 5 year period

  1. Identify Total Return Ratio: Then he would asses the companies ESP growth & Dividend yield using this formula:
  • ESP Growth% + Dividend Yield%/ P/E ratio
    • If the numer was Dounble the industry average then it met his criteria

  1. Extra Items to look for: He would then look at the TTM (Which tracks the companies financial performance over a 12 month period) and calculate the Cash Flow Per Share. If cash flow per share was greater than 0 and the company grew within the TTM, then he’d buy the stock.

Additional Investment preferences: He really dug deep into the management team and the financial books of companies he was interested in. Neff's strategies generated pretty high turnover with an average holding period of three years. He placed considerable emphasis on return on equity (ROE), because he believed that it was the best measure of management effectiveness. Neff also focused on predicting the economy and projecting a company's future earnings. Also, Neff liked to choose stocks with high dividend yields, in the 4% to 5% range.

Investment Strategy: In closing, He liked to invest in stocks that were discounted, but had potential and buy a large percentage of their shares. with P/E’s between 40%-60% of the market average.

Takeaways:

  • When it comes to finding valuable stocks, you can’t expect to find them following the crowd
  • Concentration is better the diversification, for the sake of mitigating risk. If you have a formula that midigatets risk to begin with then, yo’ll have a more successful portfolio

Quotes

  • "Rather than load up on hot stocks along with the crowd, we took the opposite approach. Our strength always depended on coaxing overlooked, out-of-favour stocks to move from undervalued to fairly valued. We left 'greater-fool' investing to others."
  • "We've found that you make money by bucking the conventional wisdom.… You should buy into weakness and sell into strength.… It's the only intelligent way to run big money and maybe even smaller money too."

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