The legacy of value investor John Neff
Legendary investor John Neff who took the Vanguard Windsor Fund to its great heights, passed away on June 5. He leaves us with valuable insights into picking stocks.
Jun 7, 2019
Earlier this week, the exemplary investment manager John Neff, who managed the Vanguard Windsor Fund for 31 years from 1964 to 1995, passed away. Known for his contrarian investing style, Neff was responsible for outperforming the S&P 500 over the period he managed the fund, with Windsor becoming the highest returning mutual fund during that period. His success was founded on his predilection for stocks that were no one's favourites, but ones in which he saw great potential.
Under Neff, the Vanguard Windsor Fund saw a cumulative return of 5,546%, more than twice the return of the S&P 500. Neff was a value investor who believed in buying good stocks using what he called a low price-to-earnings (P/E) methodology. Like Buffett, he placed a strong emphasis on a company's management and focussed his efforts on the company's books, rather than any sophisticated statistical analysis. Return on equity (ROE) was of paramount importance to him, and he viewed this as the best measure of how effective a company's management was. Unlike a lot of value investors, including Buffett and Charlie Munger, Neff sought out funds with high dividend yields.
Neff was well known for his generosity, his wit, and his timely insights. In this article in Barron's, he discusses how during the 1973-74 crisis, he bought growth stocks no one cared for, which were at the time 'getting creamed.' This move went on to bring the fund much success. Talking about his philosophy, he said, 'It's not always easy to do what's not popular, but that's where you make your money. I look for solid fundamentals, a beat-up chart and a good price.' According to Neff, if you were right, such companies would eventually move into more capable hands. However, if you weren't right and things weren't working by the end of a year, you must revisit your thesis, and check if the fundamentals have deteriorated.
In 1971, when he was still 70 years old, he told a reporter that half his personal portfolio was invested in fixed income, rather than in equity. Why? 'I'm old,' he told her, emphasizing that younger people should invest 70 to 80% of their portfolio in equity, specifically in good companies with low P/E's. It was in this part of the marketplace that Neff saw the greatest potential. He was against too much diversification. 'Obsession with broad diversification is the sure road to mediocrity,' he said. He believed instead in being 'out of fashion' in one's selection of stocks. Of course, this did not entail picking anything that was unpopular, but simply recognizing the merits of stocks even when they were 'out of favour and unloved.'
For Neff, as for most contrarian investors, it was important to resist conventional wisdom. For instance, according to most investors, the more information you have, the better. But for Neff, too much information distracts from the most important information. After all, as Neff said, 'frenzies end, fundamentals prevail, and every tub sits on its own bottom.'