“It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.” — John Neff

John Neff was one of the world’s greatest investors but little is known about him. John Neff managed Vanguard’s Windsor fund from 1964-1995 and produced a return of 14.8% per annum versus 10.6% for the S&P.  This is one of the best long term records out of any money manager ever.

Vanguard was started and run by John Bogle. John Bogle despite being an asset allocator and not a  investor is one of the most influential men of investing in this past century.

John Neff: Background & biojohn_neff

John Neff was born outside of Toledo, Ohio in 1931 in the midsts of the Great Depression. His parents got divorced when he was only three years old. His mother got remarried and moved to Texas.

John Neff was not popular in school and received poor grades. He eventually joined his father’s industrial-equipment supply company. His father taught him a very important lesson that he would hold for life; pay close attention to the price you pay.

John Neff later joined the Navy for two years, he attended University of Toledo and graduated Summa cum laude. The head of Toledo’s department of finance, Sydney Robbins was a close colleague of Graham. This gave John Neff his first taste of value investing. He became a security analyst for at a bank for the next eight years.

In 1963 John Neff joined Wellington Management. One year later he was offered a job as the portfolio manager of Wellington Management’s Windsor fund. Neff would remain at that post for the next 31 years.

John Neff was far from a typical Wall Street “hot shot”. He lived in Berwyn Pennsylvania far away from the rich hedge fund managers of New York and Connecticut. He had a disorderly office and dressed slightly messy. However, despite the fact that he shunned the spotlight, John Neff was rated the number one money manager to manage their money in several polls.

John Neff: Investment philosophy

John Neff was a value investor, but like many later value investors he veered slightly off the strict Benjamin Graham style of investment. He is like Graham in that he buys stocks that are cheap and dull and sells them when they reach their fair value.  He also put high emphasis on stocks with  dividends since he considered dividends to be far more certain than growth.

John Neff like other famous value investors did not try to buy what everyone else was. He would simply buy what was cheap. If auto stocks were cheap he would have a large concentration in that area. In 1988 John Neff believed financial stocks were cheap and had 37% of his portfolio concentrated in financials.

The average stock over the life of the Windsor had  P/E a third below the market average and a dividend yield 2% higher than the market average.

John Neff managed a diversified portfolio of 70-80 stocks. When he found a true bargain he would place up to 5% of his assets in the stock. However, most stocks in his portfolio comprised about 1% of of his stock portfolio.

Some of the criteria that John Neff looked for in a stock included:

  • A strong balance sheet
  • Cash flow positive
  • A higher than average return on equity
  • Good management
  • Prospects for near term growth
  • A good product and market in which to sell the product

John Neff had a specific formula for finding attractive stocks. He would take the estimated growth rate plus the dividend yield and divide it by the P/E. For example if the growth rate was 10%, the yield 5% and the P/E was 7.5 the stock would have “terminal relationship”. This would be a satisfactory return. However, if the stock had a earnings growth rate of 10%, the yield 5% and the P/E was 15 the “terminal relationship” would only be 1; much less attractive.

John Neff: Quotes

“For the expectations to be correct, you have to believe that the p/e multiple would have to go to never-before-reached heights or there is significant earnings to the upside of the estimates. Both expectations are problematic.”

“I’ve never bought a stock unless, in my view, it was on sale.”

“Successful stocks don’t tell you when to sell. When you feel like bragging, it’s probably time to sell.”

John Neff: Books

John Neff: Articles

John Neff: Newspaper cuttings