John Neff's contrarian strategies helped him out-perform the market consistently for decades.
From 1964 until his retirement in 1995, John Neff ran the very successful Vanguard Windsor fund, delivering a compound 13.7% per annum, and beating the S&P 500 by 3.1% annually. Just as impressively, he beat the market in two years out of every three.
Born in Ohio in 1931, Neff grew up in Ohio and Michigan. His first degree was a Bachelor of Arts from the University of Toledo in 1955, and he subsequently earned an MBA from Case University while working as a securities analyst with the National City Bank of Cleveland.
In 1964, Wellington Management hired him to run their newly-launched Windsor fund. The company was run by John Bogle, and following a protracted boardroom battle the fund eventually became part of Bogle's new Vanguard operation in the early 1970s.
Neff is decidedly contrarian and value-oriented in his approach. He loves to buy companies that have been unduly shunned by the market following bad news. "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." He avoids 'adrenaline stocks' which are driven by momentum.
He uses the usual yardsticks of value investors, such as price/earnings ratios (P/E) and dividend yields, but he is also looking for growth. To combine these factors he adds the expected future growth rate to the dividend yield, and divides by the PE ratio to give what he calls a 'total return ratio'. This is the same as the Lynch ratio I looked at some weeks ago -- essentially a dividend-adjusted price-to-earnings growth (PEG) ratio -- although Lynch tended to focus on a longer-term growth figure.
Market timing and cycles all play a part in estimating growth. Ideally he is looking for growth rates in the range 7% to 20%, which helps to avoid anything with excessively high expectations and the corresponding risk of disappointment. And the P/E ratio should be well below the market median -- "I've never bought a stock unless, in my view, it was on sale."
Regarding his 3% annual return in excess of the S&P 500, he suggests that 2 percentage points of this were due to above-average dividend yields. This bird-in-the-hand approach gives some degree of comfort, in comparison to zero dividend pure growth shares: "A superior yield at least lets you snack on hors d'oeuvres while waiting for the main meal."
Neff is a big fan of meeting the management, and also solicits the opinions of others in the industry, what Peter Lynch termed 'scuttlebutt'.
Deciding when to sell is never easy, and Neff suggests that you typically know within a year or so whether you're sitting on a winner or a loser. And if it's a winner, one subjective indicator is to sell when you're feeling good about it: "Successful stocks don't tell you when to sell. When you feel like bragging, it's probably time to sell."
Outperforming the S&P 500 may not seem impressive at first glance, but over the thirty-one years of his management this compounds to more than doubling investors' returns compared to just tracking the index. $1,000 invested in 1964 would have grown to over half a million dollars.
A particular success was buying Ford in 1984, when it looked to many that it might go bust. Neff's holding almost quadrupled in value within a couple of years.
Although he retired in 1995, he occasionally pronounces on the markets, some more recent investments appear to have been less kind to him; I'd be surprised if he's made any money from his late-2008 investments in Seagate, but ConocoPhillips and Georgia Gulf were at least ahead for a while before crashing heavily.
All things considered, you have to respect his long-term success and his common-sense approach to buying 'cheapo' stocks.
Books by John Neff:
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