Below is Part 1 of a three-article write-up on legendary investor John Neff, following my visit to his presentation at the 2006 Financial Analysts Seminar, hosted by theCFA Institute. Read on for a history of his career, current musings, and a number of stocks Mr. Neff currently finds interesting.
Yesterday afternoon, I heard John Neff, CFA -- recently honored as one of "The World's Great Investors" by SmartMoney -- speak at the Financial Analysts Seminar. What's more, I had the rare opportunity to meet with him briefly to further discuss his stellar track record and his current thoughts on the market. If you promise to read all three parts, I promise to reveal the several interesting stock ideas that Neff talked about today.
Meet John Neff
Neff opened his 75-minute talk by explaining that although he is known as a value investor, the term is very open-ended and subject to interpretation. For instance, Bill Miller (scheduled to present later this week at the seminar) is also known as a "value guy," despite taking a different path than Neff to achieve his own incredible track record.
Neff said his childhood in Michigan lent a down-to-earth, straightforward, and substantive Midwestern style to his stock-picking ability, while a stint down South added a more dynamic Texas flair to get his ideas across to investors. Though the comment was made in jest, he admitted it held some truth. He then described his personality as opinionated but well-respected, and intellectually honest in terms of his investment style.
Low P/E investing
Neff believed this background formed the foundation for his amazing 31-year track record (June 1964 to December 1995) as head of the Vanguard Windsor Fund (FUND: VWNDX ) , earning 13.7% annual returns, versus only 10.6% for the S&P. That means a $10,000 initial investment would have grown to close to half a million by the end. His philosophy can be described as "low P/E investing" with a number of underlying "enduring principles:"
- Low P/E ratios
- A company that expands core growth by 7% or more
- Dividend yield protection -- or better yet, dividend growth
- Applying an appropriate P/E discount on cyclical companies to account for their volatility
An all-cap, focus investor
Like many great value investors, Mr. Neff made a career of going against the grain by preaching and practicing concentration over diversification. While at the helm of Windsor, his top 10 holdings constituted approximately 40% of the entire portfolio -- big bets indeed, and not unlike those of a famous Omaha-based investor. To this day, Mr. Neff runs a concentrated portfolio, with eight to 10 stocks (and a self-confessed 20% return over the past 10 years) in his own account. Although he holds 30% in fixed income, due to a more conservative stance and less need for growth due to his age, he remains "just as opportunistic as [he] always has been."
Another iconoclastic yet unquestionably prudent stance of Mr. Neff's was to pursue an all-cap strategy. Seeking big, small, and everything in between, Neff refused to be pigeonholed into a single style. Instead, he chose to pursue his low-P/E strategy across most of the publicly traded stock spectrum. He called it being "never smart enough to tell the difference," but he's clearly due more credit for pursuing a successful, against-the-grain approach. No wonder he sent the consultants packing when they uttered the phrase "tracking error!"
One of the more turbulent times during Mr. Neff's tenure at Windsor was the 22% market crash of October 19, 1987. Prior to the meltdown, he couldn't find anything to buy, and he held 20% of his portfolio in cash on the day of the crash. Although 80% of his portfolio took a hit, his investment-style steadfastness and high cash holding helped his investors, especially compared to those funds that were fully invested. He received many angry shareholder letters prior to the crash but looked like a smart man afterwards.
Within a couple weeks of the downturn, he became almost fully invested, buying companies that rival current low P/E leaders such as Home Depot (NYSE: HD ) , Lowe's (NYSE: LOW ) , IBM (NYSE: IBM ) , Dell (Nasdaq: DELL ) , and McDonald's (NYSE: MCD ) in the single-digit P/E range. Now there's a way to use market weakness to your advantage.
Fool contributor Ryan Fuhrmann is long shares of Home Depot and Mickey D's, but has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email Ryan with feedback or to discuss any companies mentioned further.