John Neff started poor and had to see his family struggle in the early days of his child hood.Once into Investments he was more of aGrahamite and successfully ran the Vanguard Fund. His investment philosophy was based on the mantra of "buy value and sell euphoria". In the 31 years that he ran the fund (from June 30, 1964 to December 31 st 1995) the returns averaged a compounded annual growth rate of 14.8%. Thus an initial investment of US $ 10,000 was worth US $ 5,87, 000 when the great man retired.
Best Quote: "When you make up your mind stick to your conclusion and above all be patient".
What would have Neff bought in India ? Neff liked low PE stocks cheap stocks. So he would have bought a S.B.I
Neff's investment style was in strict contrast to a Fisher or T. Rowe. He opined that growth stocks are always over valued and suffer from two basic disadvantages
*Businesses exhibiting higher growth always suffer from increased mortality
*The exact point from where growth would stop is always hard to predict.
Neff stated that investors of a slow growth company paying higher dividend would generate better returns compared to a high growth company. This reminds us of an old adage " A bird in hand is better then two in the bush".
Neff believed in taking concentrated bets. He justifies this by stating that since he protects his down side by buying real value stocks the maximum he can lose in any stock is the opportunity cost of not buying some thing else that has gone up in the interim .
On the selling part he insisted on making a substantial sale once the stock went up and hold on the existing position. If the stock fell back again you may buy it back. But Investors were advised to sell a part of there holding as and when the stock became dear and look for cheaper pastures else where. He always sold into strength and avoided selling more then 25% of the stock's trading volume. If nothing happens to a stock that he buys he remained invested for years till the stock achieved its potential.
The stocks that Neff recommended would have invariably been out of favor in the market. These stocks would be unacceptable buys into the portfolio of a common investor but that is how Neff got his stocks. He often commented, "Merchandise well bought is well sold".
Neff had an interesting tool to investing. Like Peter Lynch he used to compute the Price Earning to growth (PEG) ratio of his portfolio.. The growth consisted of capital growth and dividend yield. Thus if he were holding a portfolio having a PE of 10 with a capital growth of 12% and
a dividend yield of 3% this ratio would be (Capital growth + dividend) / PE) i.e (12+3)/10 = 1.5.He would work out the same ratio for the market and then evaluate the incremental growth of his portfolio for each unit of price multiple.
Neff insisted that a stock should always be sold before it has achieved its full potential
Key learning:
A low PE ratio
A high Return on Equity RoE.
Excellent Management.
Stable cash flows.
Great products or services .
A large market that could facilitate scalability.
Happy Learning
ROHIT
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