"John Neff on Investing": Timeless Wisdom of a Value Investing Legend (Part 2)

Introduction

Starting Part 2 of the book review: "John Neff on Investing." For those who want to read Part 1 first, here’s the link:

"John Neff on Investing": Timeless Wisdom of a Value Investing Legend (Part 1)”

Below, I’ve highlighted passages that particularly resonated with me, so this is not a straightforward summary of the book. Please note that I’ve rearranged, rephrased, or condensed some parts. I’ll mark my thoughts as "Neo" to distinguish them from the book’s content. Let's get started.

John Neff’s Investment Principles

1. Seek out unpopular growth stocks.
2. Significant price drops represent future opportunities.
3. Identify companies that sustain quality growth.
4. Don’t fixate on popular growth stocks.
5. Look for companies with products or services capable of dominating the market.
6. When conditions are not favorable, take a break.
7. Sometimes, not holding can yield the highest returns.
8. Momentum drives the market until a turning point arrives.
9. Reversal of circumstances is an enduring truth in the market.
10. Invest with a calm mind.

[Neo: To expand on “Invest with a calm mind,” John Neff noted that individual investors have a unique advantage over professional investors. In the competitive market, professionals are often preoccupied with quarterly results and constant action, while individual investors can take their time, choose stocks at their own pace, and invest without time pressures. While this is true, individual investors often feel more anxious.]

John Neff’s Investment Advice

- Being different from others doesn’t guarantee success. Sometimes contrarian investing can be mistaken for mere stubbornness. I always look for buying opportunities, but there are times when I acknowledge the crowd may be right. Ultimately, the key to successful investing is reaching your own sound conclusions based on fundamentals.

- Blindly pursuing contrarian strategies without flexibility can lead to disaster. However, a true contrarian investor learns from past lessons, stays open-minded, and keeps a sense of humor.

- Avoid investing in cyclical stocks that have already peaked. This is a timeless principle in stock investing. [Neo: Be mindful that by the time a company reports record profits, its stock may already be on the decline as its growth prospects wane.]

- We aren’t always right. But if you believe you’re right and fail to act, you risk losing more by trying to protect something small. Seasoned investors always stay ahead of the times, whereas average investors often realize change only after prices have risen. [Neo: This aligns well with the famous Tony Robbins’ quote, “Losers react, leaders anticipate.”]

- The smartest approach is to buy overlooked stocks and sell once their potential begins to shine.

- "Reversal of circumstances" is an unchanging truth in the market. A growth stock that once showed high growth will eventually stabilize, often leading to significant market impact.

[Neo: What goes up must come down, and what’s down often rises — the principle of yin and yang seems to apply to the stock market too. While long-term upward trends exist for companies like Microsoft, Apple, and Walmart, these giants still experience ups and downs in the short- to mid-term cycles. Of course, if our investment horizon spans decades rather than years, we needn’t worry too much about these short-term cycles.]

John Neff's Reflections

- In 1969, the Dow Jones Industrial Average (DJIA) plummeted by 15% to 800.36, and the market faced even tougher challenges in 1970. By May 26, the Dow had fallen to 631.16, a 37% drop from 1000 points four years earlier. During this time, Windsor Fund responded with a strategy that combined calculated participation and low P/E investments, analyzing the market and diversifying among various growth stocks.

- Although the Dow first surpassed 1000 on a closing basis in November 1972, it soon dropped below 700 again. It wasn't until 1982 that the Dow stayed above 1000 consistently. Investors who put money into the Dow in January 1966 had to wait 16 years to see a return. Adjusting for inflation, they effectively lost about 60% of their original capital. While many investors suffered heavy losses in popular funds in the early 1970s, Windsor saw this as an exceptional investment opportunity.

[Neo: The fact that it took 16 years to recover the principal reminds us that the U.S. market, though highly regarded, has faced several dark periods. Some of these down periods lasted over a decade. Therefore, even when the U.S. stock market looks strong, it may be wise to remain cautious of risks and consider diversifying investments.]

- In 1992, simply avoiding pharmaceutical stocks and IBM provided a 3% edge over the S&P 500. Sometimes, not holding a stock can be the most profitable strategy. When the market is uncertain, reducing exposure is also a viable approach. Windsor chose to increase buying only when the market showed signs of "digestive distress."

[Neo: For example, an investor who bought Moderna in 2021 or Intel at the end of 2023 and held on would likely have seen very disappointing returns. Not holding these stocks might have produced better results, especially since they were very high P/E stocks at the time. While not all very high P/E stocks decline, it's generally wise to exercise caution with them.]

- Every stock investor should prepare for upcoming events. Predicting precisely when a turning point will occur is impossible. The stock market is sentiment-driven, making predictions challenging and definitive conclusions unwise. Thus, it’s prudent to keep options open and avoid absolute terms like “never.”

[Neo: Words like “never,” “always,” and “certainly” are pitfalls for investors. There’s no 100% certainty in investing. Adopting a probabilistic approach helps avoid betting everything on one idea, and allows for flexibility if the market takes an unexpected turn.]

- My success was less about genius or special insight and more about a modest temperament and lessons learned from others. I adhered to my own investment principles, evaluating stocks by earnings, dividends, and growth rates while consistently applying a low P/E investment strategy.

Neo's Closing Thoughts

Among the investing legends, many were early starters with extraordinary talent. Warren Buffett made his first stock purchase at age 11, Jesse Livermore began working as a brokerage office boy at 14, and Peter Lynch delved into stock investing in his early 20s as a college student. Observing their words and actions, one might think they were born investment geniuses.

However, John Neff’s story is different — he’s strikingly ordinary. Raised in a challenging environment after his parents divorced when he was four, Neff held various jobs after high school before enlisting in the Navy when the Korean War broke out. Only after discharge did he enroll in a local college to study industrial marketing. Attempts to join renowned firms like Merrill Lynch and Smith Barney were unsuccessful, leading him to start his career not on Wall Street, but in Cleveland as a securities analyst.

John Neff's book and his writing style are similarly unpolished. Unlike the philosophical musings of André Kostolany or the witty insights of Peter Lynch, Neff wrote plainly and straightforwardly about his investment approach and experiences, which is why his book is less popular in my guess.

Yet, Neff’s performance is anything but ordinary. During his 31.5 years managing the Windsor Fund, he achieved a cumulative return of 5,546.4%, more than doubling the S&P 500’s returns. Under his management, Windsor became the highest-earning and largest mutual fund of its time. His successful tenure also bolstered Vanguard's reputation, aiding its eventual rise in the ETF space. Even after retirement, Neff reportedly achieved an average annual return of 20% in his personal portfolio over a decade.

Neff's life reminds us that even ordinary investors can achieve extraordinary success by establishing and adhering to their own principles, staying resilient through market turbulence. While his book might not be the most entertaining, it’s worth a read for the valuable lessons it offers.

Thanks for reading. Wish you grow rich slowly and surely!

This blog post includes excerpts from the book “John Neff on Investing”, published by Wiley, quoted under fair use as permitted by copyright laws in relevant jurisdictions. The content includes both direct excerpts from the original work and my personal thoughts, rephrasings, and interpretations. All original text and images from the book are the property of the respective author and publisher, and are not to be used for commercial purposes.