TIP747: John Neff: The Value Investor Who Quietly Crushed the S&P 500 with Kyle Grieve
Podcast Information
- We Study Billionaires | The Investor’s Podcast Network
- John Neff: The Value Investor Who Quietly Crushed the S&P 500
- Host: Kyle Grieve
- Guest: Discussion of John Neff’s investment philosophy and track record
- Episode Duration: Approximately 1 hour and 15 minutes
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HOOK
In an investment world dominated by growth stock mania and passive index funds, John Neff’s three-decade track record of beating the S&P 500 by 3% annually through disciplined low P/E investing stands as a testament to the enduring power of value investing principles.
ONE-SENTENCE TAKEAWAY
John Neff’s extraordinary investment success stemmed from his disciplined focus on low price-to-earnings ratios, solid dividends, contrarian positioning, and rigorous selling discipline that allowed him to outperform the market for three decades while managing one of the world’s largest mutual funds.
SUMMARY
This episode explores the life and investment philosophy of John Neff, one of history’s most successful value investors who managed the Windsor Fund from 1964 to 1995, consistently outperforming the S&P 500 by 3% annually. Kyle Grieve draws from Neff’s autobiography “John Neff on Investing” to examine the principles, strategies, and personal characteristics that enabled this remarkable track record.
The discussion begins with Neff’s early life and development as a contrarian thinker, including his argumentative nature, early business experiences at his father’s company, and formal training under value investing principles at the University of Toledo. These formative experiences shaped Neff’s preference for dull, profitable businesses over glamorous ones and his understanding of supplier negotiations.
A significant portion focuses on Neff’s transformation of the struggling Windsor Fund, where he inherited a portfolio filled with overpriced stocks lacking competitive advantages. The episode examines his three core principles: concentrated positions for impact, individual consensus building, and dedicated analytical support that formed the foundation of his approach.
The episode delves into Neff’s seven investment principles, with particular emphasis on low P/E ratios, fundamental growth requirements, yield protection, and the total return to P/E relationship. Unlike traditional value investors, Neff focused on earnings power rather than liquidation value, making him a “low price-to-earnings investor” rather than a pure value investor.
Dividend yield receives extensive attention as a distinctive feature of Neff’s approach, providing 2% of Windsor’s annual outperformance and offering downside protection during market declines. The discussion explores how Neff’s flexibility allowed investment in high-growth companies even without dividends when earnings growth was compelling.
The conversation examines Neff’s innovative “measured participation” framework for portfolio construction, categorizing investments by growth characteristics rather than industry classifications. This approach enabled concentration where the best values existed and contrarian positioning against popular blue-chip stocks.
Bargain basement hunting forms a core part of the discussion, with Neff’s systematic approach to stocks at 52-week lows and his “Hymph test” for evaluating upside potential. The episode highlights successful investments like Home Depot that demonstrated Neff’s ability to identify growth stories in depressed stocks.
Selling discipline receives equal emphasis to buying discipline, with Neff’s simple two-criteria approach: selling when fundamentals deteriorated or when price reached expectations. The discussion explores how this approach sometimes meant selling too early but prevented larger losses and freed capital for new opportunities.
Market cycle navigation and inflection point recognition are presented as key skills Neff developed, including his understanding that refusing to participate in euphoric markets would cause short-term underperformance but provide protection during downturns.
Cyclical investing constitutes a significant portion of Windsor’s portfolio, and the episode examines Neff’s specialized approach to timing cyclical swings, buying 6-9 months before expected earnings upturns and selling into rising demand.
The discussion addresses Neff’s notable mistakes, including missing Amazon’s potential and selling Capital Cities/ABC too early, using these examples to explore the tension between value discipline and growth recognition.
The episode concludes with Neff’s enduring legacy, emphasizing his ability to stick to principles during periods of underperformance and his flexibility to invest in growth opportunities when valuations supported it.
Throughout the episode, Grieve emphasizes that Neff’s success demonstrates the enduring power of disciplined value investing combined with contrarian thinking and rigorous selling discipline.
INSIGHTS
Contrarian thinking drives value investing success: Neff’s argumentative nature and outsider perspective naturally aligned with contrarian value investing, allowing him to identify opportunities others missed.
Dull businesses offer hidden advantages: Neff’s early experience taught him that unglamorous businesses making steady profits often avoid destructive competition and provide better investment opportunities.
Earnings durability matters more than current earnings: Neff’s emphasis on evaluating earnings power under adverse conditions provides crucial protection against macroeconomic downturns.
Low P/E focus requires growth consideration: Neff’s approach balanced low P/E requirements with fundamental growth expectations, creating a sweet spot for value creation.
Dividends provide multiple benefits: Beyond income, dividends offer downside protection, signal management confidence, and contributed 2% annually to Windsor’s outperformance.
Contrarian positioning creates opportunity: By placing popular blue-chip stocks at the bottom of his investment hierarchy, Neff avoided overvalued “Nifty Fifty” stocks and found better opportunities.
Bargain hunting requires systematic discipline: Neff’s daily review of 52-week lows and “Hymph test” created a systematic process for identifying mispriced growth stories.
Selling discipline equals buying discipline: Neff’s simple two-criteria selling approach (deteriorating fundamentals or reaching price targets) prevented larger losses and freed capital.
Market cycles require patience: Neff understood that refusing to participate in euphoric markets would cause short-term underperformance but provide long-term protection.
Flexibility enhances value discipline: Despite his value focus, Neff maintained flexibility to invest in higher-multiple growth stocks when fundamentals justified the valuation.
FRAMEWORKS & MODELS
The Low P/E Value Investing Framework
John Neff’s systematic approach to value investing:
- P/E as primary metric: Use price-to-earnings ratios as the primary valuation yardstick
- Growth requirement: Demand fundamental growth of at least 7% to justify investment
- Total return focus: Evaluate investments based on total return relative to P/E paid
- Earnings durability assessment: Stress test earnings power under adverse economic conditions
The Measured Participation Portfolio Model
Neff’s innovative approach to portfolio construction:
- Growth-based categorization: Classify investments by growth characteristics rather than industry sectors
- Flexible concentration: Concentrate capital where best values exist regardless of industry
- Contrarian positioning: Place popular stocks low in the hierarchy while seeking unrecognized opportunities
- Balanced participation: Maintain exposure across growth categories while emphasizing best values
The Bargain Basement Hunting Framework
Neff’s systematic approach to depressed stocks:
- Daily screening process: Review 52-week lows daily to identify potential opportunities
- Hymph test evaluation: Assess whether depressed stocks offer sufficient upside potential
- Growth recognition: Look for earnings growth stories that markets have temporarily ignored
- Risk management: Avoid stocks that deserve their low valuations due to fundamental problems
The Cyclical Timing Model
Neff’s specialized approach to cyclical investing:
- Early cycle entry: Buy 6-9 months before expected earnings upturns
- Normalized earnings focus: Target normalized earnings levels during upcycles
- Sell-into-strength approach: Sell as demand rises rather than waiting for peak earnings
- Capital efficiency: Avoid being trapped in downcycles by selling early
The Inflection Point Recognition Framework
Neff’s approach to market cycle extremes:
- Warning sign identification: Monitor excessive IPOs, cheap debt, speculation, and lack of opportunities
- Selective participation: Refuse to participate in euphoric markets even if it causes short-term underperformance
- Cash accumulation: Build cash reserves during periods of excessive optimism
- Aggressive deployment: Deploy accumulated cash during market panics
QUOTES
“John loved arguing. His mom told him that he would argue with a signpost. And this is a pretty common trait that I think I’ve seen in many value investors. Their natural ability to think in a contrarian manner just aligns really well with them being a tried and true value investor.”
This quote highlights how Neff’s argumentative personality naturally suited him for contrarian value investing.
“Nef noted a few learnings from his time working with his father. The first one is that you don’t need glamour to make a buck. The second is that dull businesses that make money are great and because they’re boring, they don’t attract competition.”
These early business lessons shaped Neff’s preference for unglamorous but profitable businesses throughout his career.
“Then as now, I assign great weight to judgment about the durability of earnings power under adverse circumstances. This is such a powerful concept and one that I think most investors, myself included, just don’t emphasize enough.”
This insight about stress-testing earnings power under adverse conditions represents one of Neff’s most valuable contributions to value investing.
“Windsor edged the market by 3.15% per year after expenses while Jon was in charge and 2% of that outperformance was due to the dividend yield that Jon had received.”
This statistic demonstrates the significant contribution dividends made to Windsor’s long-term outperformance.
“Windsor participated in each of these categories irrespective of industry concentrations. When the best values were available in say the moderate growth area, we concentrated our investments there.”
This explains Neff’s flexible approach to portfolio construction that prioritized value over industry diversification.
“In the course of my career, few days have passed when the new low list has not included one or two solid companies worth investigating. The goal is to find earnings growth capable of capturing the market attention once the climate shifts.”
This describes Neff’s systematic approach to finding opportunities in depressed stocks.
“Windsor sold for just two reasons. The first one was if fundamentals deteriorated and the second was when price approached expectations.”
This simple but effective selling discipline kept Neff from holding overvalued stocks.
“He also came to grips with the fact that if you refuse to take part in inflection points during times of excessive euphoria, you’re going to underperform in bull markets.”
This shows Neff’s realistic understanding that his contrarian approach would cause short-term underperformance during bull markets.
“This example is just an issue that I think I have with some of the really, really good value investors that I’ve researched. They’re so obsessed with price and value that their ability to value quality becomes completely negated.”
This reflects on the tension between strict value discipline and recognizing exceptional growth opportunities.
“what he did clearly works. And even though he went through periods where the strategy underperformed, he never lost his way of searching for value.”
This captures Neff’s unwavering commitment to his value investing principles despite periods of underperformance.
HABITS
Practice Contrarian Thinking Daily
Regularly question popular investment trends and conventional wisdom. Ask yourself if market consensus might be wrong and where opportunities might exist.
Screen for Low P/E Opportunities
Regularly review stocks with low price-to-earnings ratios, particularly those with solid dividend yields and reasonable growth prospects.
Stress Test Earnings Power
When evaluating investments, specifically consider how companies would perform during economic downturns and recessions.
Monitor Dividend Yields
Track dividend yields as part of your investment process, recognizing their contribution to total returns and downside protection.
Maintain Selling Discipline
Establish clear criteria for selling investments and stick to them, whether due to deteriorating fundamentals or reaching price targets.
Study Market History
Regularly review historical market cycles and inflection points to better recognize current market conditions.
Keep Investment Records
Document your investment decisions, including thesis, entry price, and expected outcomes to learn from both successes and mistakes.
Practice Cyclical Analysis
For cyclical stocks, focus on timing entry 6-9 months before expected upturns and selling into rising demand.
Value Process Over Outcome
Focus on following sound investment processes rather than short-term performance, understanding that discipline compounds over time.
Learn from Mistakes Actively
When investments go wrong, thoroughly analyze what went wrong and why, using these lessons to improve future decision-making.
REFERENCES
“John Neff on Investing” by John Neff
John Neff’s autobiography provides firsthand insights into his investment philosophy, strategies, and the experiences that shaped his approach.
“The Intelligent Investor” by Benjamin Graham
Benjamin Graham’s foundational work on value investing provided the theoretical foundation that influenced Neff’s approach.
“Security Analysis” by Benjamin Graham and David Dodd
The seminal work on security analysis that shaped Neff’s understanding of value investing principles.
Windsor Fund Historical Performance Data
Historical records of the Windsor Fund’s performance under Neff’s management demonstrate the consistency of his outperformance.
“Value Investing: From Graham to Buffett and Beyond” by Bruce Greenwald
This book provides context for understanding Neff’s place in the value investing tradition.
“The Little Book of Value Investing” by Christopher Browne
Browne’s work on value investing principles complements Neff’s approach and provides additional practical guidance.
“The Most Important Thing” by Howard Marks
Howard Marks’ investment philosophy shares similarities with Neff’s approach, particularly regarding contrarian thinking and cycle recognition.
“Common Stocks and Uncommon Profits” by Philip Fisher
Philip Fisher’s growth investing principles provide contrast and context for understanding Neff’s value-oriented approach.
Historical Market Data from 1964-1995
Market data from Neff’s tenure provides context for understanding the market environments in which he achieved his remarkable track record.
“The Essays of Warren Buffett” by Warren Buffett
Warren Buffett’s investment philosophy and letters provide additional context for understanding value investing principles.
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