04 -- John Neff -- The Professional's Professional

John Neff was born 19 September 1931, in Wauseon, Ohio. He grew up in a modest environment, later influencing his frugal investment style. Neff attended the University of Toledo, where he graduated with a degree in industrial marketing in 1955. He later pursued an MBA at the University of Michigan, graduating in 1958. Neff then joined Wellington Management Company, where he managed the Windsor Fund for over 31 years until his retirement in 1995. Under his stewardship, the Windsor Fund became one of the best-known and most successful mutual funds. Neff is best known for his contrarian approach, investing in sectors he believed were out of favour and unpopular with the market at the time. These investment philosophies, coupled with great timing and action, ultimately led to his timely success.

'Everything we own was bought to be sold.'

Neff's Leadership -- The Vanguard Windsor Fund

John Neff had a thirty-one year tenure at the Vanguard Windsor Fund. During his tenure, he achieved an average annual return of around 13.7%, outperforming the S&P 500 index by a whopping 3%. Neff was known for his value investing strategy, focusing on low price-to-earnings ratios and high dividend yields. His disciplined approach and long-term perspective significantly contributed to the fund's success and popularity. At his retirement, the fund posted a cumulative total return of 5546%, more than doubling the performance of the S&P 500.

Investment Philosophy -- Return on Equity is Key

Neff believed that the best measure of management effective is their return on equity. He valued tactical contrarian approaches rather than statistical ones, often analysing deeply into company management and their bookkeeping; which generated impressive turnover. A low price-to-earnings ratio was also key to judge an undervalued stock, which echoed Buffett's investment philosophy.

In 1999, Neff warned the market, believing that the current price-to-earnings ratio in the market was as high as 2.8, but the yield rate was only 1.1%, a significant overvaluation. When investors started to brag about their profits and earnings, Neff believed, on the contrary, that it was time to be vigilant! He accurately predicted the bursting of the stock market bubble just a few months later.

In September 2002, amidst the pessimism after the dot-com bubble, a reporter asked John Neff about his views on the market. Neff believed that the general public often forgets about the damage caused by the last bear market after going through a long-term bull market; and the last five golden years in 1990 have proven such -- but the final result would be that the market cannot continue to survive in the face of adversity.

He believed that the U.S. market has reached a low point and would rise by 6% to 7% annually in the future, with the yield rate remaining at about 2% and the total return rate at about 8% to 9%.

'The stock selection criteria we use in the Windsor Fund is to buy companies with solid fundamentals at a discount of 40%-50% below the market price-to-earnings ratio, and the current discount level is 50%-60%.'

Neff's Seven Maxims -- John Neff on Investing

Neff published his seminal work John Neff on Investing in 1999, originating from Neff's extensive experience as the manager of the Windsor Fund. John Neff's investment principles include seven evaluation criteria:

1. Low Price-to-Earnings (P/E) Ratio

2. Earnings Growth Rate Exceeding 7%

3. Yield Protection: Even at the stock market peak in the late 1990s, the Windsor Fund's portfolio maintained a 2% yield.

4. Superior Total Return Ratio: Total return can reflect growth expectations for a company. The total return ratio is the total return (earnings growth rate plus dividend yield) divided by the P/E ratio. The Windsor Fund typically invests in companies with a total return ratio of 2.

5. Avoid Cyclical Stocks: Due to the difficulty in predicting economic cycle fluctuations.

6. Good Companies with Growth Potential: Blue-chip stocks facing short-term difficulties and entering undervalued territory present good buying opportunities.

7. Solid Fundamentals: Including strong revenue, profit margins, and cash flow.

   
   

Investments not meeting these standards carry a higher risk of loss. In the past, investors chased the "Nifty Fifty" stocks, believed to grow perpetually. When the bubble burst, the S&P 500 index fell 45% from its peak, turning these growth stocks into a graveyard. Neff believed that these companies had sound fundamentals; the problem was their unreasonable valuations.

Legacy and Influence

John Neff became a public speaker in his later days, giving many interviews, financial seminars, and investment conferences. Neff is the epitome of the disciplined investor, his 'dig for gold' mindset earning him the success he so much deserves. His influence lives on with his writings and mentorship within the investment community. John Neff passed away on June 4 2019, at age 87.

Appendix

Earnings Growth Rate:

Yield (Dividend yield):

03 -- Philip Fisher -- The Scuttlebutt Innovator

Philip A. Fisher began his mark on the world as a Stanford dropout, but would alter become one of the most influential figures in the world of business and investing. He launched his career in 1928 as a securities analyst and later founded Fisher & Co. in 1931, managing it until his retirement in 1999. Known for his focus on innovative, research-driven companies and long-term investing, Fisher gained legendary status through his influential book, Common Stocks and Uncommon Profits. He pioneered the "scuttlebutt" technique, gathering detailed company insights to inform investment decisions. Fisher's most notable investment was in Motorola, which he held from 1955 until his death. His work significantly influenced renowned investors like Warren Buffett, who praised Fisher's methods and writings.

"I don't want to spend my time trying to earn a lot of little profits. I want very, very big profits that I'm ready to wait for."

Fisher's Investment Philosophy -- Growth, Growth, Growth

Fisher was a pioneer in the field of growth investing. He is a firm believer in investing in companies that exhibit signs of above-average growth, even if the security appears expensive in terms of traditional quantitative metrics. It stands in great contrast to value investing, which focuses on looking out for undervalued securities. (See Graham and Buffett)

One of Fisher's most famous investment was his purchase of Motorola, a company which he purchased in 1955, and held it for almost half a century until his death in 2004. Buy-and-hold, he coined.

The Scuttlebutt Method

The scuttlebutt is an old nautical term -- a cask on a ship used for drinking water, where sailors gathered to exchange stories and information. This is synonymous to Fisher's strategy to differentiate between companies with great growth potential, as supposed to companies which are tumbling. Here, there are three key aspects:

Diverse Perspectives: Collecting insights from suppliers, customers, competitors, and former employees.

Qualitative Analysis: Focusing on understanding the company's management quality, corporate culture, and competitive positioning.

Informed Decisions: Using the gathered information to make more informed investment choices by assessing the company’s potential for long-term growth.

Common Stocks and Uncommon Profits

Growth investors and value investors often stand on differing perspectives. Buffett, a disciple of Benjamin Graham, has been a staunch value investor all these years -- while Fisher stands as a growth investor. Despite this, Buffett offered immense praise to Fisher's seminal work, his philosophies still prominent in today's ever-varying investing world:

15 Points to Look For in a Common Stock

1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

3. How effective are the company's research and development efforts in relation to its size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company's cost analysis and accounting controls?

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?

12. Does the company have a short-range or long-range outlook in regard to profits?

13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

14. Does the management talk freely to investors about its affairs when things are going well but quot;clam upquot; when troubles or disappointments occur?

15. Does the company have a management of unquestionable integrity?

Legacy and Influence

"My investment style is 85% Graham and 15% Fisher" Warren Buffett

Fisher is part of the greatest generation, having lived through the hardships of the Great Depression, witnessing the progress of the Second World War. They say tough times make great men, and Fisher was certainly an expert crafted by the circumstances which surrounded him. As financial markets evolve, the core tenets of Fisher's philosophy —emphasising quality, integrity, and long-term growth — continue to resonate, ensuring that his insights endure in the ever-changing landscape of investing.

02 -- Warren Buffett -- The Oracle of Omaha

Warren Buffett, born in 1930 in Omaha, Nebraska, is widely regarded as one of the most successful investors in history. His value investing approach, learned from Benjamin Graham at Columbia Business School, formed the foundation of his extraordinary success. Prior to his academic pursuits at Columbia, he attended the Wharton Business School at Pennsylvania before graduating from the University of Nebraska. Buffett's acquisition of Berkshire Hathaway in 1965 and its subsequent transformation into a diversified holding company became the cornerstone of his empire.

Graham's Apprentice -- Buffett's Path to Success

Buffett studied under Graham at the Columbia Business School, later offering to work for Graham for free, but Graham refused. In 1954, Buffett accepted a job at Graham's partnership. After Graham retired and closed his partnership two years later, Buffett decided to return to Omaha, where he would quickly start a series of investment partnerships. There, he would accumulate his most illustrious of successes.

"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

The 1/8 Discrepancy -- Buffett's Berkshire Hathaway Origins

Buffett's relationship with Berkshire Hathaway began in 1962 when he started acquiring shares in the company, which was then a struggling textile manufacturer in New Bedford, Massachusetts. At the time, Buffett was running his own investment partnership and saw Berkshire as an undervalued opportunity, typical of his value investing approach.

Initially, Buffett's interest was purely financial. He noticed a pattern where the company would buy back its shares whenever the price dropped, and he aimed to profit from this predictable behavior. However, a pivotal moment occurred in 1964 when Berkshire's management, led by Seabury Stanton, made a verbal tender offer to buy back Buffett's shares at $11.50 per share.

When the official offer came in writing, it was for $11.375 per share, slightly lower than the verbal agreement. This small discrepancy irritated Buffett, who felt it was a breach of their gentleman's agreement. In a move that he later described as an emotional decision rather than a rational one, Buffett decided not to sell. Instead, he began aggressively buying more shares to gain control of the company.

The Circle of Competence

You have to figure out where you've got an edge. And you've got to play within your own circle of competence. The size of that circle is not very important; however, knowing its boundaries is vital.

The Circle of Competence is a concept popularised by Warren Buffett and his long-time business partner Charlie Munger. At its core, it's about recognising and operating within the areas where you have the most knowledge, experience, and expertise. The principle posits that every individual or organisation has a limited field of proficiency – their "Circle of Competence." Within this circle, one can make well-informed decisions and accurate judgments. Outside of it, the risk of error increases significantly.

Buffett famously avoided tech stocks for many years because he felt they were outside his Circle of Competence. This discipline helped him avoid significant losses during the dot-com bubble.

Buffett's Shareholders' Engagements -- The Woodstock of Capitalism

Each year, at the Qwest Centre in Omaha, Nebraska, over 20,000 visitors are gathered willingly -- for a witty and insightful shareholder meeting featuring Buffett's financial genius amalgamated with his midwestern humour, while he engages with his shareholders in a riveting Question-and-Answer session lasting for hours-on-end. Along with long-time partner and right-hand man Charlie Munger, their candid and often witty responses provide invaluable insights into their investment philosophy and views on the economy. The meeting also features a large exposition showcasing Berkshire's various subsidiaries, allowing shareholders to interact with the companies they partially own. This event, known for its transparency and educational value, has become an unparalleled learning opportunity for attendees, who glean wisdom from two of the most successful investors in history.

Equally anticipated are Buffett's annual letters to Berkshire Hathaway shareholders, typically released in February. These letters have gained renown for their clarity, insight, and educational value, extending their influence far beyond Berkshire's immediate stakeholders. In these communications, Buffett provides a clear and honest assessment of Berkshire's performance over the past year, including both successes and shortcomings. He frequently shares his investment philosophy, emphasising long-term value investing, and offers commentary on the broader economic landscape. Despite addressing complex financial topics, the letters are written in clear, often humorous language that's accessible to a broad audience.

Legacy

Buffett is as much a philanthropist as he is a financier. Buffett has committed significant resources to philanthropy through the Giving Pledge, encouraging billionaires to donate their wealth to charitable causes. His teachings are worldwide -- there is not a place in finance where his traces are not heard. By promoting principles such as the circle of competence and economic moats, Buffett has provided a framework for sustainable investing that remains relevant today. His leadership of Berkshire Hathaway and his insightful shareholder letters exemplify his commitment to ethical business practices and financial education. As a mentor, leader, and philanthropist, Buffett’s legacy will continue to shape the landscape of investing and inspire future generations.

Footnotes: The Buffett Indicator

The Buffett Indicator is a valuation metric popularised by Buffett in 2001, used to assess whether the overall stock market is overvalued or undervalued relative to the size of the economy.

The Buffett indicator:

A ratio around 100% is considered fair value.

A ratio significantly above 100% may indicate an overvalued market.

A ratio below 100% might suggest an undervalued market.