John Neff died this week. He was the manager of the Windsor Fund for more than 30 years. During that time, he delivered an average annual return of 3 percentage points ahead of the market, after expenses. Neff retired in 1995.
I read his book, which came in 1999: John Neff on Investing. I still have it. His book was a source of sanity during a crazy market time. How crazy? Consider that the NASDAQ was up 85% in 1999. The entire NASDAQ! And this on top of a nearly 40% return the year before.
If you were trying to be a sensible investor then – thinking about valuation and cash flows and balance sheets – you got left in the dust.
Neff was old school. In his book, he lists the principal elements of his style:
* Low price-earnings (p/e) ratio
* Fundamental growth in excess of 7%
* Yield protection
* Superior relationship of total return to P/E paid
* No cyclical exposure without compensating P/E multiple
* Solid companies in growing fields
* Strong fundamental case
Like a lot of investment philosophies, the points are somewhat vague. (What constitutes a “solid company”?) But he elaborates in the book. Even so, the style has a certain charm. It seems so simple. And old-fashioned. I mean, low price-earnings ratios?
The market has changed. Accounting rules have changed. Business models exist today that did not exist in Neff’s time. Still, I suspect if someone followed Neff’s path, they’d do well.
Where’d he get ideas? A favorite was the 52-week low list – the “dusty rag and bone shop of the market, where the supply of cheap stocks replenishes itself daily.” Bad press. Big price drops. These things got his attention.
Neff also had a sense of humor that comes through in the book. He even tells a few jokes:
“Investors usually invite catastrophe themselves, like two hunters who hired a plane to fly them to moose hunting region in the Canadian wilderness. Upon reaching their destination, the pilot agreed to return to fetch them after two days. He warned them, however, that the plane could carry only one moose from each. More weight than that would strain the engine, and the plane might not make it all the way home.
“Two days later, the pilot returned. Despite his warning, each of the hunters had killed two moose. Too much weight, said the pilot. 'But last year you said the same thing,' one hunter declared. 'Remember? We each paid an extra $1,000 and you took off with all four moose.' Reluctantly, the pilot agreed. The plane took off, but after an hour gas was low. The engine sputtered, and the pilot was forced to crash land. The two hunters, dazed but unhurt, climbed out the wreckage. 'Do you know where we are?' one asked. 'Not sure,' said the other, 'but it sure looks like when we crashed last year.'"
The book also includes a market journal. It’s a kind of diary that takes you through the Windsor years, year by year.
I think Neff’s book is one of those forgotten classics in the investing world. Re-reading parts of Neff’s book made me think of other books that might be forgotten…
After a casual look over my shelves, I nominate two. Maybe the best investing books you’ve never heard of…
Humble on Wall Street by Martin Sosnoff, 1975
The book is a (seemingly) candid tale of managing money in the 1960s and 1970s. My copy is about to fall apart. I’ve got it well marked and have read it several times. It’s not that Sosnoff’s investing style is like my own. In fact, he’s a very different kind of investor. But I love his writing style – punchy, metaphoric, colorful...
Just opening the book up randomly:
“And if you were betting on the Dow Jones stocks and other cyclical goods for your performance in 1973, it was time to look for a job pushing spaghetti in a nice roadside stand.”
“The symbolic meaning of the new issue market is that much of money management is irresponsible and there always is a new generation coming along willing to live by the sword and die by the sword for the greater glory and greed of nobody but number one. These boys are content to breathe only pure oxygen on the frontier of speculation.”
“It was a revelation for me to find the people with a lot of money acted impulsively in the stock market… Big money flies by the seat of his pants if only because it is a privilege to do so.”
I could quote this book endlessly. If you like this one, you’ll also like his subsequent Silent Investor, Silent Loser. They’re fun to read and impart some deep wisdom along the way.
By the way, I spent over an hour with Sosnoff in his office in 2015. One area where we agree is on the importance of having someone at the top with skin in the game. He told me a story: In the 1980s, he owned about 15% of the New York Times. The market valued the stock at about $3 billion. In 2015, it was about the same price it was 30 years ago. By contrast, look at what Rupert Murdoch did. He was also in the newspaper business. His company then was also worth about $3 billion. By 2015, that’s turned into about $80 billion.
“It just shows you that in the long run you got to have good management,” Sosnoff told me. “And you got to stay with them. Buffett has the right idea.” Good management will always surprise you, he said, by being innovative or by doing a deal.
Sosnoff has since retired from money management.
Simple But Not Easy by Richard Oldfield
It doesn’t get a lot of play (at least in the US) but I found this book a good read. Oldfield is the top dog at Oldfield Partners, a London-based money management firm. His book is a memoir about his investing experiences and the lessons learned over 40 years of investing.
It’s well written and even funny in parts. And he gives some good advice.
In one of his stories, he writes abut a meeting with clients where he says: “I think investing in Russia is safer than investing in Coca-Cola.” This was in May 1997. Coca-Cola, a staid blue chip, was trading for a pricey 42 earnings. Russia, which he had just spent time visiting, was full of cheap stocks with higher growth rates.
In August 1998, both the Russian stock market and currency collapse. In US dollar terms – in just a few months – the market fell by 90%.
He’s thinking at this point that his quip might haunt him as the silliest thing he’s ever said. (I can sympathize. I’ve done a lot of interviews and public speaking. And I can think of some things I’ve said that I wish I hadn’t.)
But mark the sequel.
From the bottom in 1998, the Russian market doubled. Then it doubled again. And again. The Russian ruble also recovered. By the end of 2005, the Russian market was 18 times what it was at the end of 1998. From May of 1997, when Oldfield made his quip, the market was worth 3.7 times more.
And Coca-Cola? Earnings grew 60% over that time. But the price-earnings ratio fell from 42 to 21. By the end of 2005, the stock price was 21% lower than it was in May 1997.
“Safety… is not an absolute term,” Oldfield writes. “It is a function both of the investor’s time horizon and of the investment’s volatility.” Oldfield says you should hold stocks for at least five years. You get the most benefit out of investing in stocks by giving them time to work.
The other point to come out of the story is this:
“Investment managers have to learn early in their career that share prices can fall precipitously… Every manager should also learn not simply to abandon ship when such a disaster occurs, but to see whether anything can be salvaged. After such a share price for all the right answer, emotionally difficult as it is, maybe go back for more.”
Another story I liked was how after the 1987 cash, his firm decided to hold 40% cash. They had a big picture thesis about what the effect would be and how the world had changed.
Of course, they were completely wrong as the market recovered.
This experience leads to another good nugget: “Dogmatic large scale views of prospects for the world, or for markets in general, is unwise as betting all one’s chips on a single number in roulette.”
A portfolio should be more than one big idea. If you think inflation is a threat, fine, but don’t commit 100% of your portfolio to that view. You could be wrong. As an investor, you can’t afford to be dogmatic.
Another good piece of advice, which made me chuckle because it’s so simple: “the only way to be sure that part of the portfolio is not exposed to equity market risk is to invest in something other than equities.”
So simple and yet many try so hard to invest in stocks and make them not behave like stocks – by using stop losses, by being overly diversified, etc.
Oldfield writes well about the folly of forecasting. He dredges up some gems here. Thomas Watson (of IBM fame) predicting, in 1943, “there is a world market for maybe five computers.” Or a Western Union internal memo saying the telephone had “too many shortcomings to be seriously considered as a means of communication.”
And there are financial forecasts gone awry, examples of which are endless. Oldfield, as usual, sums up the case against forecasting eloquently:
“Why bother? This kind of record shows that reality has very little to do with forecasting… Managing money does not involve tremendous prescience. It requires the common sense to be doubtful about the flawed prescience of others.”
In the book, there are chapters you might find helpful on such topics as fees, benchmarks, what to look for in a manager, when to fire that manager and much more. Most of the time Oldfield is just using good old common sense.
“The great battle in investment is to avoid becoming more enthusiastic about something which has just done well and avoid becoming more gloomy about something which has just done badly. This is hard, because human beings like togetherness. To hold a view alone is uncomfortable. But in investment is axiomatic that if all are enthusiastic they are wrong.”
As his well-chosen title says: investing is simple, but not easy.
That’s my two. I could name others, but this post is long enough!
Thanks for reading. You can write me at info [at] woodlockhousefamilycapital.com
Published June 6, 2019
See our disclaimers