How to Invest Like One of the Greatest Investors of All Time

The name John Neff might seldom be associated by the general public with the pantheon of investing greats unlike more well-known figures like Warren Buffett or Peter Lynch. But, a true investing great Neff was.

From 1964 to 1995, Neff was the mutual fund manager of Vanguard’s Windsor Fund in the USA. During his tenure, he helped build the Windsor Fund into one of the largest mutual funds in the world. And, a huge part of the fund’s growth was down to Neff’s investing acumen – he was able to achieve an annual compounded return of 13.7% during his 31 years at the fund as compared to the S&P 500’s (an American stock market index) annual return of ‘only’ 10.6%.

To put things into perspective, a $1,000 investment entrusted to Neff in 1964 would have become $53,500 by 1995. Meanwhile, the same $1,000 invested into the S&P 500 would have grown into only $22,700. Yet despite such a stellar investment career, there are many investors in Asia who have never heard of him and he has only only book, titled John Neff On Investing, that touches on the subject of his investment style and career.

Ryan Fuhrmann, a contributor at The Motley Fool US, once did a 3 part write-up about this legendary investor during the 2006 Financial Analysts Seminar. It provided great insight into the investing-mind of Neff and how he approached his craft. You can read about Ryan’s articles here: Part 1, Part 2, Part 3

Coming back to Neff’s investing approach, there’re some great techniques that we could apply to our stock market here in Singapore too.

Neff’s Basic Approach

As an investor, Neff tended to look for value by focusing on shares with low Price/Earnings (P/E) ratios. Since ‘low’ is a subjective term that can be open to different interpretations, Neff preferred to invest in companies that are valued at P/Es lower than the average P/E ratio of the general market.

In Singapore’s context, the general market would mean the Straits Times Index (SGX: ^STI). And if we use the SPDR Straits Times Index ETF (SGX: ES3) as a proxy for the Straits Times Index,  we can see that its P/E ratio is around 14 as of 7 April, 2014. Therefore, using Neff’s methods, we should concentrate our attention only on companies trading below that P/E ratio.

However, a low P/E ratio should only act as a starting point. Neff also believed that any company that he was going to invest in needed to be fundamentally strong, have a long term growth rate of at least 7%, and preferably pays a dividend. The banks like United Overseas Bank (SGX: U11) and Oversea-Chinese Banking Corporation (SGX: O39) might be considered as possible investment targets for him as both have P/E ratios lower than 14 (it’s 11.5 for UOB and 12 for OCBC) and have been paying dividends for many years.

Benefiting from fast-growing industries by investing in related-companies

Neff was also known for making ‘proxy-investments’ into companies that could benefit either directly or indirectly from popular, fast-growing companies in high-growth industries. He was seldom interested in the fast-growers themselves as those were shares that generally carried high valuations.

For an example of how Neff’s ‘proxy’ approach could work here, we can turn to the healthcare industry. Most healthcare providers are currently trading at very high P/E ratios here in Singapore. Companies like Raffles Medical Group (SGX: R01) and Q&M Dental Group Singapore (SGX: QC7) carry P/E ratios of 21 and 41 respectively. Even though they might have good growth prospects, it is highly unlikely they will be chosen by Neff as an investment. But, if he was still very interested in the healthcare space, he might find a ‘proxy’ investment, such as First REIT (SGX: AW9U), a real estate investment trust consisting of predominantly healthcare properties and facilities. It is currently trading at a low P/E of only 6.5, significantly below that of the healthcare providers.

Foolish Summary

There is never a fixed formula in investing. However, pointers from investing legends like Neff should still be taken into serious consideration for any long term investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.