How Growth Industries Can Grow Your Wealth

There can be many approaches to grow your wealth in investing.

For investing legend John Neff, he has a few distinct preferences. But wait, who’s Neff, you might be asking? Now, if you’ve never heard of him, here’s why you may want to.

Neff planted his stake in investing folklore while managing the U.S.-based Windsor fund from 1964 to 1995. In those 31 years, each dollar invested in his fund would have become $56, handily outpacing the return of the S&P 500 (a U.S. market index) by two-to-one.

With a sterling track record like that, there can be a lot to learn from his investment approach. And fortunately for us, we can do so by turning to Neff’s book John Neff on Investing. In it, Neff had laid out seven principal elements of his investing style.

Prior to this article, I had written about five of those elements:

  1. Fishing in the low price to earnings (PE) pond
  2. Finding companies with fundamental growth of more than seven percent
  3. A preference for shares with high dividend yields
  4. Wanting a superior relationship of total return to PE ratio
  5. Investing in cyclical companies only if he was being well-compensated for bearing the risks (Neff tried to achieve his aim by insisting on a low prospective PE ratio)

In here, I’d like to talk about the sixth principle: Solid companies in growing industries.

Fields of gold

“Typical Windsor fare featured good companies in solid market positions and evidence of room to grow…

…When markets were least accommodating, we bought the shares. So long as the business remained sound, strategic plans were in place, and sufficient resources existed to weather difficult conditions, we counted on them to work their way back to the center stage.”

– John Neff

We have seen in Neff’s first principle (a low PE ratio) and second principle (fundamental growth) that he was primarily interested in stocks with low valuations and that also had a good bit of growth.

The sixth principle further refined his search by looking for leading companies in industries that are growing. But beyond that, Neff would also be seeking moments when these companies fall out of favor. As Neff would have it, good companies tend to fall out of favor from time to time because “bad news almost always overshadows good news”.

Here’s an example of a Singapore-listed company which may fit the bill for part of Neff’s sixth principle: Healthcare services provider Raffles Medical Group Ltd (SGX: R01).

The hospital operator benefits from being a solid player in growing trends such as medical tourism in Singapore and a growing middle class in emerging countries in the region.

But, at its current PE ratio of around 36, Raffles Medical’s share price may be too rich for the bargain-loving Neff. After all, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund mimicking Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has a PE ratio of just 13.3 at the moment.

And with Raffles Medical’s current share price of S$4.52 being just a whisker away from its all-time high of S$4.68, the company’s also certainly not in a situation now which is remotely close to being “out of favour.”

Foolish takeaway

As the eagle-eyed Foolish reader may have noticed, there is one last principle in Neff’s overall approach. This will be covered in a future article. So, stay tuned, and Fool on!

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.