The value investment strategy, a strategy aimed at finding stocks that are being valued below its true value by the market, seems to have gradually lost its attractiveness to investors.
But this does not last too long, “value investing” is gradually getting noticed again, and many studies have shown that, if persevering is mastering the principles of this strategy, investors can earn higher returns than growth1 investment strategies.The peculiarityof value investing is not to target preferred stocks without making risky judgments about a company’s growth rate in the future.
Instead, finding good stocks according to our own standards among the stocks that are being reproached by the market is a very difficult job due to the time and effort it takes to find out the real value of the company.Despite2 the above difficulties, John Neff, a prominent investor in the US stock market, has succeeded in pursuing a valuable investment strategy and has become one of the leading investors in our time.
For 31 years as the leader of the Windsor investment fund, he consistently beat the S&P 500 index by finding gems among the companies thrown out by the market.
From becoming the head of the windsor fund in June 1964 until retiring at the end of 1995, the windsor fund consistently achieved an average annual return of 13.7% compared to 10, 6% of the S&P 500.
Thanks to these successes, John Neff has put Charles Ellis, manager of Greenwich Associates, a consulting firm for financial services companies, on a par with legendary investor Warren Buffet. So how did John Neff implement his value-stock investing strategy to achieve these results? We would like to introduce to you the five principles of value investing that John Neff implemented.
Buy stocks with low P/E ratios.
Neff is usually interested in stocks with P/E ratios below the market average. Stocks with low P/E ratios are usually due to bad news about the company’s business and prospects, or stocks of companies that are currently struggling. It is this that makes every investor want to remove them from their portfolio.
But once the low P/E stocks rebound, you can make a significant profit not only from the increased earnings per share, but also because most investors are willing to pay. high price to buy the shares you are holding.
Looking for growth companies is not so high.
John Neff is always looking for companies with an average growth rate of 7%, because he wants to make sure that this is not a bad company. But he doesn’t like companies with too high growth rates (over 20%), because when there is a decrease in profits, the stock price of the companies will fall very sharply.
Neff argues that, in the same situation, the stock prices of companies with low P/E ratios are only slightly down and losses are negligible.
Don’t underestimate dividends.
Dividends help create a balance for stock prices in the stock market, especially in the down-market. Neff calculated that more than 50% of the profits he made to Windsor came from dividends higher than the average he wanted to achieve.
According to him, if the stock chooses not to go up, it should at least receive a dividend.
When both of these goals are not met, it is best to sell those stocks and invest the money elsewhere.
Selling stocks requires the same consideration as buying stocks.
Unlikegrowth stock investors who hold their stocks as they go up and are hunted down by most investors, John Neff goes against them.
He often began to gradually sell the stock he held when it gave him about 70% of the expected return. This strategy may yield more certain returns and may be even higher if the stock continues to hold. John Neff advises you, don’t expect to make all the profits by keeping hold of them, save some of them for other investors.
Don’t care what the crowd is doing.
When pursuinga value investment strategy, it is necessary to always act in the opposite direction to other investors, that is, to sell the stock when the market is bullish and to buy when the market is bearish. At the same time, great attention must be paid to stocks that are not favoured by the market. To do this, the investor must have a strong personality, not even a prowler.In addition to these five principles, John Neff also built a score to pick out valuable shares.
He called it the “total return on investment.”
The above ratio is calculated by multiplying the growth rate of the company’s predicted profit by the dividend yield divided by the stock’s current P/E ratio.
He only invests in stocks when its “ total return on investment” ratio is at least 2 .