The greatest risk is not price risk but quality risk. Focus on the long-term returns brought by corporate growth.

John Neff, Peter Lynch, and Bill Miller are recognized as the "Three Musketeers" of mutual funds in the American investment community.

John Neff managed the Windsor Fund for 31 years, achieving a staggering total return of 5545.6%, compared to the S&P 500's 2229.7% over the same period. His annualized return was 13.7%, outperforming the S&P by 3.5 percentage points annually.

From 1970-1976, Buffett, Templeton, and Neff beat the market by 188%, 88%, and 22% respectively. From 1977-1981, Peter Lynch surpassed them all, outperforming the market by 308%, followed by Buffett at 204%, Neff at 48.5%, and Templeton at 41.1%.

John Neff is known as the "P/E Ratio Pioneer and Value Discoverer." His name is less prominent compared to Buffett, Templeton, and Lynch, both domestically and in the U.S., partly due to his low-key demeanor.

A poll once showed he was the preferred manager for handling money among Wall Street fund managers, chosen as the "FOF Fund Manager."

The Dawn of Windsor Fund: John Neff and John Bogle's Friendship

John Neff was the main manager of the Windsor Fund under Vanguard Group, the world's largest investment management company.

Vanguard's founder, John Bogle, is known as the "Father of Index Funds" and launched the first index fund, the Vanguard 500 Index Fund.

In 2006, John Neff was ranked sixth among the top ten global fund managers by The New York Times, following Buffett, Lynch, Templeton, Graham and Dodd (co-authors of "Security Analysis"), and Soros, with John Bogle in seventh.

John Bogle recalled in his book "Stay the Course":

"In the early years, Windsor Fund had poor performance, lacking a clear investment direction. From 1958 to 1964, the S&P 500 index had an annual return of 11%, while the Windsor Fund had only 7.7%. By mid-1963, Windsor Fund's size exceeded $75 million. Legendary fund manager John Neff joined, completely rewriting Windsor Fund's history."

John Neff became the portfolio manager of Windsor Fund in the summer of 1964. "From then on, we established a comradeship," Bogle wrote.

Neff described his acquaintance with Bogle: "We hit it off immediately. I have some traits that particularly attract Bogle. I know this well. For example, we both have crew cuts."

Time as the Ultimate Test

From 1964 to 1995, Neff managed Windsor Fund for 31 years, transforming it into the largest mutual fund at the time, with a total return growth of 5545.6% (compared to the S&P's 2229.7%).

The fund's annualized return was 13.7% (compared to the S&P 500's 10.6%), outperforming the market 22 times, with an average annual return exceeding the market by 3%.

Though 3% seems small, it was achieved with far less risk than the market average. Only a few, like Buffett, have managed such long-term success:

• John Neff: 31 years, annualized 13.7%
• Bill Ruane, founder of Sequoia Fund: 36 years, annualized 15.5%
• John Templeton: 38 years, annualized 16%
• Walter Schloss, Buffett’s mentor: 47 years, annualized 15%
• Buffett: 57 years, annualized 19.8%

Bogle believed Neff quickly proved his value investing philosophy through performance. Under Neff's management, Windsor Fund exhibited both conservative and aggressive traits.

"I call 'conservative' Neff's focus on distressed stocks and high-dividend stocks, effectively controlling the fund's downside risk.

'Aggressive' refers to Neff's willingness to heavily invest in stocks he favored, resulting in greater short-term volatility compared to more diversified portfolios. Despite this, Windsor Fund began to stand out in the industry."

Bogle further detailed Neff's performance:

"In 1965, Windsor Fund began to shine. By 1970, its annualized return was 12.6%, while the S&P 500's was only 4.8%. From 1970 to 1973, growth stocks prevailed, and Windsor Fund underperformed the market.

However, from 1974 to 1979, Windsor Fund's annualized return was 16.8%, compared to the S&P 500's 6.6%. From 1965 to 1979, Windsor Fund's cumulative return was 359%, while the S&P 500's was 126%."

Such outstanding performance attracted more investment. Even as Windsor Fund grew, it maintained excellence, unlike other successful funds that faltered under increased capital.

Neff's investment method was highly actionable, and Bogle regarded him as a "true star fund manager" alongside Peter Lynch.

Entering asset management in 1964 wasn't fortunate, as the Dow only rose by one point over the next 17 years—from 874 at the end of 1964 to 875 at the end of 1981.

Yet, during this time when most stock investors lost money, Neff achieved unprecedented success.

In 1981, Windsor Fund's assets were under $1 billion. By the end of 1985, Windsor's assets exceeded $4 billion, becoming the largest equity fund in the U.S. By 1995, when Neff retired, the fund's assets had ballooned to $11 billion.

The mean reversion of performance seems inevitable in the mutual fund industry, but Windsor Fund was an exception. Apart from a brief dip from 1989 to 1990, Windsor Fund's annualized return from 1980 to 1992 was 17.2%, annually outperforming the S&P 500 by 1.2%.

John Neff, along with Peter Lynch and Bill Miller, became known as the "Three Musketeers" of American mutual funds.

In May 1985, Neff and Bogle did something unheard of in the mutual fund industry—they closed Windsor Fund to new purchases.

Why not let the goose that lays golden eggs continue?

"In traditional fund governance, managers are reluctant to close their funds to new purchases, forfeiting substantial management fee income. But Neff and I knew that even the tallest trees can't grow to the sky. Otherwise, the growth of the fund's size would eventually become the enemy of its performance. We had no incentive to blindly expand for management fees."

Bogle said when Neff proposed this idea, they both agreed.

Born in 1931, Neff, and Bogle, born in 1929, both passed away in 2019.

In 1980, the University of Pennsylvania asked Neff to manage its endowment fund, which had been the worst-performing among 94 university funds for decades. Neff used his old method of buying low-profile, unpopular, but very cheap stocks.

Some trustees opposed this approach, urging him to buy exciting stocks of the time. Neff remained steadfast, and the results proved him right.

The fund achieved a tenfold return in 16 years, eventually ranking among the top five university funds.

Investing in Misunderstood "Sorrowful" Stocks

Seemingly shabby areas always attract me, for a compelling reason: mainstream views often focus only on the hottest companies, frequently underestimating the value of good companies.

—John Neff

Neff didn't use sophisticated investment techniques or mathematical models. He employed a widely known method—low P/E ratio investing.

He believed low P/E stocks have dual profit margins, offering greater upside potential and smaller risk loss.

Thus, he always bought unremarkable, poorly performing but very cheap stocks, the misunderstood "sorrowful" stocks, selling them when the market rediscovered them and their prices surged.

Neff shared in his book that every company's P/E information is easily accessible, "Besides subscription services like 'Value Line,' stock charts in newspapers usually include P/E ratios, and all worthwhile personal finance websites publish these data."

Neff was immersed in the business world from high school, working in his father's automotive and industrial equipment supply business, learning management.

His father's motto, "Buy well to sell well," taught him to pay close attention to price, profoundly influencing him.

Some call Neff a value investor, others a contrarian, but Neff prefers to be known as a low P/E investor:

"Some say I'm a value investor. That esteemed style stems from the pioneering work of Graham and Dodd. They demonstrated that stocks abandoned during the Great Depression often outperformed popular growth stocks.

Others label me a contrarian, a term that might imply I'm rebellious.

Personally, I prefer the label: Low P/E Investor. It clearly and accurately expresses my investment style during my time at Windsor Fund."

Generally, contrarian investing involves extremely low valuations with potential for reversal. Even if Neff doesn't want the "rebellious" label, it fits.

Among his contrarian investment cases, Citibank is most famous. Neff bought Citibank shares all the way down from 33𝑡𝑜33to8, eventually reaping several times the return.

He once warned:

Windsor's success wasn't achieved by always opposing the crowd. Stubborn contrarians will ultimately face tragic outcomes. Smart contrarians remain open-minded, investing with historical insight and humor.

A recent conversation with a research director of a billion-dollar private equity firm revealed that enduring investment success doesn't depend on mastering an investment bible but on adhering to simple, logical strategies.

Neff exemplifies this.

From 1964, managing Windsor Fund for 30 years, "Windsor Fund was never flashy, never blindly pursued trends, but also never settled for average market performance. Whether the market rose, fell, or stayed flat, we consistently followed a timeless investment style."

Neff published his autobiography, "John Neff on Investing," in 2001, detailing his growth, education, and career, along with his investment journey and philosophy. 

In his book, Neff summarized his low P/E investment style with seven elements:

1. Low P/E ratio (company P/E below market average by 40%-60%).
2. Fundamental growth rate above 7% (growth rates below 6% or above 20% are rarely chosen due to high risk).
3. Guaranteed dividend yield (dividend yield adds value).
4. Excellent total return relative to P/E (Neff liked stocks where P/E was half the total return).
5. Never hold cyclical stocks unless compensated by low P/E (Neff bought oil stocks like Atlantic Richfield Company during six different periods).
6. Stable companies in growth industries.
7. Strong fundamental support.

These elements include both quantitative and qualitative aspects, with low P/E as the foundation supported by other factors to ensure value in low P/E stocks.

The fourth point's total return is Neff's invention: Total Return = Earnings Growth Rate + Dividend Yield. Total Return / P/E = Total Reward Rate.

Low P/E investing appears simple but is challenging to execute, requiring long-term "buying neglected stocks" and resisting human nature by ignoring popular market views.

Windsor's reasons for selling stocks were only two:

1. Deteriorating fundamentals.
2. Price reaching a predetermined value.

Neff's investment strategy was conservative.

But in his words, "In an industry where nothing is guaranteed, we can still expect to identify investment targets that offer Windsor Fund greater profit opportunities. The process isn't smooth, sometimes stumbling, but long-term performance far exceeds peers."

The aforementioned Citibank is his typical case. In 1987, Citibank, once among the "Nifty Fifty" star stocks, began to decline. In 1991, entangled in bad loans and huge debts, Citibank's stock fell daily, causing many investors to panic and flee.

Neff was fearless, even experiencing significant temporary losses, but Windsor Fund continued buying Citibank shares. By the end of 1991, Citibank's stock was around $8, and Windsor Fund held 23 million shares.

Neff believed Citibank's profitability remained intact, and with rapid cost reductions, stronger earnings expectations became clearer. He felt the mortgage issues would eventually resolve.

In 1992, Citibank's earnings turned around, and its stock began rising, surging 43% in a year. In 1993, amid a sluggish market, Citibank continued rising nearly 25%. After nearly five years of waiting, Citibank rose over eightfold, justifying Windsor Fund's "trials and tribulations."

Ugly stocks are often beautiful. If Windsor Fund's portfolio looks easily agreeable, then we're just being perfunctory. Citibank wasn't the first such stock, nor the last.

—John Neff

It emphasizes not losing first, then winning. Ensuring one's defense before attacking.

Like Buffett, Irving Kahn (Buffett's mentor), and Schloss (Buffett's second mentor), Neff inherited Graham's system, emphasizing safety margins while evolving in different directions.

Unlike Graham, Neff focused more on company fundamentals. His second, sixth, and seventh elements show he didn't solely pursue low P/E but also stable growth.

Buffett shares this trait, having evolved his investment framework several times, transitioning from Graham's low valuation approach to Munger's "high-value growth" investment method.

Buffett admitted in his reflections: The greatest risk isn't price risk but quality risk. Long-term returns come from corporate growth.

In the A-share market, investors like Qiu Dongrong and Lin Yingrui share Neff's style.

Qiu Dongrong adheres to a low valuation plus safety margin philosophy, achieving the only positive return among billion-dollar active equity funds in 2022. His portfolio rarely includes popular leaders.

Lin Yingrui's "distress reversal strategy" has been his main approach in recent years, offering natural advantages in returns: high safety margins and high upside potential.

Buying to Sell

For Neff, all techniques for finding low P/E stocks aim at calculating the price range after company performance improves.

"Windsor Fund buys any stock to sell it. If others can't see you trying to highlight the company's strengths, you'll never achieve expected returns."

Can you sell a stock at your desired price? No guarantees, but a low P/E strategy tips the odds in your favor.

Unlike many value investors like Buffett, Neff focused on predicting economic trends and specific companies' future earnings, holding stocks for an average of three years. Similarities include emphasis on capital return.

In addressing "when to buy" and "at what price," Neff predicted future earnings and normal market P/E conditions, determining target prices and calculating the stock's discount rate.

For "how to sell" and "when to sell," Neff's principles were:

Willingness to sell at market prices and strategy. Target prices were based on the portfolio's "minimum acceptable return rate." When a company's stock rose due to positive market outlooks, its potential dropped below other stocks.

When potential fell to 65%-70% of the portfolio's average, Neff started selling.

Essential Qualities for Successful Active Investors: Patience and Perseverance

Nothing can replace persistence. Talent won't, genius won't, education won't. Only persistence and determination can lead to success.

—Calvin Coolidge, 30th President of the United States

In March 2017, Jim O'Shaughnessy, managing over $30 billion in quant funds, published an article on Yahoo Blog outlining seven traits of successful active investors.

One trait is patience and perseverance, exemplified by John Neff:

"Neff favored low P/E, high dividend yield, and high return on equity stocks, but his short-term performance lagged the market. Buffett faced similar situations. Neff adhered to his principles, continuing to deliver outstanding returns for his investors."

A single article can't cover everything. Neff has many more cases and stories worth sharing, which will be updated later.

Here are ten investment maxims from Neff, each profound and thought-provoking:

• Stubborn contrarians will face tragic outcomes. Smart contrarians remain open-minded, investing with historical insight and humor.
• Success doesn't come from talent or foolish intuition but from frugality and learning from lessons.
• If you can't handle stock price fluctuations or are too impatient, better tuck your money under the pillow.
• The market has a remarkable ability to misjudge, always offering unpopular stocks. Investors applying effective methods to assess growth prospects and concentrate investments will find the world at their fingertips.
• Only when large growth stocks are pushed into the abyss by impulsive markets can we pick up discarded bargains. Even then, we only do so moderately.
• Bitter lessons are only valuable when investors remember them. History repeatedly shows that the stock market's memory is astonishingly short. Investors often forget the past.
• Negative news always overshadows positive news, even affecting good companies. Every industry eventually offers low P/E bargains.
• After a frenzy, people echo each other and can't extricate themselves. If you don't agree, try leading applause at the next briefing. Most people find it hard not to join in.
• Smart investors don't put all their eggs in one basket, but over-diversification can be crippling.
• We're not always right, sometimes underestimating numbers and selling too early. But compared to holding stocks as they slide into error, it's a small price to pay.