John Neff: The Value Investor Who Quietly CRUSHED the S&P 500 w/ Kyle Grieve (TIP747)

Summary

• Investment Strategy: John Nef was known for his value investing approach, focusing on low price-to-earnings (PE) ratios and avoiding high-risk, high-growth stocks.
• Market Approach: Nef's strategy involved selling stocks when they became fully valued and buying during market downturns, emphasizing the importance of understanding market cycles and inflection points.
• Company Analysis: Nef preferred companies with solid fundamentals, moderate growth, and high dividend yields, often investing in less recognized growth stocks and cyclicals.
• Portfolio Management: He categorized investments into growth stocks, basic industry stocks, and special situations, using a measured participation approach to diversify and manage risk.
• Investment Principles: Nef's seven principles included low PE ratios, fundamental growth, yield protection, and strong company fundamentals, focusing on long-term value rather than short-term gains.
• Market Insights: He highlighted the importance of understanding industry dynamics, macroeconomic factors, and maintaining a contrarian mindset to identify undervalued opportunities.
• Key Takeaways: Nef's success was attributed to his disciplined approach, focusing on value and yield, and his ability to adapt to changing market conditions while maintaining a long-term perspective.

Transcript

(00:00) What I always find interesting is  why investors sell their winners. And in   true value investor fashion, Nef strategy  didn't really surprise me. He would hold   on to some winners for 3, four, 5 years if  the fundamentals remained intact or they   improved. However, he also mentioned  that Windsor Fund had periods where   they hold stocks for a month or less. (00:20) Since he was very well aware of   the price appreciation potential of all of his  holdings, he preferred to sell into strength.   He was not into the buy and hold strategy seen  in investors who focus more on highquality   assets that can compound for a long period. If  a company became fully valued, then there was a   good chance it would not stay in the portfolio. (00:39) [Music] Hey, real quick before we jump   into today's episode, if you've been enjoying  the show, please hit that subscribe button.   It's totally free, helps out the channel  a ton, and ensures that you won't miss any   future episodes. Thanks a bunch. We're going to  be discussing one of the most underrated legends   of the value investing world and that's John Nef. (01:02) So I'll be citing his autobiography here   which is called John Nef on investing. The book  provides a very very good illustration of his long   and successful career and a lot of details on his  strategy which is what I'm going to be focusing   on. So John Nef's investing career ran about  three decades and during that time he outperformed   the S&P 500 by 3% annually which is one of the  most impressive investing fees I've ever seen.  (01:26) One thing I really admire about John  was his steadfast ability to just maintain his   strategy when other strategies were working better  for a time now. He ran the Windsor Fund from 1964   to 1995, meaning he was around during the go-  go years where investors who chase momentum   were very wellrewarded until they weren't. But  let's start with John's early life before we   transition to some of his primary principles here. (01:50) So John loved arguing. His mom told him   that he would argue with a signpost. And  this is a pretty common trait that I think   I've seen in many value investors. Their  natural ability to, you know, think in a   contrarian manner just aligns really well with  them being a tried andrude value investor.  (02:07) Additionally, Nef wasn't really a great  student and saw himself as a bit of an outsider   in school. So, John learned a lot about investing  indirectly from his father. So, his father owned   this business called Nef Equipment Co., which sold  items such as air compressors, drive lubrication   equipment, lifts, and pneumatic tools to other  businesses including automobile dealers, service   stations, auto repair shops, and even farmers. (02:30) Now, his father bid on and won a contract   with a US defense company that did very, very well  during the Korean War. Nef noted a few learnings   from his time working with his father. The first  one is that you don't need glamour to make a buck.   The second is that dull businesses that make  money are great and because they're boring,   they don't attract a competition. (02:48) And third, bargaining with   suppliers was a great way to ensure a business got  the best possible terms that could then be passed   on to customers. Nef then moved on and joined the  Navy for a 2-year stint. Before leaving to join,   his father introduced him to his first stock, and  that was a stock called Arrow Equipment. The terms   for him buying the stock were great as his father  basically told him that he would cover any losses   that he incurred from investing in that stock. (03:11) Now once John joined the Navy, he went to   Toledo and just crushed it there. So I mentioned  he wasn't a very very good student. But at Toledo,   he rarely got anything below an A. And it was  in Toledo that John met his first mentor in   the world of investing. This was a disciple of  Graham and Dodd named Sydney Robbins. So Dr.  (03:30) Robbins was a professor of John's  two investment courses that he took while at   Toledo. And even though those were the only two  investing related courses that John ever took,   he actually ended up winning the school's  outstanding student finance award. Robins   taught John a ton about value investing and  just thinking broadly. So at the age of 23,   John hitchhiked to New York with $20 in his  pocket to take part in a series of interviews.  (03:53) Nef originally wanted to be a  stock broker, but after being offered a   job not as a stock broker, but as a security  analyst with Bosch, a Cleveland-based firm,   he came around to the idea that he was probably  better suited to just actually analyze stocks   rather than sell them. He also figured that  avoiding the constant handholding that comes   with being a broker would be a welcome feature  of being an analyst rather than a stock broker.  (04:17) So, he ended up taking that job in  Cleveland with another firm called National City   Bank. So as a security analyst there he focused  on several industries chemicals, pharmaceuticals,   automotive, automotive parts, rubber and banking  and finance. So industries that he really   resonated with included auto and auto parts. (04:35) He wasn't really crazy about chemical   and pharmaceutical industries. Now keep in  mind this was back in the 1950s and just like   today we have all sorts of businesses that  are mentioning you know AI to create buzz   um and hopefully prop up their share price.  So at this time that buzzword was trronics. So   during this time Russia had launched its Sputnik  into space creating a frenzy for tech stocks.  (04:59) So any hint of being an electronics goods  manufacturer could boost your stock price which   was why companies were using this Trronics  buzzword. So the bank that he was at had this   investing committee and it was often at odds with  how John wanted to invest. So while at National   City Bank, Jon met his second mentor, Art Bannis. (05:19) Bananas hadn't been educated by Graham   and Dodd like Robins had, but his thought  processes were very similar. Art also had a   problem with the investing community. He would  find very interesting ideas, but the community   just wouldn't go for it. Instead, they sought out  well-known names that their customers could hold   on to forever, but offered pretty low returns. (05:37) But at this time, Nef was just doing very,   very well in his personal account. So, money from  his Arrow equipment investment that his father   suggested he had had grown to about $3,000.  And by the time he arrived at Windsor, the   fund that he would spend the rest of his career  at, he periodically added cash to his personal   account and had accumulated about $100,000. (05:58) However, he also lost his desire to   work for that bank due to their lack of creativity  in buying some of the new ideas that he was coming   up with. So, as a result, John joined the  Wellington Equity Fund in 1963. So inside   Wellington was another fund, the one that I just  mentioned, which was called the Windsor Fund for   which Jon had been hired specifically to work. (06:18) Now picture this. So the Wellington fund   had a long history of success being launched  way back in 1928 and was originally quite   conservative, but the times had changed  before John had joined. The fund had this   diverse portfolio of just unfortunately overpriced  businesses with minimal competitive advantages.   So during the early 1960s, these  were the type of businesses that   were actually getting really good returns. (06:41) But these were also the times when   Buffett was no longer seeing bargains in the  market. So buying overpriced tech names was   kind of par for the course for many funds  during that time. Now once John joined,   he began scrutinizing just why  Windsor had fared so poorly. So   in 1962, the fund had negative 25% returns. (07:00) So the first order of business was to   get rid of businesses that just didn't belong in  the fund. John made things pretty simple here. So,   stock prices were a function of just two  variables, earnings and earnings multiples. So,   since the fund had a bunch of growth names  with high multiples attached to them,   once the market got any hint of declining  earnings growth, it would be followed by   some pretty severe multiple contractions. (07:23) And this was a crucial lesson for John   as you'll see. So while looking at the Windsor  fund specifically, John kind of came up with these   three generalizations regarding some of the losers  that the fund held. So the first one was that   there were just too many errors in fundamental  analysis. The second one was that they were   overpaying for companies with poor earnings power. (07:44) Many of the businesses saw significant   declines in earnings power after Windsor had  purchased them. And third, this was more of   a strategic shift, but it was to sell losers and  then just move on from them. So, regarding point   three here, it sounds like John didn't make too  many mistakes of omission at this time. You know,   he was liquidating a lot of the portfolio. (08:04) While he doesn't discuss mistakes of   omission in the book, I have views on it that  I'm going to share a little later when we   uh start diving into his strategy. Now, one  part of the book that I thought was really worth   highlighting was this quote. Then as now, I assign  great weight to judgment about the durability   of earnings power under adverse circumstances. (08:23) This is such a powerful concept and one   that I think most investors, myself included,  just don't emphasize enough. To avoid losers,   consider earnings power during weak macroeconomic  environments. You simply do not know when that   weakness will happen, but you're nearly guaranteed  that it will happen at some point in the future.  (08:42) So by 1964, Nef had three investing  principles that he wanted to instill into the   Windsor fund that he'd learned from his previous  experiences at First National Bank. So the first   here was to create impact. You know, this is  doing things like increasing position sizes in   positions that really offered tremendous returns. (09:02) The second one was to avoid the issue with   the investing committee. So John approached each  member separately to gain a consensus on some of   his newer ideas. And this worked a lot better than  approaching the three as a complete group. And the   third here was that Windsor was a $75 million fund  inside of Wellington which had 2 billion in AUM.  (09:20) So Nef unfortunately had problems getting  the analysts to help him on specific positions   that he wanted to learn more about. And as a  result, he requested just one full-time analyst   to work for him at the Windsor Fund. So in 1964,  Nef was promoted to the head of the Windsor Fund.   Now, interestingly, at this time, mutual funds  weren't nearly as competitive as they are now.  (09:42) But Nef was running a mutual fund, and  he was very competitive, and he definitely cared   about performance. So, in October of 1964, Windsor  Fund was lagging the S&P 500 by about 3%. Now,   that was actually pretty good progress  compared to when Nef had or first joined   the fund. At this time, Nef was beginning  to really solidify his investing strategy   that would make him into this legend. (10:02) And much of that strategy was   based just purely on simplicity. He started  by bucketing investments into two potential   areas. Growth stocks and basic industry stocks.  So growth stocks were established businesses   with above average long-term prospects  in earnings and dividends. Basic industry   stocks would track the growth of the US economy. (10:23) These also included special situations.   While they had inherent growth potential in  some of these areas, they might be closer to,   you know, market averages. If you bought them  at a low price or time to cycle correctly,   you could make a great return. However, now  another interesting concept that Nef came up   with was what he called measured participation. (10:41) So, measured participation meant   evaluating each stock based on its relative risk  and reward and comparing those opportunities to   other opportunities in other sectors rather  than becoming overly focused on any one   specific industry. Instead of using traditional  industry classification, Windsor assessed stocks,   particularly growth and basic industry  stocks based on their quality, marketability,   growth, and economic characteristics. (11:09) And the strategy really began   to work. So in 1965, Windsor had an excellent year  of returns, crushing the S&P 500 by 17%. However,   the late 1960s was a very challenging period for  Windsor when compared to some of the other mutual   funds. So keep in mind this was the go-go era and  the years in which people like Jerry Sai became   infamous for buying very expensive growth stocks. (11:30) So even though the Windsor fund was doing   well, it wasn't performing as well as someone  like Jerry Sai's fund with Fidelity. Now when   referencing Windsor fund, one bank went as far as  to say Windsor Fund was just not with it. Looking   back, that was probably a good call for the top.  When others are saying your results aren't good   because they're succumbing to something like  contrast misreaction tendency, it's probably   a good signal that things are getting frothy. (11:56) So the contrast misreaction tendency   occurs when we compare things rather than using  absolutes. Windsor was still beating the S&P 500,   but it was losing to funds that were buying a  large number of these high-flying tech stocks,   which were being overbought by speculators  that were just seeking a very quick return.   If you are comparing two funds and  one is outperforming the other,   the question should be why. (12:18) And often you'll conclude   it's because they're taking more risk by  buying more expensive stocks with a very   very minimal margin of safety or none. So  by 1970, investors had changed their tune   towards Nefrightes. After having been eclipsed by  this adrenaline funds for several years running,   we persevered in the very testy 1969 market. (12:39) Amid this wreckage came one of my   better moments. I was in New York attending a  popular annual mutual fund conference and the   very salesman who 12 months earlier were ready  to give Windsor up for lost instead initiated   a spontaneous and glowing ovation when I  was introduced. Windsor's demise Mark Twain   would have said has been greatly exaggerated. (12:59) We are now going to take a pause on   Nef's life and look at some of the details  on Nef's investing strategy. His investing   strategy was predicated on seven primary  principles. So the first one here is low   price to earnings ratios. Second, fundamental  growth over 7%. Third is yield protection.  (13:17) Fourth, a superior relationship of total  return to the price to earnings paid. Fifth,   no cyclical exposure without a  compensating PE multiple. Sixth,   solid companies in growing fields. And seventh,  strong fundamentals. Now, let's go over each of   these principles in a little more detail. Very  interestingly, John Nef didn't think of himself as   a traditional value investor like Graeme and Dodd. (13:39) He prefers to be known as a low price   toearnings investor. Now, part of the distinction  is likely because Nef doesn't mention anything   about things like liquidation values in his  principles. He certainly looked for a deal,   but he also sought businesses that  paid a dividend, meaning they were   profitable and growing at a moderate rate. (13:58) Nef liked to use PE ratios as a yard   stick. The cheaper the business meant you got  more for less. And it's just that simple. Nef   also understood that growth plays a role  in a PE ratio of a stock. A business with   high growth rates demands a higher PE ratio.  But from what I took from reading this book,   I don't think Nef was necessarily  looking for long-term compounders either.  (14:20) Since he looked for businesses trading  in the doldrums, many of the companies he bought   were largely unloved. and he would buy them at  those points because he knew that sentiment would   eventually shift and he'd make his profit then. He  preferred looking for businesses that could still   grow earnings but not necessarily high flyers. (14:37) The high-f flyers rarely traded cheap   enough for him and even with 10% growth in  earnings per share, you wouldn't need much   expansion in PE to generate 50 to 100% returns.  Nef mentioned looking for businesses that could   expand their PE from something like 8 to 11 rather  than, you know, 40 to 55. He also felt that a   business trading for that cheap was less likely  to go through painful multiple contractions.  (15:00) Nef also mentioned in his book that he  avoided windfall opportunities. Businesses that   I own like Topicus or Lumine would just not be on  his radar. For Nef, windfall opportunities were   also the ones that could obliterate your gains. So  let's look at some of the growth that Nef really   did look for. His bar wasn't very high at 7%. (15:20) And I think having that low bar worked   very well for him given that he just wanted things  to be cheap. Businesses with a history of growing   at 20% or higher rarely trade for singledigit PE  multiples. It's worth mentioning that Nef's sweet   spot was in the 6 to 20% growth range. So Nef  makes a great point that Wall Street tends to   obsess over trailing 12 months earnings,  but doesn't put enough emphasis on where   earnings will be 12 to 18 months from now. (15:48) So, a business with slow trailing   12 months earnings growth might be  primed for regression to the mean,   meaning they may make a massive jump  in EPS over the next year. However,   since they experience a slowdown, the  market doesn't always factor in these   future improvements. As you'll see in some  of the examples we'll be going over, John   absolutely loved these types of opportunities. (16:06) The next tenant is yield production.   And this is a principle that I think really  differentiated John Nef. Because while many   investors enjoy yields, I haven't seen another  investor have as much success as Jon who just   made yield a very very high priority. So  Windsor edged the market by 3.15% per year   after expenses while Jon was in charge and  2% of that outperformance was due to the   dividend yield that Jon had received. (16:34) Meaning the outperformance in   capital gains was approximately 1%.  While he liked a dividend yield,   if a business was growing earnings in the double  digits, he was okay investing in them even if they   had 0% yields. The concept of a dividend yield is  interesting to me. And I think it really matters   depending on where you are in your wealth cycle. (16:53) So, if you're employed full-time and don't   require dividend income, then getting yield  just doesn't matter that much from your stock   picks. But if you're a personal investor managing  your own money for a living, then yield becomes   much more important as you require cash to live  off of. And if you don't have dividend yielding   companies in your portfolio and the market  dies, then you're going to be selling stocks   at a pretty big discount to fund your lifestyle. (17:16) One thing I've never really liked about   dividends is how they are sometimes abused in  terms of capital allocation. Some businesses   appear to be able to invest 100% of their earnings  back into their business at high rates of return.   So when I see a company like that that  pays a pretty hefty dividend, you have to   actually challenge management's capital allocation  decisions, if they can get 20% returns on capital,   then why are they intentionally deploying  less capital? I always consider this   when analyzing a company that pays a (17:45) dividend. Now, alternatively,   another way of looking at it, kind of the Peter  Lynch way, is that companies that pay a dividend   can actually be a good thing. So this is how Lynch  looked at it and his reasoning was that okay if a   company has cash on its balance sheet what can  often happen is that they just want action and   they want action for the sake of having action. (18:09) So in his opinion one of the functions of   having the dividend was to kind of slow down the  action that a company would need to do and instead   of making let's say a poor acquisition they would  just pay a dividend. So, you know, I think that's   actually a pretty decent way of looking at  why a company might pay a dividend as well.  (18:26) So, let's go back to the Windsor fund  here. So, Windsor fund used an interesting   metric to observe the total returns that it  received compared to the PE that it paid. So,   they referred to it as their total return ratio.  This was the sum of per share earnings growth   and yield divided by the initial PE paid. So, he  had an example here of a business called Yellow   Freight that he compared to the 1999 S&P 500. (18:49) So yellow freight had a total return   ratio of 2.6 and the S&P 500 had a total  return of just 04. So the point here is   that yellow freight was a better investment  compared to the index. Generally nef sought   businesses that had a ratio of 2:1 compared  to that business compared to the uh index.   So Nef also just absolutely loved cyclicals. (19:12) He said they made up about a third   of Windsor's portfolio. Nef ensured that he  would only buy cyclicals when the market was   employing a wait and see approach. So this would  allow Nef to enter when earnings were depressed,   but he had a very good chance of making  money when those earnings normalized   back to the upside. The last two principles  resonate very strongly with me as I prefer   businesses that are growing and high quality. (19:33) So John typically looked for businesses   in healthy industries that were trading at a  discount to peers. For instance, he discussed   ABC which he felt was in a growing industry,  had better prospects than his competitors,   but was actually trading at a discount to  the industry in general. So, in terms of   fundamentals, John looked at a few things. (19:51) The first thing was that he demanded   some sales growth even if a company was  improving margins and therefore improving   earnings. At some point, margins can't expand  anymore and sales are actually vital to growing   those earnings. The second one was to look  at cash flow. John's definition of cash   flow was retained earnings plus depreciation. (20:09) Many businesses would have experienced   depressed cash flows due to the nature of their  operations and incurred larger depreciation   expenses which can mask the actual value and  cash flow of a company. And third was return   on equity. He liked it because it showed  how skilled management was at delivering   returns to the owners of a company's equity. (20:27) And fourth was margins. He mentioned   operating and pre-tax margins and he used this  to help ensure that a business had resilient   earning streams. So the next chapter I want to  look at is titled the bargain basement and I   think it's aptly named as that is where John  really played his entire game. The beautiful   part about investing in the bargain basement is  that it's not hard to find new opportunities.  (20:50) Today we can look at apps to find  stocks you know trading at 52- week lows.   Now in John's day he would have to look at  things like public stock tables. John writes,   "In the course of my career, few days have passed  when the new low list has not included one or two   solid companies worth investigating. The goal  is to find earnings growth capable of capturing   the market attention once the climate shifts. (21:13) " Now, it's vital to understand that   the 52- week low list isn't some giant gold  mine. Many of the basements are down there   because they deserve to be down there. Maybe,  you know, earnings have gone negative. Maybe   they've lost a large contract. Maybe  their IP is becoming public domain or   maybe they just can't service their debt. (21:30) These are all pretty bad situations   for a business to be in. But if you look close  enough, there may be a handful of companies   that don't quite belong there. Those are the  ones that you want because those businesses   can really turn on a dime once the market  understands that things maybe aren't as   bleak as what's embedded in the stock price. (21:48) For many of the examples that John   gave in the book, that was what  he was looking for. you know,   50 to 200% returns over a reasonable period  of time. Many of these names were boring,   misunderstood, and cheap. He'd made his returns  based on increases in earnings and accompanying   multiple expansion. Nef used what he called  the Hymph test to see whether a stock was   worth looking into when it was down big. (22:12) So, if there was a big name down   big that he was aware of, he might use his  total return ratio to see if the business   was offering unacceptable upside. Outside  of looking at things like 52- week low list,   he also just read a lot. Like all good investors,  reading opens up just so many opportunities. And   similar to someone like a John Templeton or a  Warren Buffett, the news would often signal the   market's perception of the market as a whole. (22:37) Nef gives an example here in 1991 when   Windsor was featured in Forbes under a story  called Tarnished Glory. A few months later,   signaling a rebound in the market, another story  was written called Stockpicker Returns to Success.   Now, in the 1980s, Nef observed the gloom around  the property and casualty insurance industry.  (22:53) So, one company that had come on  Windsor's radar was called Sigma Corp.   Regarding the industry, nearly every analyst  on Wall Street predicted high liabilities in   the range of half a trillion dollars. Nef  adds, "Wall Street's propensity for group   think fans these dire expectations. Too many  sellside analysts whisper in each other's ears,   and few want to stick his or her neck out too far. (23:16) There's not much of a reason to be a   hero if being wrong can cost you your job.  You can sum up the street psychology this   way. Hope for the best, expect the worst.  Meanwhile, don't stick your neck out. Now,   Sigma had some exposure to this area, but it  wasn't the entire business. One of the best parts   of the business was its managed care operations. (23:39) Nef didn't really elaborate on what the   segment was, but from some of the research that  I did, it appears to be an insurance on services   such as medical, dental, and behavioral health,  vision, pharmacy, and supplemental benefits. So,   even with the environmental liabilities looming  over Sigma, it didn't actually affect the   profits of this part of the business. (23:59) So, Windsor bought shares and   as the environmental consequences abated,   Sigma's share advanced about 54% while  other insurers gained about 45% on average.   And John noted at this time the S&P 500 logged  about a 29% gain at this time. So one thing I   liked about Nef was that even though he enjoyed  a singledigit PE types, he would stray outside   that range if the right opportunity arose. (24:23) Even a high growth company that was   hit hard by the market can still present a  very good opportunity. So one such example   was Home Depot. So in 1985, Nef found this  business trading at a high PE by his standards   of 20 times earnings. But in his modeling,  looking forward to 1986, the business was   trading at only 10 times normalized earnings. (24:44) So for a business at the beginning of   its growth phase, that's simply incredibly cheap  on a forward basis. He noted that the business   had gone from about 22 to 50 stores in 1985  and that the cost involved with opening that   many new locations had momentarily depressed  normalized earnings. After only 9 months,   they were up 63% on their Home Depot investment. (25:04) Jim Ran once said that you're the average   of the five people you spend the most time  with. And I really could not agree with him   more. And one of my favorite things about being  a host of this show is having the opportunity   to connect with high quality like-minded people  in the value investing community. Each year we   host live in-person events in Omaha and New  York City for our tip mastermind community,   giving our members that exact opportunity. (25:32) Back in May during the Bergkshire weekend,   we gathered for a couple of dinners and social  hours and also hosted a bus tour to give our   members the full Omaha experience. And  in the second weekend of October 2025,   we'll be getting together in New York City for two  dinners and socials as well as exploring the city   and gathering at the Vanderbilt 1 Observatory. (25:55) Our mastermind community has around 120   members and we're capping the group at 150  and many of these members are entrepreneurs,   private investors, or investment professionals.  And like myself, they're eager to connect with   kindered spirits. It's an excellent opportunity to  connect with like-minded people on a deeper level.   So, if you'd like to check out what the  community has to offer and meet with around   30 or 40 of us in New York City in October,  be sure to head to the investorspodcast.  (26:25) com/mastermind to apply  to join the community. That's the   investorspodcast.com/mastermind or simply  click the link in the description below.   If you enjoy excellent breakdowns on  individual stocks, then you need to   check out the intrinsic value podcast hosted by  Shaun Ali and Daniel Monka. Each week, Shawn and   Daniel do in-depth analysis on a company's  business model and competitive advantages.  (26:51) And in real time, they build out the  intrinsic value portfolio for you to follow   along as they search for value in the market. So  far, they've done analysis on great businesses   like John Deere, Ulta Beauty, AutoZone, and  Airbnb. And I recommend starting with the episode   on Nintendo, the global powerhouse in gaming. (27:11) It's rare to find a show that consistently   publishes highquality, comprehensive deep dives  that cover all the aspects of a business from an   investment perspective. Go follow the intrinsic  value podcast on your favorite podcasting app   and discover the next stock to add to your  portfolio or watch list. One of my favorite   jaw nefisms is what he calls the silly season. (27:35) So this occurred at times when the   market was selling at exorbitant prices. In  John's case, this would be the time when he   would just sell some of his winners to increase  his cash position. When it wasn't silly season,   Jon was often buying. and he enjoyed quality  stocks about as much as I do. One quality   cyclical that he liked was Gulf Oil back in 1978. (27:56) So, Gulf Oil was undergoing an improvement   in its quality as it was increasing its  concentration of revenue from US and Canada. So,   in 1973, earnings from North America were just  about 30%. By 1978, they moved up to 85%. So,   GF had been involved in some litigation and John  had a view that they would eventually prevail.  (28:15) While he waited, the business paid a  beautiful 8% yield and was trading at only 5.8   times earnings. He ended up selling over the next  two years, posting returns between 42 and 86%. One   category of companies that Windsor Fund like to  look at was those that were miscatategorized. So,   I like this investment category because you  can really find some exceptionally highquality   businesses that are just often overlooked. (28:38) One of my favorite examples of this   is a business that I own called Terab  Industries. I started researching the   business in Q1 of 2024. After speaking with  some great investors who had passed on it,   I realized that investors were looking at the  business the wrong way. If you look at their   ticker on Yahoo Finance, they are categorized as  an oil and gas equipment and services company.  (28:57) Now, while that is technically true,  when you dig a little deeper into Terabes, the   actual exposure to the highly volatile oil and gas  industry is a lot less than what you might expect.   Currently, the segment is about 24% of revenue,  but Teravez has been incredible at smoothing   out revenues based on the demand of the industry. (29:14) Now, while Terravest is often incorrectly   categorized as a pure play oil and gas service  company, it generates the majority of its revenue   for more stable segments, including HVAC and  containment and compressed gas. As a result, I got   shares at a decent multiple, and now shares trade  at what I consider a pretty expensive multiple.  (29:31) One mental model that John Nef used was  called critical mass. I like to think of it as   a smallest sum, an ingredient, an idea, wealth,  anything really that can create a self- sustaining   entity. So, one example he gave of a business that  didn't fit this mental model was a business called   US Industries. The company experienced impressive  growth of about 24% per year over a 5-year period,   and yet it was only trading at 8 times earnings. (29:56) John believed they could continue to   compound earnings at about 15% per  year going forward. Unfortunately,   it just wasn't able to create that self-sustenance  that critical mass dictates. US Industries was   unable to dominate its industry and command  any pricing power, and its fundamentals   quickly deteriorated. This caused Windsor  Fund to lose about half of that investment.  (30:16) Now, as I've alluded to, John loved yield  as a bonus to waiting around for a business's   stock to rerate. But in the absence of yield,  John looked for another type of opportunity   he titled free plus. This is basically looking  for an opportunity with a free call option on   additional upside optionality. Or you can think  of it as a business where management is just   so good that they often outperform expectations. (30:39) This works very well in low PE world that   John was fishing in since he searched primarily  for low PE businesses. The businesses already   had a lot of potential downside priced directly  into the stock. So this meant that if there was   some minor positive event that were to happen,  you know, something like the business signing a   nice new contract or maybe cutting costs that  could increase margins or maybe an unexpected   boom in the company's industry could mean very  fast and fierce improvements in the company's   fundamentals which would ultimately be (31:09) shown in the stock's price. So   similar to Peter Lynch, Nefiked finding  ideas outside of referring to just his   stock broker. I think this might be more  of a problem for investors during his time   as it's much easier to find ideas today.  I personally have never gotten one idea   from speaking with a stock broker, but  the point is you don't have to peruse   professional investors tips to find ideas. (31:32) Nef used the example from retailers,   for instance, which are an easy category to search  for when you just go shopping. He made a few good   points here, which was that execution separates  the best retailers from the average. And don't   confuse buzz for a company's products for good  execution as a retailer can actually ride momentum   for short bursts before just fizzling out. (31:52) Now, a notable win for Windsor Funday,   specifically inside of retail, was  a business called Pier 1 Imports,   which was a specialty retailer of home  furnishings. So, in the mid1 1980s,   a new management team took over, which improved  their marketing, product mix, and improved the   attractiveness of some of their stores. (32:10) This resulted in improvements in   the company's volumes and prospects, but it was  just too expensive for Nef at that time. So he   waited to see if an opportunity might arise in the  future. And Black Friday in October of 1987 was   just the opportunity that he was looking for.  So on that day, the market plunged about 20%.  (32:27) Peter 1 Imports, which John thought could  increase EPS by 47% in 1988, was only trading at   eight times earnings. He gobbled up shares and  doubled his investment within a few months.   This is an area that most investors should  probably try to take more advantage of, and   it's also a good reason to keep some cash on hand. (32:46) For instance, in early April, the tariff   threats cause the market some extreme levels of  anxiety. The S&P 500 dropped nearly 11% over just   a 2-day period. If you had cash on the sidelines,  there's a very good chance that either one,   a company that was on your watch list reduced  in price enough to become attractive, or two,   a company that you already own, which you've  wanted more of, becomes attractive to add to.  (33:07) It's important to remember that you  don't always need a market sell-off for a   good opportunity to present itself. Nearly all  companies have just some degree of cyclicality.   If you find one that you think has great  long-term prospects, but is maybe going through   some headwinds that you believe to be temporary in  nature, you can make off like an absolute bandit.  (33:27) You just need to have conviction  that you're correct. Now, I find getting   this conviction a lot more often in businesses  that I already own versus businesses that I'm   just starting to research. When I own a business,  I become much more attuned to how the business   runs and how the market perceives it. Since I'm  generally looking for wonderful businesses I can   hold for a multi-year time period, it means  that I'll have a very good chance that my   businesses may undergo some temporary headwinds. (33:51) And since I know the business so well and   have a high level of conviction in the idea, it's  a lot easier for me to have a variant perception.   Now the final interesting lesson here that I took  from this chapter was based on a concept known as   developing a curbstone opinion. So Nef writes  investing is not a very complicated business.  (34:09) People just make it complicated. You  have to learn to go from the general to the   particular in a logical sequential and rational  manner. Curbstone opinions entail informed   observations about the general condition of  a company or an industry or aspects of the   economy that are likely to affect the first two. (34:27) Ask and get answers to these questions.   What is the company's reputation? Is the  business likely to grow? Is it a leader   in its industry? What is the growth outlook for  that industry? Has management demonstrated sound   strategic leadership? So, one thing that you  learn pretty fast reading this book is just   how much attention Nef gives to looking at the  economy with his knowledge and time he spent   studying different industries and the economy. (34:50) In some ways, he was a top- down investor,   but in other ways, he was more of  a bottoms up investor, pouring over   resources like value line each week, looking  for specific stocks trading on the cheap. So,   the questions posed above help when evaluating  an individual business. If you can answer those   five questions, you know probably more about  that business than 99% of investors out there.  (35:11) And if you can maintain your curbstone  opinion and update it quarterly, you'll be very   well prepared to pounce on the business when it  goes through some sort of temporary headwind.   Speaking of maintenance, the next theme that  I want to cover is a chapter on the care and   maintenance of a low PE portfolio.  I love this chapter because it deals   specifically with how to manage a low PE  portfolio, which may differ from other   investors who have a medium or high PE portfolio. (35:35) If John, for instance, were to review my   portfolio, he'd probably consider me to be a high  PE investor, as I have multiple companies that   trade at price to earnings ratios of more than 30  times. Nonetheless, I think his principles still   stand here. A notable excerpt that he has written  discusses the psychological aspects of investing.  (35:53) His point is that many investors claim to  adopt a low PE strategy, but when reality sets in,   they tend to just sit on their hands waiting for  the price to recover before deploying capital   into an idea that has already lost its very  lowpriced PE. waiting for the price to recover   before deploying capital into an idea that has  already lost its ability to rerate as multiple.  (36:16) He writes, "When shares of a  stock change hands for 30 times earnings,   who doesn't recall the day when shares fetched  only 12 times earnings? But where were the   buyers then? Most were cowering in fear of the  latest news reports or piling into the speediest   growth stock bandwagon, even if its wheels were  about to fall off." This is a great reminder to   evaluate just how brave you really are. (36:36) A straightforward exercise is to   just review some of the trades during periods of  significant market turmoil. Are you a net buyer   or net seller of stocks? You can look up your  trades during such times as the CO 19 crash in   March of 2020, the inflation and interest rate  fears in the first half of 2022, or the regional   bank crisis in March of 2023, or maybe even the  most recent tariff selloff in April of 2025.  (36:59) If you're a net seller during these times,  you're acting in accordance with human psychology,   which tends to be riskaverse. But  unfortunately, this is not the way   to win in the market. What the best investors  do during these times is really deploy as much   capital as possible because the upside and  the margin of safety during these sell-offs   provide them the best possible opportunities. (37:20) And in today's market, you often need   to act very fast or that opportunity vanishes.  Speaking of opportunities, let's look at a term   that Nef used extensively throughout the book,  which is inflection points. So inflection points   to nef are times in the market when there is  an excessive sentiment to the highs or to the   lows. When an inflection point happened, he  viewed it as a signal that the trend had gone   too far and he would take appropriate action. (37:45) In Nest's case, that meant searching   for inflection points to the downside, which  allowed him to deploy capital. On inflection   points to the upside, Jon would usually sell  off some of his portfolio to free up cash   once the market turned. A few other ways that  Nef used inflection points to his advantage   included being aware that inflection points  can be long duration episodes lasting years,   such as the Nifty50 era of 1971 to 1973. (38:07) He also came to grips with the   fact that if you refuse to take part in inflection  points during times of excessive euphoria, you're   going to underperform in bull markets. And lastly  was that inflection points are just impossible to   predict. But warning signs will be apparent such  as excessive IPOs, cheap debt, a lack of good   opportunities, and high amounts of speculation. (38:26) This type of rhetoric always reminds   me of Howard Marks and cycles. We  don't know when a cycle will turn,   but at least we can observe where we are inside of  a cycle. You can use that information to help you   with decision-m. Whenever I read about cycles,  I always get a degree of cognitive dissonance.   I can see what value investors like John Nef  or Howard Mark are saying, act per the cycle.  (38:49) But how I really act is actually  a lot lazier. What many value investors do   during exuberant times is to sell stocks that have  approached or exceeded intrinsic value. However,   this is actually not a strategy that  I employ that often. And the reason is   simple. I'm not looking for stocks that  I can hold for 6 to 12 months which will   quickly rerate and then never grow again. (39:09) I'm looking for businesses that can   continually improve their intrinsic value.  And I don't think I'm smart enough to time   when I should be in and out of these names. So,  my general strategy is to just hold these names   even when the market is euphoric. When there's  a marketwide sell-off or if one of my businesses   goes through headwinds is when I'm most likely to  add to my current positions, which I'm generally   more apt to do than pile into new positions that  I probably don't understand as well as something   that I already own. One area I think I can (39:34) improve is allowing cash to accumulate   more in my brokerage account, which would give me  a higher buffer during periods of excess euphoria.   Once that euphoria ends, I'll just deploy  capital. It sounds easy, but since I tend to   stay fully invested, I often have in that I often  have that feeling where excessive amounts of cash   doing nothing is just a waste of my capital. (39:56) So, Nef devised a novel approach to   investing that I think avoids standard  industry classifications that I discussed   earlier. He called this measured participation.  This allowed Windsor to think differently about   diversification and portfolio management.  Instead, they categorized businesses into   four broad investing categories. (40:14) The first one was highly   recognized growth. The second was less recognized  growth. Third moderate growth and fourth cyclical   growth. Nef writes Windsor participated  in each of these categories irrespective   of industry concentrations. When the best values  were available in say the moderate growth area,   we concentrated our investments there. (40:35) If financial service providers   offered the best values in the moderate growth  area, we concentrated in financial services.   This structure enabled us to flout the  constraints that usually condemn mutual   funds to hoump performance. So, Nef believed  that most investors tend to focus just on that   first category, which is highly recognized growth. (40:54) This was because since they attempted to   copy an index, they actually had to ensure  that they had adequate representation. But   this act alone is why many funds chronically  underperform. They are actively buying stocks   that they should probably be trying to sell  instead. For Windsor, the well-known blue   chip growth stocks were on the lowest rung. (41:12) The majority of other funds placed   these investments on the highest rung. As a  result, Windsor constantly held out of favor   and less popular stocks, which was a significant  reason for their long-term outperformance. Now,   as a retail investor myself, I've never  actually thought much about having a   specific representation of an index. (41:29) I prefer to have none,   actually. And as a matter of fact, I've never  owned a stock that was in the S&P 500. While I   wouldn't say that my portfolio is made of maybe  ugly ducklings like Nefs was, I definitely have   businesses that are much less known to the average  person compared to a business inside the S&P 500   such as, you know, Amazon, Tesla, Microsoft. (41:50) If I had to say where my focus on, it's   on probably number two, which is less recognized  growth. While I love businesses that can grow 25%   or more per year and are trading at single-digit  forward multiples, they're pretty tough to find.   I see them now and then, but I think another  strategy that many investors employ is to search   for businesses that have a high likelihood of  growth, at a higher rate, and for a longer time   than the market gives them credit for. (42:12) These are businesses that are   misunderstood, which can hide some potential  upside in the opportunity. Businesses that I   own like Topicus, Lumine, Aritzia, and Dino  Pulska, I think are really good examples of   this. They just never appear cheap, but the market  always seems to assume growth rates that are below   what these companies are capable of producing. (42:30) This is why having a variant perception is   so important. You can buy an optically expensive  business, but if you have a view on the growth   trajectory of the company that the market just  doesn't share with you, then you're buying it at   a discount to intrinsic value. This is something  that I think Bill Miller really excelled at.  (42:47) His investment in Amazon was a great  example. He knew the business didn't look   attractive on a gap basis, but if you made the  necessary adjustments, the company was growing   incredibly fast. and he felt that Amazon had  the DNA to continue doing so for many years   into the future. And of course, he was correct. (43:03) Now, the mention of Amazon is a good   transition into another one of Nef's points  regarding growth stocks. Don't chase highly   recognized growth stocks. This is an area that  I mostly agree with Nef, but I think investors   like Terry Smith would probably disagree with  him. So, Terry Smith would say that the right   growth stock that is also of high quality can  be bought and held for an extended period of   time and provide tremendous returns. (43:26) For instance, in his book,   Investing for Growth, he mentions two businesses  that are highly recognized growth stocks,   Coca-Cola and Palm Olive. He examined the  returns of these businesses over a 30-year   period spanning from 1979 to 2009. So, in 1979,  these businesses were trading actually pretty   cheaply at a market multiple of 10 times. (43:46) However, if you had bought them,   then you would have earned a much higher return  than the market. So his question was okay how   much could you have paid for these businesses and  made marketlike returns and the answer is 40 times   earnings which is an absurdly high number but if  you have even a wellknown company of just superior   quality they can do things that most businesses  can't and they can provide value at a much higher   rate for a lot longer than investors can imagine. (44:12) So, while I do think that Nef is mostly   right that you probably shouldn't  chase highly recognized growth stocks,   it's more of a product of long-term thinking.  One of his worst experiences of underperformance   was during the Nifty50 years. And this was  when Windsor underperformed the index because   it didn't own many of the high-flying  stocks that were driving a significant   portion of outperformance at that time. (44:33) And while Nef did not enjoy the 25%   loss that his fund had in 1973, which coincided  with the end of the Nifty50, he also realized that   that was the time that was about to breed just  enormous opportunity. So in his 1973 letter to   shareholders, he wrote, "It is my view as Windsor  Funds portfolio manager that there is a period of   outstanding potential appreciation on the horizon. (44:55) As a shareholder with a substantial   portion of my family's resources invested  into the fund, and one who has personally   and financially lived and breathed each good day  and each bad day within the fund since mid 1964,   I hope you await the inevitable eye-catching  appreciation of our fund with the same solid   confidence and eager anticipation as I do. (45:16) But even during the Nifty50 days,   Windsor actually did own a couple more well-known  growing businesses. as they own things like IBM,   Home Depot, McDonald's, Xerox, and Intel.  However, since these businesses tended to   trade on expensive multiples, Windsor Fund never  really achieved meaningful levels of concentration   in those positions inside of the fund. (45:36) So, Nef had a highly amusing joke   here on how investors tend to flock to expensive  investments, even though they usually end with   people losing a lot of money once they tend to  rerate downwards. So, here's a joke. Two hunters   hire a plane to take them to a remote destination  to hunt for moose. Once at their destination,   the pilot warns the hunters that the aircraft  can only accommodate one moose per hunter,   and any more weight could cause a crash. (46:02) So, the pilot arrives 2 days   later to pick up the hunters, who have each  killed two moose a piece. The pilot tells   them that they can't take two moosees each  because of the added risk. The hunters say,   "But last year, we did the same thing.  Remember, we each paid an extra $1,000   and you took off with all four moose. (46:19) Reluctantly, the pilot agrees   and takes off. After an hour, the plane sputters  under the unsafe weight and safely crash lands.   The hunters exit the plane and one asks, "Do  you know where we are?" The other responds with,   "Not sure, but it sure looks a lot  like the place we crashed last year.  (46:38) " So this anecdote illustrates how  investors will just continually chase assets   out of greed even after having a bad experience  in the past. This is why it's crucial to   identify and just learn from your mistakes. If you  just identify mistakes but continue to make them,   then you're making a very grave error.  The sad fact is that most investors   just don't learn from their mistakes. (46:59) Which is why if you go back four   centuries, you can see bubbles forming repeatedly  and they will again into the future. You can try   to protect yourself from participating  by adopting a value investing mindset.   If something is now trading at two times  its average multiple over the last decade,   the multiple is probably unsustainable. (47:17) Let's get back to the importance   that Nef put on less recognized growth stocks  because it's a segment of his portfolio that   was pretty large at about 25% of his career at  Windsor Fund. So, one advantage he saw in these   lesserk known names was that the well-known  names would receive most of the attention.   This meant that certain businesses which might  have been too small or maybe lacked visibility   wouldn't receive that same amount of attention. (47:41) An example in the book was a business   that was called Edison Brothers. So Edison  Brothers was a specialty retailer of women's   shoes. Earnings had improved in the industry at  a steady rate in 1974, but since the market was   obsessed with just these larger growth companies,  it just didn't pay that much attention to the   improvements that were being made at Edison. (48:01) One year after the Windsor fund purchased   it, Edison's share price increased by 137%.  The process of discovery in stocks is truly   powerful. So, Nef had some very interesting  warnings for investors looking at the less   recognized bargain bin. He noted that one in five  of these businesses tended to fail each year. Now,   by failure, he's not saying that they file  for Chapter 11, but rather that they will   see things like their growth rates decline  along with a corresponding PE contraction.  (48:28) So here are some of the specific  attributes that he looked for. 12 to 20%   growth rate with high visibility. High singledigit  P multiples of 6 to9. Dominant or large market   share and well- definfined growth areas in an  easy to understand industry. An unblenmished   record of double-digit historical earnings  growth. A high ROE, high enough market cap   and profitability to qualify for institutional  ownership, a minimal but present Wall Street   coverage, and a 2 to 3 and 12% yield. (48:56) Next is the third part of measured   participation in which Windsor fund invested  which was moderate growers. So these are your   blue chip companies which are relatively boring  investments but offer high yields that Nef really   loved. Think of businesses you know like uh  phone companies, electric utilities and banks.  (49:15) These businesses have dividend yields  that often exceed 7%. And are expected to grow   at rates similar to GDP growth. Add that all  up along with the fact that they generally   trade for mids singledigit P multiples and John  felt that he could get a very good return from   some of those names. Another bonus was that  since these names were boring, they would   often remain attractive even in heated markets. (49:36) So he mentions a few names from the tech   bubble of 1999 that were still trading at yields  of 4 to8%. The other interesting trait that he   noted about moderate growers was that they  provided liquidity during inflection points.   For instance, during the tech bubble, it would  have been challenging to find good opportunities   where you weren't taking part in speculation. (49:56) However, since the bubble would eventually   burst at some point, these moderate growers  allowed Windsor fund to accumulate extra cash   through the yields, which could then be deployed  during any potential market sell-offs. Now,   the final category of measured participation  was in cyclicals. Nest spent a significant   amount of time on cyclicals and frequently  mentions them in his investing career.  (50:15) He understood cyclicals very well,  especially the timing part. Here's how he breaks   down cyclicals. So, earnings pick up and investors  flock to them. Earnings peak and investors abandon   them. The strategy was just to buy cyclicals 6  to9 months before earnings would swing upwards   and then sell them into rising demand. (50:34) The key was to understand and   anticipate the fluctuations in commodity  pricing. So, he presents an interesting   case study in the book on a business called  Pneumont Mining. So this was a company that   was very well diversified across copper, gold, oil  and gas and coal. But he bought it specifically   due to the copper part of the business. (50:53) So in 1981, Windsor's view on   copper was that it was due for a rebound  in pricing from current depressed levels.   The copper capacity wasn't really growing very  fast at a rate of only 3%. So Nef liked Newmont   because they were a lowcost provider and  their customers were all domestic. So here's   what happened after Windsor purchased it. (51:11) There was a quick run up in price.   The price then slid by 40% dropping  15% below Windows initial buy price,   but the fundamentals held, so they ended up  buying more shares a year later. And in 1983,   they made about a 61% return and  sold into strength. So, I personally   find cyclicals to be just too complicated. (51:29) My one obvious cyclical play that I no   longer own is a business called Natural Resource  Partners. I actually still love the business,   and if you want my full pitch, I'll have it linked  in the show notes below. So NRP is simply just   a royalty play on a commodity. In this case, the  commodity is coal. So they own land that mines use   to extract thermal and metallurgical coal from. (51:49) Then they have another piece of mine   that deals in soda ash. And then they have another  piece of a mine that deals with sodash. So their   customers pay a percentage of revenues back to  NRP for use of their land. The thing I liked   most about NRP was that I didn't have to worry  much about cycles. The business just gushed cash.  (52:07) Whether the cycle was up, whether  it was down, they're always cash flow   positive. But it's a different story at  the mines where when supply is highest,   it then lowers the price that they can charge  for their commodity, yet input prices remain   the exact same. So the reason NRP was interesting  was that it was inexpensive and had a very high   proform of cash flow yield in the high teens. (52:28) It had paid down a ton of debt to   get near debtree. And since it was seen as a  coal business, many hedge funds just weren't   interested in the name. If I had to bet, NEF  would have been all over a company like this. So,   even though NRP was involved in cyclical  businesses, they didn't participate in the margin   compression that plagued cyclical industries. (52:46) I like that because it meant that I   could lazily just hold on to my position.  For those wondering, I sold purely based on   non-investing reasons. The business is a master  limited partnership, meaning that I would have   to hire someone to handle all my taxes, and  it just became a little bit too much of a   headache. If I didn't have to worry about any  of that, I would still gladly be a shareholder   of the company. Now, back to cyclicals. (53:07) Nef noted that the market is   knowledgeable about one aspect of cyclicals  and specifically the application of non- peak   PE ratios when these businesses are at the  top of their cycle. The typical growth stock   will have a PE that generally expands  as earnings growth expands. But this   is a death sentence in a cyclical business. (53:25) So what happens typically in cyclicals   is that the PE will decline as a cycle moves  towards its apex. Windsor's strategy was to   gauge what normalized earnings would be at some  point during the upcycle. That way he knew that   when the business reached that normalized earnings  number, he could just sell out. He admitted that   this did sometimes result in selling out too  early, but it also prevented him from having   to ride back down when the cycle was over and  sell at a loss or locking up capital waiting for   the next upcycle. Now, one twist on cyclicals is (53:56) just to find a business that is becoming   less cyclical. One business I think that has  executed on this flawlessly is Apple. So,   Apple up until 2015 was primarily engaged  in hardware sales. However, the sales   numbers and margins were somewhat volatile  depending on consumer demand and peak cycles   of Apple's specific products such as the iPod. (54:17) As a result, Apple's operating margins   fluctuated wildly between, you know,  2 and 10% in the early 2000s. However,   as the business scaled and diversified its  products, its cyclicality decreased and now Apple   boasts rising operating margins all the way up  in the low30s. I mentioned a little earlier that   NEF was both a top down and bottoms up investor. (54:35) So, let's expand a little bit on that.   While Nef liked looking at individual businesses,  I think he got a lot of his ideas from a top-   down approach as well. When you understand just an  industry and its various subtleties, you begin to   really separate yourself from others. If you know  that a positive or negative catalyst is likely to   happen in an industry by understanding it, you can  find a business inside of that particular industry   that might benefit the most that the market isn't  pricing properly. So if you want to understand  (55:03) an industry better, Nef mentions a few  simple questions to ask. Are the industry's prices   headed up or down? What about costs? Who are the  market leaders? Do any competitors dominate the   market? Can the industry capacity meet demand?  Are new plants under construction? What will   be the effect on profitability? And when it comes  to macro, which Nef paid very close attention to,   he was looking at just three signs of excess. (55:27) Capital expenditures, inventories,   and consumer credit. Since Windsor Fund was  pretty widely diversified into 50 plus stocks,   Nef built fact sheets for all of his businesses to  keep track of them. They had pertinent information   like you know the number of shares owned,  their average cost basis, the current price,   historical and projected price to earnings ratios,  historical and projected earnings per share,   historical and projected growth rates,  historical and projected PE ratios, yield,   returns on equity, price projections based on, (55:57) you know, earnings expectations and   upside potential. I think this is a really  good idea to hold on to even if you are a   more concentrated portfolio. This is a really  good idea to hold even if you keep a more   concentrated portfolio. It's nice to have this  information handy in case you want to share some   of this information with others so you can  quickly provide them with important numbers.  (56:18) Next, I want to discuss an area that I  always enjoy breaking down in different investors   that I get to examine and that's their selling  framework. So, NES was pretty simple. Windsor   sold for just two reasons. The first one was  if fundamentals deteriorated and the second   one was when price approached expectations. (56:37) So the first point is pretty simple.   I think any halfdecent investor is likely to  sell once they realize that the business's   fundamentals have deteriorated. Unless  investors are short a stock, there is   just no money to be made holding a stock that  is likely to drop in value. What I always find   interesting is why investors sell their winners. (56:55) And in true value investor fashion,   Nef strategy didn't really surprise me. he would  hold on to some winners for, you know, 3, four,   5 years if the fundamentals remained uh intact  or they improved. However, he also mentioned   that Windsor Fund had periods where they hold  stocks for a month or less. So, similar to this   strategy of selling on the way up with cyclicals,  he employed the same approach with non-yclicals.  (57:19) Since he was very well aware of the price  appreciation potential of all of his holdings,   he preferred to sell into strength. He was  not into the buy and hold strategy seen in   investors who focus more on highquality assets  that can compound for a long period. He also   admitted to not trying to capture market tops. If  a company became fully valued, then there was a   good chance it would not stay in the portfolio. (57:42) The final thing I want to discuss today   is some of Nef's blunders. We all make them. And  the beauty of being a good investor like Nef is   that when you make a blunder or commit an error of  omission, it doesn't harm your investing results.   For instance, in a 1999 roundt discussion  with Barons, Nef said, "It's the valuation,   stupid," when referring to Amazon. (58:03) He warned investors of the   perils of Amazon since its market cap exceeded  the retail sales of all bookstores in the entire   world. It's easy to look back now and see that  this remark clearly shows a misunderstanding   of the business. But when you hear most of  the stories surrounding Amazon at this time,   there was no value investors outside of, you  know, Bill Miller or Nick Sleep in Quesakaria   that thought that Amazon was a value stock. (58:25) Then there are other stocks where when   I was reading this book, I just thought, you know,   why didn't you just hold on to these for  a longer period of time? For instance,   ABC. So Windsor bought the stock around 1978  for five times earnings. This was a business   that he believed could grow earnings at  about 11% and offer about a 4% yield,   resulting in a total return of about 15%. (58:46) Now, over the next year, he ended   up selling and his gains ranged as high as 85%.  Now, that's great, but I decided that I wanted   to dig a little deeper. So, I asked myself, okay,  what would have happened if he just held ABC from   then until ABC was acquired by Cap Cities  in 1985? The numbers were hard to come by,   but I used Perplexity to look them up. (59:08) So, it shows an EPS of about   $4.89 89 in 1978, which was approximately when  Windsor purchased it. By 1974, before merging   with Cap Cities, ABC grew EPS to $6.71. Now, at  a PE of five times, Windsor would have purchased   ABC for about $25. Had they held on to it until  the merger in 1985, they would have sold their   shares for about $118 a share or nearly a 5x. (59:32) So, full disclosure, I couldn't find   any data on share splits, so my assumption  is that there weren't any during this time.   But this example is just an issue that I think  I have with some of the really, really good   value investors that I've researched. They're so  obsessed with price and value that their ability   to value quality becomes completely negated. (59:49) However, as with many things, this could   very well be a result of my own biases. A part  of me truly appreciates the nomad partnership   style of investing, which involves just finding  a few incredible compounders to hold on to and   ride off into the sunset with. But when it comes  to Nef, the results just speak for themselves.  (1:00:05) what he did clearly works. And  even though he went through periods where the   strategy underperformed, he never lost his way  of searching for value. Another thing I really   appreciated about Nef was that he wasn't afraid  to look at growthier type stocks trading above   market multiples if the opportunity was right. (1:00:23) Even though it was a smaller part of   the investing strategy, he knew that growth, even  when priced where he wasn't typically comfortable,   could provide value if he had high conviction  in the company's abilities to continue growing   at high rates. That's all I have for you today on  John Nef, a nononsense dividendloving PE skeptical   investor who quietly beat the market for 30 years. (1:00:45) Want to keep the conversation going?   Follow me on Twitter at irrationalmrts or connect  with me on LinkedIn. Just search for Kyle Grieve.   I'm always open to feedback, so feel free to share  how I can make this podcast even better for you.   Thanks for listening and see you next time.  So, value investors are more concerned with   avoiding losses than with generating profits. (1:01:07) However, most investors don't really   think that way. You know, most of them are  very very focused on the aspect of making   money and less on the chances of them  losing it. So Clarman makes the point   that loss avoidance must be a cornerstone  of a riskaverse investment philosophy.