Everyone talks about buying low and selling high. But according to John Neff, the legendary portfolio manager, you have to have some "good old- fashioned stubbornness" to live up to that maxim.
As one of the quintessential contrarian investors, Mr. Neff built his career sticking with strategies when others lost their nerve. It was his intransigence, he says, that helped him resist bailing out of Citicorp when the stock spiraled to single digits in the winter of 1991.
"A friend of mine once said: 'Tell John Neff yes and he'll say no; tell him black, and he'll say white,'" said Mr. Neff, who for 31 years managed the Vanguard Windsor Fund, which is now worth $15.8 billion.
Mr. Neff had 37% of Vanguard's portfolio in the flagging money-center bank, which was rumored to be on the verge of closing its doors.
One shareholder wrote twice threatening to redeem his stake in Vanguard if the fund continued to hold its Citicorp position, recalled Mr. Neff, who retired from the fund last year.
"I didn't care what size position he had," said Mr. Neff. "I told him to redeem it, then. I wasn't selling Citicorp."
Mr. Neff, 64, has spent more than half of his life searching for and investing in companies with sound balance sheets and low price-to-earnings multiples.
Mr. Neff is writing a book on the value-investing strategy due to be published by John Wiley & Sons in early 1998.
The strategy made him a lone supporter of banks during the early 1990s, when the industry suffered its worst crisis since the depression.
"I considered him a friend of bank stocks," said James K. Schmidt, who manages the Hancock Mutual Funds. "Banks have often been underappreciated by institutional investors, but Neff - because of this value orientation - picked up on the concept that banks are worth more than they have been selling for."
Frank Anderson, bank analyst at Stephens Inc., of Little Rock, calls Mr. Neff one of the best portfolio managers in history.
"In 1990, the banking system was in shambles. None of us in the analytical community was prescient (enough) to call the exact turn," Mr. Anderson said.
Within a year of Mr. Neff's disagreement with the shareholder, Citicorp's stock turned around. This month, the money-center's stock broke through the $100 ceiling, adding new luster to Mr. Neff's already bright legacy.
Although Citicorp, like other banks, was sustaining serious losses in real estate, the company still had strong franchises overseas, argued Mr. Neff.
"In other words, Wriston was wrong on sovereign credit, but he was right on emerging countries," he said, referring to former Citicorp chairman Walter Wriston. "As a matter of fact, half of the company's earnings are in emerging countries.
Mr. Neff also made substantial gains with other once-languishing commercial banks, such as BankAmerica Corp., NationsBank Corp., and First Union - companies whose stocks have been soaring to new highs all year.
Investors can find "good value" in companies that have low multiples and show strong earnings, said Mr. Neff, now a consultant at Wellington Management Co., which manages some of Vanguard's funds. The idea, he said is to "sell on strength and buy on weakness."
Mr. Neff remains optimistic about bank stocks, although he is quick to note that they are "not great stocks, but good stocks.
"Banks have had a super run," he said. "But the bone has been picked pretty good."
He recommends Chase, BankAmerica, and First Union and is still bullish on Citicorp - even at its current lofty price.
"Citicorp stock price is high in comparison to its depressed levels in the '90s," Mr. Neff said. But at its current price/earnings multiple (13.23 at the close of trading Tuesday) it still trades at a discount to the average stock, which trades at a multiple of about 16, he said.
"He hung in there with Citicorp when everybody was pounding out of the stock," said Richard Bove of Raymond James & Associates. "The key thing is the speed which his mind operates and a quick grasp of information."
Charles T. Freeman, who has known Mr. Neff for 27 years and now manages the Vanguard Windsor Fund, agrees that good buys still remain in the sector - although only 9% of his portfolio is in financial stocks.
Mr. Freeman said Citicorp's overseas businesses are the envy of the marketplace. "Everybody would like to be where they are in the emerging markets."
Mr. Freeman continues to follow the Neff philosophy, saying: "We're opportunistic on the buy side, disciplined on the sell side, and willing to concentrate where it makes sense."
Mr. Neff's biggest concerns about the banking sector are acquisitions and deteriorating credit quality.
Many banks pay too much in acquisitions, which hurts their growth rate, he said. "What glories are there in being a national bank other than to puff up your own ego?" he asked.
"Obviously many banks have very good critical mass, but when you go into contiguous territory, where you don't have any overlapping territory, you're not getting any real critical mass, you just become a big enterprise."
When Edward Crutchfield, the chairman of First Union, told Mr. Neff about the acquisition of New Jersey's First Fidelity Bancorp., he knew Vanguard's management would disapprove, recalled Mr Neff.
"Ed Crutchfield said to me, 'I know you're not being facetious because you're not smiling,'" said Mr. Neff. "And I wasn't."
"First Fidelity had good products," Mr. Neff explained. "But that only brings the company to ground zero, because you still have to contend with the dilution."
Mr. Neff said he reduced his holdings considerably in First Union shortly after the acquisition.