Legends Value

Why do a small number of money managers consistently outperform the markets over the years while the majority fails? Are they smarter? Are they better able to predict change in the market? Do they know some secret that evades the masses?

The answers are some are smarter. Others do possess superior methods. But the simpler truth is that they do much better than the market by being very different from the market. The stocks they buy share characteristics that are different from the characteristics that define the market as a whole.

For example, imagine assembling the United States’ best basketball team. You would likely focus on players with superior height, speed, and experience. Imagine how different this team of 10 players would look from 10 random people pulled from any street corner. Are they similar? Not in the least. The factors that define your basketball team would be much different from the factors that define the average person.

To assemble a winning portfolio, great money managers do the same thing. They focus on factors that are different from the average stock and then diligently follow their discipline year after year. At NorthCoast Asset Management, we have dissected the portfolios of the best value managers over the last thirty years to determine what factors they favor. We then use those factors to construct a superior value portfolio that will consistently filter the market for stocks that have those winning characteristics.

John Neff: While serving as portfolio manager of the Vanguard Windsor Fund from 1964 until his retirement in 1995, Neff delivered an annual average return that exceeded the rate of return of the S&P 500 by more than 3%. Neff believes that judgment and fortitude are prerequisites for investment success. Judgment singles out good investment opportunities and fortitude helps you live with brief downturns while the rest of the world jumps ship. Though stocks changed in his portfolio over the years, the strict adherence to low p/e multiples, strong dividend growth, and solid earnings and sales growth served him well and helped move him into the pantheon of legendary investors.

Benjamin Graham: Largely considered to be the first proponent of value investing, Graham’s thinking has guided such great investors as Warren Buffet and John Bogle. Graham recommended that investors spend time and effort to analyze the financial state of companies and advised that suitable investment exists when a company is available on the market at a price which is at a discount to it's intrinsic value. This strategy focuses on companies that have reasonable earnings growth prospects yet carry price-earnings multiples that are below their peers.