📖John Neff

Selling Discipline

🌿 Intermediate★★★★☆

Sell when stocks reach fair value or investment thesis breaks.

💬

Sell when a stock reaches fair value or the thesis breaks. Dont fall in love with winners.

— John Neff on Investing，1999

🏠 Everyday Analogy

Valuation is like buying a house: the asking price reflects mood, but true value comes from structure, location, and long-term utility. Good assets still need sensible prices.

📖 Core Interpretation

In Selling Discipline, John Neff focuses on the gap between price and value. Returns come from paying less than what a business is worth, not from guessing short-term market moves.
💎 Key Insight：Unlike buy-and-hold zealots, Neff believed in disciplined selling when stocks reached his price targets or fundamentals deteriorated. Holding winners too long means giving back gains when valuations become stretched. Emotional attachment to successful investments clouds judgment and prevents redeployment of capital to better opportunities. He established clear sell criteria before buying: specific price targets based on fair value calculations and fundamental triggers indicating thesis deterioration. This discipline ensured he captured gains and avoided the common mistake of riding winners back down.

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❓ Why It Matters

Ignoring valuation turns even good companies into poor investments. Overpaying compresses future returns and leaves little margin when assumptions are wrong.

🎯 How to Practice

Estimate intrinsic value with conservative assumptions, set clear buy ranges, and act only when price offers a meaningful discount with acceptable downside.

🎙️ Master's Voice

I do not buy stocks; I buy earnings.
Neff focused on what he was actually purchasing: a stream of future earnings. The stock certificate was just paper; the earnings power was the real asset. This mindset kept him focused on fundamentals.

⚔️ Practical Guide

✅ Decision Checklist

  • What earnings am I buying?
  • Are earnings sustainable and growing?
  • What am I paying per dollar of earnings?

📋 Action Steps

  1. Analyze earnings quality and sustainability
  2. Calculate price per dollar of earnings
  3. Compare earnings growth to P/E ratio

🚨 Warning Signs

  • Ignoring earnings in favor of other metrics
  • Buying stocks with declining earnings
  • Paying too much for earnings growth

⚠️ Common Pitfalls

✕Confusing a low price with true cheapness
✕Using one metric without business context
✕Overly optimistic assumptions that erase margin of safety

📚 Case Studies

1
Trimming Winners Before Black Monday (1987)
Neff reduced holdings in overvalued blue chips as valuations stretched in mid-1987, emphasizing his selling discipline based on P/E and earnings outlook.
✨ Outcome：When Black Monday hit, Windsor Fund losses were cushioned, allowing redeployment into cheaper quality names.
2
Exiting Overvalued Retailers (1991)
After a strong late-1980s run, Neff sold or cut retail names whose prices outran their earnings power, despite continued market enthusiasm.
✨ Outcome：Subsequent multiple compression hurt many retailers; Windsor under Neff avoided larger drawdowns and rotated capital into better risk‑reward stocks.

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