Chapel Hill, N.C. (MarketWatch) — Charles Allmon, one of the most successful investment newsletter editors of the 1960s, 1970s and 1980s, died earlier this month at age 94.
To be sure, few millennials knew who Allmon was, since in 2008 he discontinued his newsletter, Growth Stock Outlook. But that’s a shame because there are several powerful investment lessons to be drawn from his career.
Allmon was a close follower of Benjamin Graham, the father of fundamental analysis, who advocated buying only stocks that trade for significantly less than their net worth and holding them for however long it takes for the rest of the equity market to appreciate their true value. Though Allmon mildly relaxed Graham’s criteria to favor faster-growing companies, he remained far closer to the value end of the growth-versus-value spectrum than virtually any other investment adviser I monitor.
Consider Allmon’s response in the late 1980s when the number of stocks satisfying his criteria of value shrunk to near zero. Unlike many of his fellow value advisers, who became “closet” growth stock advisers, Allmon refused to give up his principles to cater to an investment public increasingly bent on turning a quick profit. As a result, he built up a cash position that, with few exceptions, remained at or greater than 75% until he discontinued his letter in 2008.
Though that large cash position didn’t make Allmon very popular in the go-go 1990s, the stellar performance of the few stocks that he continued to recommend, along with the power of compounding, kept him near the top of the Hulbert Financial Digest’s performance ratings. When he discontinued his letter in 2008, he was tied for second place among HFD-monitored services for risk-adjusted performance over the 28-year period.
I draw three investment lessons from Allmon’s investment career:
- Slow and steady really can win. Though Allmon’s conservative approach was well-behind a buy-and-hold strategy at the bull market peaks of March 2000 and October 2007, the bear markets that followed each of those tops pulled the broad market averages back down below the return of Allmon’s portfolio. Ask yourself: Is the thrill of being ahead of the market at bull market peaks enough to overcome the agony of being behind at bear market troughs?
- You don’t need to incur huge amounts of risk to produce stellar long-term returns. This, of course, runs counter to the conventional wisdom, but Allmon’s record shows that it isn’t always true. The HFD calculates that the annualized return of Allmon’s portfolio was 1.7 percentage points less than the broad market averages, and 55% less volatile (or risky). Are 1.7 percentage points of annual performance a fair price to pay to cut risk by more than half? The judgment of modern portfolio theory is “yes,” as judged by his risk-adjusted return being well ahead of the market.
- The third lesson of Allmon’s investment career has to do with the power of compounding. Though Allmon’s returns in any given year were never at the top of the rankings, at the same time he never lost money in any calendar year. As a result, his very conservative strategy continued to propel his portfolio’s worth ever higher, even while the market gyrated wildly above and below.
Is there an investment letter editor who continues Allmon’s tradition? It’s not clear. Your best bet might be Hendershot Investments, the money-management firm to which Allmon transferred his accounts when he retired in 2011. It is headed by two former employees of his: Ingrid Hendershot and Susan Christ.
Following in Allmon’s footsteps won’t be easy, however. One-time MarketWatch columnist Peter Brimelow has described Allmon’s approach as “rifle-shot,” distinguishing it from more mechanical approaches that could be readily duplicated: Out of the myriad stocks that appear on the horizon, Allmon would pull the trigger when he spotted one through his rifle scope that — for an at least partially inscrutable combination of quantitative and qualitative reasons — looked attractive.
Allmon himself claimed almost apostolic succession from Graham, however. In his book “Wall Street Gurus,” Brimelow quotes Allmon as saying: “Graham called me on the phone, as I recall in 1969, maybe 1970. He said, ‘I’ve got a copy of your Growth Stock Outlook and I’ve been very intrigued by what you’re doing here. How are you spotting these values?’ I said, ‘Mr., Graham, I’m taking a lot of your own criteria and trying to crank in my own for value relative to growth potential.’ And he said, ‘Well, it’s a very intriguing idea. I think if I were young again, that might be the course I would take. It sort of speeds things up a bit.’ ”
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