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Bram de Haas
Bram de Haas
Articles (457)  | Author's Website |

Bill Miller: Stocks Will Keep Going Up

A review of investor's 1st-quarter 2019 letter

April 22, 2019 | About:

Bill Miller of Miller Value Partners (Trades, Portfolio) just released his first-quarter 2019 commentary. I read Miller every quarter because I read most "value"-oriented investors' commentaries if the investors tend to be focused on fundamentals and have a pessimistic outlook.

It is both Miller's biggest fault and greatest strength that he tends to be positioned according to a bullish outlook. Below are a few of the most interesting paragraphs from his commentary. Of course, I don't pretend to know more than the highly accomplished Miller, but I enjoy his letter because it draws me out of my filter bubble. All emphasis is mine:

"Another exploitable behavior that has harmed investors’ results for the past decade is the attempt to forecast the twists and turns of the US or global economy, usually on a short-term basis, and to adjust portfolios accordingly. The motivation here is to try to avoid a recession and bear market. I agree with the remarks of Peter Lynch, Fidelity’s great portfolio manager, who said he did not spend 15 minutes a year trying to forecast the economy. He said he believed that more money was lost worrying about or preparing for recessions than was lost in the recessions themselves. This was particularly evident during the euro crisis of 2011, the so-called Taper Tantrum of 2013, the recession scare at the beginning of 2016, the sharp drop in the fourth quarter of 2018, and again in March of this year. In each case, the stock market sold off sharply because of macroeconomic fears, and in each case those fears proved erroneous. The market reversed course as soon as investors had adjusted their portfolios for what never happened. Trying to surf the market according to the flow of macro data added no value but did hurt performance."

There is some truth to this though. There are few strategies that benefit from constantly going to the sidelines as soon as there are signs of danger in the market. You are always getting out while already having suffered some losses, and often you'll be forced to get back in while the market is already much higher than your exit levels.

However, in a sense, it is also a simplistic argument. Yes, you lose some money trying to dodge deep drawdowns that don't materialize. But if you are consistently dodging and weaving (in a way that doesn't kill you on transaction costs), you may suffer much, much less in the big drawdowns such as 2008. These large drawdowns destroy track records (as Miller knows) and you can do well by avoiding them and making some money otherwise.

Once the big drawdown comes through, those who scale out on the way down have more money left to scale back in on the way up. You'll never pick the bottom exactly right ,but you will be able to deploy more money when there are bargains everywhere. This optionality has some value as well.

"What has worked in this bull market if macro forecasting is a fruitless (for most) endeavor? An effective strategy, one that we have employed, is creative non-action, what Taoists call Wei Wu Wei, doing not doing. No one has privileged access to the future, a future which is largely unknowable, except in broad, probabilistic outlines. It is much easier to find companies where expectations are low, free cash flow yields are high, return on capital is solid or improving, which have a sustainable competitive advantage, and where management allocates capital effectively, than it is to forecast the economy and try to create a portfolio that will do well if that forecast is correct, which it mostly won’t be. Much better to focus on what is happening now and avoid trying to forecast the unknowable."

I'm a bit of a spiritual barbarian, so I never heard of Wei Wu Wei before, but I love the concept that reminds me of Charlie Munger (Trades, Portfolio)'s "sitting on one's ass." Doing nothing is likely one of the hardest things to do as an investment manager.

Miller likes companies where:

  • Expectations are low.
  • Free cash flow yields are high.
  • Return on capital is high.
  • There is a sustainable competitive advantage.
  • Management allocates capital effectively.

That doesn't sound easy to me at all. I've looked at Miller's top three holdings (more about those below). But it is hard for me to believe he thinks they meet all five criteria. Obviously, they meet several.

"More generally, GDP is at an all-time high, corporate profits are at an all-time high, margins are at an all-time high, cash flows are at an all-time high, dividends are at an all-time high. Unemployment is at a 50-year low, initial claims for unemployment are at lowest level relative to the population in history, household net worth is at an all-time high, consumer balance sheets are fine, the savings rate at 6% is solid. There are more economic time series that are likewise in good shape, but the picture is clear. Usually when the economic data is that positive, stocks are at an all-time high, but they are not (yet). The surprise would be if they don’t surpass the September 2018 highs. Stocks are in a bull market and bonds in the US are in a benign bear market that began in 2016 with yields just under 1.4%."

Miller views these characteristics as bullish:

  • Corporate profits are at an all-time high.
  • Margins are at an all-time high.
  • Cash flows are at an all-time high.
  • Dividends are at an all-time high.
  • Unemployment is at a 50-year low.

I view them as bearish, though. Corporate profits and margins tend to revert to the mean (in other words, decline), and I don't see any credible reason why it would be different this time.

Admittedly, I like high free cash flows because they mean companies are likely not making too many dumb investments, and they could help shareholder value creation.

High dividends are a result of the aforementioned.

Low unemployment is worrisome because we are finally seeing some wage inflation, and this could get serious now.

"My former Legg Mason colleague Ken Leech, chief investment officer of Legg Mason’s big bond subsidiary Western Asset, once described my investment outlook as varying between bullish and very bullish. It was a good line, although not entirely accurate, but accurate enough. Stocks have gone up on average about 70% of the years since World War II. If recessions or bear markets cannot be accurately forecast, then being bullish has a 70% probability of being correct unless valuations compared to returns available elsewhere are unattractive, which is certainly not the case now.

The path of least resistance for stocks remains higher."

I'm a bit disappointed with this line of thinking by Miller. I believe it is the only statement he made that I would consider false. Miller very, very simplistically thinks only about the frequency of the event, but forgets to take magnitude into account.

Imagine if markets go up 70% of the years by 12% on average, but they get cut in half the other 30% of the time. In that case being bullish is bad even though you'll win most of the years. The problem is you get taken to the cleaners in the other years. This is just an example, consider that we are 10 years into an expansion, profit margins are at all-time highs, the CAPE ratio has been higher only in 1999, the total stock market value to GDP is 142% and the Fed has almost no room to lower interest rates. Would you say a drawdown would likely be smaller or larger in magnitude than has historically been the case?

The path of least resistance may be up. But sometimes the most difficult paths take you to the most beautiful places.

Miller's top three positions are:


I don't believe expectations for Amazon are low, but perhaps Miller means they are still too low. It doesn't really have high free cash flow yield but if you adjust them, I can buy into this. I totally agree it is an amazing run business with best-in-the-world capital allocation and a clear competitive advantage.

Genworth Financial (NYSE:GNW)

This is an M&A event with a huge spread. No one believes it will go through. Genworth is being acquired by a Chinese firm called Oceanwide. So it is definitely a contrarian position. Otherwise, it is a crappy insurance business. If the deal doesn't go through, it may struggle to survive.


RH is a home furnishings retailer. This is an incredibly contrarian position, as this section of retail is very out of favor. It has a very strong cash flow yield, and it does not operate just retail stores. The company owns a number of e-commerce portals like rh.com, restorationhardware.com and others.

See Miller's portfolio here.

Disclosure: no positions.

About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

Visit Bram de Haas's Website

Rating: 5.0/5 (3 votes)



Valuator - 1 year ago    Report SPAM

Thank you! I was trying to remember which guru got destroyed by the Great Recession.

Is he or Cramer right before the dot com peak worse? I can never decide.

I'm looking to devour many value investors, this recession, but the fattest will be growth. Good thing there are companies like PG at dot com valuations that can kill two birds with one stone.

Jtdaniel premium member - 1 year ago

Bill Miller repeatedly averaged down into over-leveraged financials, including Bear Stearns and AIG in the worst stage of the 2007-2008 financial crisis. Prior to that he had outperformed for 15 years. Leverage cuts both ways.

Williama premium member - 1 year ago

This is the best article on the market that I have seen in a long time. Nicely nuanced, full of solid facts about the market, restrained and civilized. Thanks Bram.

Williama premium member - 1 year ago

This is the best article on the market that I have seen in a long time. Nicely nuanced, full of solid facts about the market, restrained and civilized. Thanks Bram.

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