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Robert Abbott
Robert Abbott
Articles (609)  | Author's Website |

Strategic Value Investing: Bill Miller

A story of the rise, fall and perhaps redemption of a value fund manager

“He was widely hailed as an investment genius and one of the top mutual fund managers of all time, garnering numerous awards from Money magazine, Morningstar, and Barron’s for his investment prowess," wrote the authors of "Strategic Value Investing: Practical Techniques of Leading Value Investors."

But, authors Stephen Horan, Robert R. Johnson and Thomas Robinson also pointed out, “The final investor profiled in the chapter, Bill Miller, CFA, is a cautionary tale.”

This was a not-so-subtle warning because while Miller trounced the S&P 500 for 15 years, between 1991 and 2005, he also was left in its dust between 2006 and 2011. In 2008 alone, his Legg Mason Capital Value Trust dropped more than 55%, while the S&P 500 was down 38.5% (the fund is now named ClearBridge Value Trust (LGVAX)).

In 2002, Miller was the subject of the book, “The Man Who Beats the S&P: Investing With Bill Miller,” by Janet Lowe. She summarized his investment style this way:

  • He does not try to predict market direction.
  • He looks for franchise value.
  • When determining value, he is willing to make forecasts but doesn’t give them a lot of weight.
  • Miller looks for investment ideas everywhere.
  • There must be a margin of safety.
  • He doesn’t often make trades.

With that, the authors asked why Miller’s performance from 2006 was so different from his performance from 1991 to 2005. They came up with four reasons for the difference:

  • Investing in the tech sector.
  • His “philosophy on probability.”
  • Concentrated positions in certain industries.
  • Overconfidence.

Starting with the tech sector, Miller was an early and enthusiastic investor in companies such as American Online, Google (now Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL)), Dell (NYSE:DELL) and Amazon (NASDAQ:AMZN). Because of these purchases, some observers considered him a growth rather than a value investor. And, the authors suggested we should give him credit for his timing in this sector because he sold most of tech holdings just before the dot-com bubble burst.

On probability, Miller thought that a few big winners would make up for any losers. Apparently, he was wrong more often than most money managers, but also scored bigger wins than they did. The authors explained that this strategy depends on stocks not being correlated with each other, yet Miller made big bets on many financial firms at the same time in the run-up to the 2008 financial crisis.

While his timing with tech stocks was impeccable, he was not so perceptive about his concentrated position in financial equities as the financial crisis loomed. Even as the sector was crashing in September 2008, he was buying 30 million more shares in Fannie Mae (FNMA), Freddie Mac (FMCC) and other financial names.

According to the authors, an investment manager needs confidence, but a manager who is overconfident can get into trouble. Miller remained confident for too long and thus got into deeper trouble by buying more financial assets as the sector kept going down. The Wall Street Journal reported him as saying that he would stop buying more only when a stock's price fell so far that "we can no longer get a quote."

Follow-up: The guru is no longer with Legg Mason, and now operates his own Baltimore-based firm, Miller Value Partners, which he manages with his two sons. This Morningstar chart shows the ups and downs of Miller Value’s Opportunity C (retail (LMOPX)) over the past decade:

Strategic Value Investing GuruFocus Miller Opportunity Fund

Conclusion

Like the other eight gurus profiled in "Strategic Value Investing: Practical Techniques of Leading Value Investors" by Stephen Horan, Robert R. Johnson and Thomas Robinson, Miller has taken the value path by following, to some extent, the teachings of Benjamin Graham.

While at Legg Mason, he subscribed to the margin of safety concept pioneered by Graham; unlike Graham, he was not a frequent trader, preferring instead to stick with selected stocks in concentrated portfolios. Unlike most value investors, he tried to time the market, successfully before the dot-com crash and unsuccessfully during the financial crisis.

Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.

Read more here: 

Strategic Value Investing: Weitz and Brandes 

Strategic Value Investing: John Neff 

Strategic Value Investing: Ruane and Tweedy, Browne 

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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