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A Simpler Explanation For Bill Miller's Losing Streak

by: David Merkel May 14, 2008    
David Merkel

David Merkel

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I sympathize with Bill Miller; no one likes to have a losing streak. That said, by my calculations, he is now behind the S&P 500 over the last ten years.

I want to offer a simple explanation as to why Bill Miller has done so poorly recently. First, he has bought growth companies — companies where the valuation is critically dependent on future earnings growth. Think of Amazon (a success) or Yahoo (a failure). Second, he avoided cyclical companies that benefit from global economic growth, that is, energy and basic materials.

Bill Miller did well in the era where he used simpler valuation metrics, before he moved onto metrics that demanded more from future growth of earnings. Since that time, he has underperformed, and deservedly so. He has neglected the core idea of value investing, which is the margin of safety. By buying companies that will get crushed if growth targets are not met, he has invited his own troubles.

And, for someone who prizes deep thinking, I’m afraid he missed the forest for the trees. (Tsst… MM is a bright guy, I like reading him, but what does he really add?) Better to spend a little time looking at the world, and adjust the investing accordingly, than to insist that a bunch of US-centric growth companies will outperform. Cyclical growth is real growth in this environment.

I hope Bill Miller turns it around because many friends of mine are part of the Baltimore money management community. As Legg Mason shrinks, so do opportunities here. But to turn it around, it means a return to down and dirty value investing, and an eye toward analyzing what sectors will do best from a global context.

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This article has 8 comments:

  •  
    May 14 07:28 AM
    David: From past Bill Miller contributions to Seeking Alpha, I don't think you'll find many Bill Miller fans. Most comments are very negative. His track record over the past 5-8 years vs S&P is pretty dismal considering investment fees. It also appears he is married to too many financials to the detriment of Legg Mason investors. Apparently he keeps smiling because he make very good money.
    Reply
  •  
    May 14 08:01 AM
    A long time ago, I thought that Harry Chapin and Cat Stevens were the only musicians worth listening to. A few years back, I thought that "value investing" was the only course towards success in the markets. I grew out of both phases. Maybe David will one day realize that even though value is an effective technique and David's technique of choice, it isn't the be-all and end-all of market navigation.

    I'm not a Bill Miller fan, but it would be nice to see some of the assertions made here backed up, like BM's alleged "style drift," when it occurred, and performance before and after (relative the benchmark index, since that rules for the institutional players that would invest with BM).

    This is one of the sloppiest pieces I've seen from David in some time.
    Reply
  •  
    May 14 08:10 AM
    David:
    I have followed your intelligent writings since your days when you wrote for TheStreet.com & Realmoney.com. I have learned alot from your writing and from my 15 years of investing experience.
    I have nothing personal against Bill Miller. However, he is the perfect example of what is wrong with the mutual fund industry.

    David wrote:"Bill Miller did well in the era where he used simpler valuation metrics, before he moved onto metrics that demanded more from future growth of earnings."

    That is the textbook rationalization.

    David, Bill Miller did well because he managed stocks thru the greatest bull market of our time, when, as the saying goes "A monkey throwing darts at a board made money."

    Yes, it is as simple as that.

    Truly good managers of shareholder's money shine thru during bear markets, or as I call them, not so good markets. Miller's fund may have beat the S & P during the 2000-2003 bear market, however he did so by just a hair or so each year. So he got paid millions for losing almost as much as the S & P 500 during that time, something like 40%. That is not asset management. You couple that with the pump monkey enablers such as Morningstar, and the media, and you have a recipe for disaster.

    Look at the media, they use terms like "legendary" to describe this man. That is an embarrassment. Bill Miller's fame is nothing more than hype, enabled by careful marketing and salesmanship. Anyone who thinks that Morningstar is an independent source of information with no conflicts of interest needs to wake up. But that is a topic for another day.

    Miller's fund is almost exactly where it was back in 1998. There is no excuse for that. None. The man has been paid millions, has millions, owns his yacht, etc. and thats good for him. His fund has a 10 yr annualized return of just 4%, and that is before inflation. Again, no excuse.

    Miller is given way to much credit for a lousy job and should be returning money to shareholders out of his own pocket for his inexcusable, over-hyped performance.

    I don't own LMVTX nor have i ever owned it.
    Reply
  •  
    May 14 01:16 PM
    I have an even simpler explanation. Bill Miller's strategies worked until they didn't!

    Try reading A Random Walk Down Wall Street by Burton G. Malkiel and Fooled by Randomness by Nicholas Taleb for starters. Only idiots buy mutual funds and anyone here who thinks they can really beat the market over any extended period of time is delusional. Try Vegas why don't you.
    Reply
  •  
    May 14 03:01 PM
    Someone should probably tell DC Housing Bear that home prices in the Maryland-Virginia area move in a "random walk" and trying to predict where they'll go next is "delusional."...

    Muhuhahahaha!
    Reply
  •  
    May 15 05:23 PM
    So I take it you've made millions shorting home building stocks is that right No DooDahs? People are entitled to guess at what ever they want, making money from it is what we're talking about here.
    Reply
  •  
    May 16 10:13 AM
    One can measure how much "deep thinking" is appreciated by the esteemed author, by the "deep thinking" put into his analysis. You out do yourself with every new post
    Reply
  •  
    Sep 08 01:35 PM
    Despite all his rage, Bill Miller is still just a monkey in a cage.

    Nice trade on FRE. Loser.
    Reply
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