"Don't you read the papers?"
Bill Miller is getting pretty tired of that question. Fortunately, he has a pretty good response up his sleeve.
Do you at least watch Mad Money?
After a rough two-year stretch, Miller -- who famously beat the market for 15 consecutive years at the helm of the Legg Mason Value Trust Fund -- has of late had numerous clients call his investing prowess into question.
"It has been explained to me that it was obvious we should not have owned homebuilders, or retailers or banks, and that I should have known better than to invest in such things," he wrote in his second-quarter shareholder letter. "It was also obvious that growth in China and India and other developing countries would drive oil and other commodities to record levels and that related equities were the thing to own."
Trust me, that stuff was not obvious
As one of the few investors who actually did see this credit crisis coming, believe me when I say that the events of the past two years are obvious only in the rearview mirror.
Suppose you suspected back in 2006 that lax mortgage underwriting standards and risky new loans would result in increased foreclosures and decreased discretionary income. It was still far from a foregone conclusion that this would lead to the complete collapse of the securitization markets.
Similarly, even if you fully comprehended the tremendous commodity demand from China and India, was $147 oil really so inevitable in early 2007 when a barrel barely fetched $50? And could you have correctly predicted that Transocean
Miller's five obvious truths
That's why Miller's simple response to his clients' question is so effective. "While I am quite aware of our mistakes, both of commission and omission, when I ask what is obvious NOW, there is little consensus," he wrote. "If there is something obvious to do that will earn excess returns, then we certainly want to do it."
Have homebuilders hit bottom? Are financials doomed forever? Can energy rebound? What's in store for NVR
But that doesn't mean that Miller is powerless to profit from the panicked market environment. In fact, in his shareholder letter, Miller identified five obvious truths that the majority of the market seems to have missed:
- The credit crisis will end.
- The housing crisis will end.
- The U.S. consumer will resume spending.
- The U.S. economy will adapt and grow.
- Stock prices will be higher in the future than they are now.
What's obvious now
Allow me to submit another "obvious" insight: With the stock market punishing many quality companies over concerns that may turn out to be overblown and short-term, now is a great time to buy shares of companies with strong financials, dedicated leadership, and great growth prospects.
Take Apple for example. Led by founder Steve Jobs, this $85 billion icon is arguably the most innovative company around. Apple's iPods and Mac computers have resonated strongly with consumers, as has the uber-cool iPhone. Thanks to an unrelenting focus on enhancing user experience, I expect this to remain the case, despite the threat of increased smartphone competition from the likes of Research in Motion
Apple shares are down over 50% from their 52-week high, but I believe investors are over-reacting to short-term concerns. The company boasts an impeccable balance sheet, with over $20 billion in cash and no debt. And the current share price is significantly discounting any future innovation that Apple's engineers might unleash.
As David Gardner noted when he recommended Apple to Motley Fool Stock Advisor subscribers, "will Apple really just be selling its current products five years from now? I can't imagine so. It's one of the best design firms in the world, and it takes fast-evolving technology and turns it into products that people have to own. That's what will keep this company on top -- and that's how Apple will continue to surprise us."
An obviously valuable service
Motley Fool co-founders Tom and David Gardner have identified plenty of promising companies that, like Apple, have strong financials, dedicated leadership, great growth prospects, and a discounted share price. So far, this strategy has paid off for Stock Advisor subscribers: Since 2002, the brothers' picks are up 15%, versus a loss of 17% for the S&P 500. To see all of Tom and David's recommendations, as well as their best bets for new money now, simply click here for a free 30-day trial.
This article was first published Aug. 16, 2008. It has been updated.
Rich Greifner obviously wishes he'd bought Apple back in 2004. Rich does not own shares of any company mentioned in this article. Apple is a Stock Advisor recommendation. Nokia is an Inside Value pick. Google is a Rule Breakers recommendation. The Fool has a disclosure policy.
