Bill Miller, who heads up Legg Mason's (NYSE: LM) Value Trust mutual fund, was once thought to be an investing mastermind. Heading into 2006, Miller had an amazing 15-year streak of beating the performance of the S&P 500 index -- which at the time ranked right up there for me with Takeru Kobayashi's six-year run winning Nathan's Hot Dog Eating Contest.
However, the financial crisis brought that to a screeching halt as major investments in financial companies such as Citigroup (NYSE: C), Countrywide Financial, and Freddie Mac torched the Value Trust's portfolio.
Miller has handily outperformed the S&P so far this year and is preaching up a bullish storm in his recent market commentary. Should we bother listening?
Don't listen to him!
As has been said in the past, some of Miller's outstanding 15-year streak stemmed from the year-end timing lining up well for him. Timing or not, though, there's no mistaking the fact that over the past one, five, and 10 years, Miller's Value Trust has underperformed the S&P 500. On an absolute basis, the fund has produced losses for investors over all of those time periods.
Was he lucky? It sure seems like a real possibility. Many academics and investing experts readily dismiss Warren Buffett's amazing success as a very long, very unlikely streak of luck, so should we allow Miller anything more?
Besides, it's not like Miller suddenly got bullish -- after Bear Stearns collapsed, he claimed "the worst is behind us," and back in January, before stocks had bottomed out, he quipped "this too shall pass."
Listen to him!
Did you really think I was going to bury Miller that quickly? Given his lackluster performance over the past decade, I'm not sure that Miller makes the top of my "investor superheroes" list. However, the Value Trust has produced annualized returns of almost 11.4% since Miller took over in 1990, versus closer to 5% for the S&P over that period, so he's obviously done something right. Besides, even if Miller's bullish conclusion is wrong, he may bring some useful insights to the table.
Miller begins his commentary by sharing that "the preponderance of the evidence supports the view that the worst has passed in the market and the economy." He notes that the economy appears to have vastly slowed its decline, if not stabilized, by the end of the second quarter. He also points to the fact that economists have been raising their growth expectations, and many now expect growth in the second half of the year.
From an equity market perspective, he highlights the fact that the "extreme risk aversion" that we saw late last year and early this year has disappeared. This has already resulted in a jump in the equity markets, but Miller believes there is a lot of money sitting on the sidelines in money market funds that may start moving back into the stock market.
What I found most interesting about Miller's remarks, though, was some research he cited from GaveKal Research about the rhythm of comments during recessions and subsequent recoveries. Miller says:
The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won't work. When the markets start up and the economic forecasts begin to be revised up -- where we are now -- the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained.
Basically this would be that classic "wall of worry" that stock markets seem to love climbing over.
Where he's put his money
If there's one thing that you have to respect, it's that Miller most definitely has his (fund's) money where his mouth his. As he's preaching economic recovery, he's got darn near 70% of his fund invested in technology, financials, and consumer discretionary stocks -- three sectors that are most at risk of going splat if we don't get traction on a recovery path.
Miller is known for an exceedingly low turnover rate in his fund, and longtime holdings such as eBay (Nasdaq: EBAY) and Amazon.com (Nasdaq: AMZN) continue to occupy top spots in his portfolio. He's also found some new names that he likes over the past year, and has been cranking up the Value Trust's ownership stake in State Street (NYSE: STT), CME Group (NYSE: CME), and Microsoft (Nasdaq: MSFT).
So what do you think? Should we still bother paying attention to what Bill Miller has to say? Chime in with your thoughts in the comments section below.
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