After an amazing 15-year run of beating the S&P 500 index, legendary value investor Bill Miller and his Legg Mason Value Trust (FUND:LMVTX) are shaping up to fall short of the benchmark for the second year in a row. Has the guru lost his mojo? Is this one of the signs of the apocalypse? Hardly.

Miller, if nothing else, does not follow the latest fashion in investing trends. For good or ill, that means he's once again avoided the energy sector, which continues to surge on the back of $100 oil. That makes sense when you understand that the investment strategy behind the fund is "a value discipline of investing by purchasing primarily large-capitalization stocks at large discounts to the manager's assessment of their intrinsic value." Discipline is something many investors lack -- which may be why they perennially underperform the market.

Too many investors, including many of Miller's money-manager contemporaries, chase the hot stocks of yesterday, jumping in and out of positions. Instead, the top names in Miller's Value Trust include Amazon.com (NASDAQ:AMZN), AES (NYSE:AES), Sprint (NYSE:S), Google (NASDAQ:GOOG), and Qwest Communications (NYSE:Q), many of which Miller has held for 10 years or more. These firms account for more than one-fourth of the fund's holdings.

Bottom-fishing returns
Yet unless these companies surge over the next four weeks, we can expect Miller and Value Trust to come up short once again. Still, Miller has announced that he will be looking at two sectors in particular that have been beaten up this year: consumer goods and financial stocks.

In a letter to shareholders earlier this month, Miller wrote, "The greatest gains over the next five years will be made in those securities people are panicked about today." That sounds like the maxim of another investing legend, Warren Buffett, who at Berkshire Hathaway (NYSE:BRK-A) notes, "Be fearful when others are greedy, and greedy when others are fearful."

Miller doesn't name any specific stocks he's interested in buying -- just that they will be large-cap U.S. companies, an area he expects to outperform over the next five years. But he does say he'll trim back his top names to move money into new purchases.

Miller's strategy and behavior offer several lessons that average investors can apply in their own portfolios:

  • Broadly diversify. Miller holds 46 stocks as of Sept. 30. That's concentrated for a mutual fund, but diversified in comparison to an individual stock portfolio.
  • Buy and hold. Miller's turnover rate is about 9%, a glacial pace compared to the typical fund's 85% turnover rate.
  • Let your winners run. Amazon has more than doubled this year. But unless he sells some to buy new names, Miller will likely still hold onto his shares.
  • Make big bets. Like Buffett, Miller isn't afraid to take an outsized position in a company.
  • Keep costs low. With a plethora of discount brokers charging little to nothing to make trades, keeping transaction costs low has never been easier. Bill Miller, on the other hand, charges a comparatively pricey 1.68% expense ratio.

Even if Bill Miller comes up short again at Value Trust, he's an investing legend that the rest of us would do well to emulate.