We’ve all seen the headlines:
"Is Bill Miller Toast?" (Kiplinger)
"Is Bill Miller Losing His Touch?" (Seeking Alpha)
"Bill Miller’s New Streak" (CNN Money)
It’s obvious: People have lost their faith in Legg Mason Value Trust (LMVTX) manager Bill Miller.
Not long ago, he was a Wall Street idol. He outperformed the S&P 500 Index for 15 consecutive years by investing in big tech names like Time Warner’s
Now, his streak of outperforming the S&P 500 Index is gone and largely undone -- he’s now losing to the market over a trailing 10-year period.
And no one’s letting him off lightly.
Poor guy …
Though I do feel for the man on a personal level (we philosophers stick together), that’s not the reason I’m going to defend Bill Miller. Nor am I defending him simply because no one else has done so.
Rather, I’m defending him because the media is looking at short-term results -- instead of what he's poised to accomplish.
It’s a media conspiracy
At the height of his streak, Bill Miller made for great headlines. Writers marveled at his achievements. He was a market genius and was consistently named one of the world’s greatest investors. The media told you to buy.
Now that the streak is over, reporters won’t even admit that skill was involved. As one Kiplinger columnist put it, “The streak was overblown to start with. It was partly an accident of the January-through-December calendar year.” The media consensus: sell out, his luck is over.
Though these ups and downs in the Value Trust lifecycle do make for good stories, the media was ultimately advising you to buy high and sell low -- exactly the opposite of the strategy investors should employ.
What gives?
Ok, the media’s wrong -- but I still haven’t answered the question of Bill Miller’s luck.
SmartMoney analyst Jack Hough’s book Your Next Great Stock claims that there is a 63% chance that one investor in 1,000 will achieve a 10-year winning streak through luck alone. But the odds that any given investor will beat the market ten years in a row through luck is only about 0.1%.
That's because there's another factor at play: skill. And this is the crucial aspect of Miller’s career that most writers are ignoring in favor of their luck hypothesis.
Let’s start with an example of Miller’s success. When he invested in AOL, his theory was that such economy-changing stocks couldn’t simply be analyzed on a price-to-earnings (P/E) basis. Instead, he argued that the stock looked cheap relative to its potential to double many times over.
He didn't look like a traditional value investor, but AOL grew subscribers at an exponential pace, and the stock followed. When, in 1999, he believed the company had reached a plateau, he sold a huge stake, booking the gain well ahead of the popping of the tech bubble.
That, my friend, is skill.
His recent past performance appears to be caused by bad calls in financials like Freddie Mac
Investors would be wise to remember that Miller made similar plays during the early 1990s -- when financial stocks were beaten down and healthcare companies were struggling. When the situation turned around, Miller profited tremendously. In fact, the gains from these companies carried much of the early years of his streak.
Despite what you’ve read, Miller’s 15-year streak can’t be attributed solely to luck. His recent underperformance is not a sign of a poor process and questionable skill, but a sign of being a little early to the party that’s likely to start.
Looking into the future
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Not long ago, we dug into -- and ultimately recommended -- a fund employing a growth-at-a-reasonable price approach, which is currently making investments into stable, well-priced growers like General Electric
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Adam J. Wiederman wonders what writers will make of Bill Miller when financials rebound. He owns none of the shares above. Time Warner and UnitedHealth are Stock Advisor recommendations. Dell and UnitedHealth are Inside Value recommendations. The Fool has a strict disclosure policy.
