Was Bill Miller Just Lucky?

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 (NYSE: TWX  ) AOL and Dell (Nasdaq: DELL  ) . Mutual fund investors wanted to invest with him, and money managers wanted to be him.

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 (NYSE: FRE  ) and healthcare companies like UnitedHealth Group (NYSE: UNH  ) . But are they really that terrible?

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
Analyzing the process and not merely the results is how we operate when choosing funds to recommend in our Motley Fool Champion Funds investment service.

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 (NYSE: GE  ) , Procter & Gamble (NYSE: PG  ) , and Cisco (Nasdaq: CSCO  ) . It has a long-tenured management team, a low expense ratio, and we believe it’s well suited to profit when growth stocks make a comeback.

Want to find out more? Try us out free for 30 days. You'll get all of our past recommendations, as well as our analyses. There's no obligation to subscribe.

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.


Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2008, at 3:19 PM, mikejw wrote:

    I think it is pretty sad how quickly the media turned on Bill Miller after so many years of superb returns. Dealing with the media is kind of like handling snakes. You have to watch out because they will eventually turn on you and bite you. If he does regain is market beating returns he will quickly become a media darling. I am curious to see if Ken Heebner will become the next victim of the media "hatchet."

    Just my two cents,

    mikejw

  • Report this Comment On July 21, 2008, at 4:34 PM, Maurice2 wrote:

    I respectfully disagree.

    I know it's easy to kick a guy when he's down, but we need to look at whether Miller's risk-adjusted returns are worth it.

    Yes, he beat the S&P 500 for 15 years straight. But there were *many* rolling 12-month periods where he underperformed (as Miller himself has noted).

    So yes, it was partially luck.

    Second, although he had quite a streak, he wasn't the best performer. There were actually a couple dozen other managers who outperformed him during his run; they just didn't beat the S&P every year.

    Which brings us to the "value" issue. As value investors, is it important to beat the S&P 500 every year? During the dot-com bubble, wouldn't we say the managers that sold tech and underperformed the market were the real value investors? Many of them struggled to keep assets, but they were unwilling to take undue risk with shareholder capital. Many of those value investors are the same ones who beat Miller over the full period; they were loading up on very undervalued, poor performing value stocks at the height of the tech bubble, and they outperformed significantly after the crash. Look at Marty Whitman, for example, who outperformed Miller and did so with 2/3 the volatility.

    Miller, on the other hand, lost about 50% and just barely beat the S&P 500.

    He crashed along with the S&P, he just crashed slightly less.

    It seems to me, the truth is, that Miller is more of a momentum investor with a value slant. Momentum is what allowed him to beat the S&P during the dot-com boom.

    That's all fine if you know what you're getting into. Just realize that he isn't a true value investor.

    This latest debacle is very similar to the dot-com period. Housing was on a tear. There was a slight decline in the biggest housing/credit bubble in history, and Miller jumped in. Again, he's getting killed, and again, many of the best value investors identified the risks and stayed clear.

    Also, his expense ratio is quite high (1.68%).

  • Report this Comment On July 21, 2008, at 10:06 PM, ibarz wrote:

    <i>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.</i>

    There's a difference here: before, he invested when they were beaten down, today, he was already invested then they got beaten down to the tune of 50-80%. Not as easy to recover from that.

  • Report this Comment On July 22, 2008, at 4:51 AM, emilette wrote:

    It's interesting that good performance is due to skill while poor performance is due to making a bad call, bad luck, as one might say.

    I'm not concerned about whether or not Bill Miller was lucky. That is for someone else to figure out. However, I fault you for the logic you present in assessing whether or not he was lucky.

    "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%."

    As you probably well know, you cannot tell who beat the market until after the time has passed. After ten years, if someone has beat the market, that person will be there as the winner, regardless of whether it was luck or skill. Going back and reviewing that person's investments or bets (depending on your take) will reveal nothing.

    The same goes for assessing the person's thinking behind the moves that may or may not have beaten the market. Just because the logic behind the move was correct won't guarantee a win.

    "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."

    Do you really not believe any luck was involved here? Why not?

    "His recent past performance appears to be caused by bad calls in financials like Freddie Mac (NYSE: FRE) and healthcare companies like UnitedHealth Group (NYSE: UNH). But are they really that terrible?"

    It seems as though you are doing your best to sweep under the carpet what does not please you while putting a gloss on what you like.

  • Report this Comment On July 23, 2008, at 4:46 PM, TMFAleph1 wrote:

    I recommend the discussion of Bill Miller's performance in Leonard Mlodinow's excellent new book: 'The Drunkard's Walk: How Randomness Rules Our Lives'.

    Alex Dumortier (XMFMarathonMan)

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