Bill Miller's Right, Even When He's Wrong

There's a word for investors, economists, and money managers who are early with their predictions: "wrong."

That was the case with investing legend Bill Miller, the star manager at Legg Mason. He saw his Value Trust mutual fund wallop the market averages for 15 years straight, then wander in the wilderness for the next three.

Seriously? You wanna buy what?
Sure, every investor has bad years. Even Warren Buffett is wrong every once in a while, sometimes spectacularly so. He was down more than 30% in 2008, for example, as investments in American Express (NYSE: AXP  ) , ConocoPhillips (NYSE: COP  ) , and CarMax went awry.

But Bill Miller's sins of commission looked obvious, even at the time. As the housing market and financial sector crises were reaching a crescendo, Miller was buying Washington Mutual and Countrywide Financial; Bear Stearns and Citigroup (NYSE: C  ) ; Freddie Mac and American International Group (NYSE: AIG  ) . Ouch!

Miller took a lot of heat for those bets. And the criticism wasn't limited to whether his stock-picking philosophy was broken. Naysayers also questioned whether he should even lead Legg Mason anymore.

What have you done for me lately?
Yet value investors absolutely must follow their strategy through to the end. You don't go from being a value investor one day to a momentum-following growth investor the next, simply because that's what's hot. You stick to your knitting, even though fads may cycle through your style. Eventually, the market will value your portfolio correctly.

Miller believed that housing and financials would eventually lead the markets out of the morass we found ourselves in. He was trying to profit from others' panic, and he said at the time, "I think the greatest gains over the next five years will be made in those securities people are panicked about today. For specific names, consult the 52-week-low list."

At least so far, it looks like Miller was right -- but early. After three straight years of losing to the indexes, his Value Trust fund tore up the charts in 2009, returning 41% in a year when the S&P 500 itself appreciated 23%. That performance put him ahead of 93% of similarly managed funds.

When you're right, you're right
Moreover, Miller did it on his own terms. We don't know yet what positions he held at the end of the year, but as of Oct. 31, his top three performing stocks over the preceding six months were Capital One Financial (NYSE: COF  ) , American Express, and Prudential Financial.

Half of the stocks the fund's annual report cited as contributing most to the fund's performance were financial stocks, while several consumer-oriented companies, such as eBay (Nasdaq: EBAY  ) and Amazon.com (Nasdaq: AMZN  ) , appeared there as well. He declared the exact sectors that would be leading the way.

Noticeably absent from the list (and from his portfolio) were housing stocks. But Miller has a long time horizon -- and patience.

A four-step plan
Bill Miller continues to offer a strategy and project an investment behavior that individual investors can apply to their own portfolios:

  • Broadly diversify. Miller holds less than 50 stocks as of his last report. That's fairly concentrated for a mutual fund, but well-diversified compared to most individual stock portfolios.
  • Buy and hold. Miller's turnover rate is about 4%, a glacial pace compared to the typical fund's 130% turnover rate.
  • Let your winners run. Capital One has quadrupled from its low point in March, but unless he sells some to buy new names, Miller is likely to hold onto his shares.
  • Make big bets. Like Buffett, Miller isn't afraid to take an outsized position in a company. As of October, AES comprised more than 9% of his portfolio, and financials made up more than a quarter of it.

By sticking to his game plan, Miller has shown not only why he's an investing legend, but that even when you're wrong, you can eventually prove just how right you are.

American Express and CarMax are Motley Fool Inside Value picks. Amazon.com and eBay are Motley Fool Stock Advisor picks. The Fool owns shares of Legg Mason. Motley Fool Options has recommended a bull call spread strategy on eBay. Try any of our Foolish newsletter services today free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 05, 2010, at 12:52 PM, kstoltz wrote:

    Ummm, look at the five year chart for AIG, C, and FRE and tell me if Bill Miller is still "right". If he was investing in 2007 and 2008, then no matter what the bounce was for his fund in 2009, that was still dead money. The only thing he could've done is keep buying right into the hole. But the fact of the matter is that whatever investments he made in those companies 2 or 3 years ago were DEAD wrong.

  • Report this Comment On January 05, 2010, at 2:35 PM, greaterajax wrote:

    kstoltz,

    Read the article carefully:

    "As the housing market and financial sector crises were reaching a crescendo, Miller was buying..."

    While Miller's timeframe is not explicitly laid out (for shame), the author is clearly not referring to the year 2007 or most of 2008.

  • Report this Comment On January 06, 2010, at 3:40 PM, kstoltz wrote:

    I think you're missing the point, Ajax. If you look at the five year charts on some of those companies, you can see that Miller was not right at any point in time over that period. If you look at the chart of LMVTX, you can see that despite 2009, he was still paying the price of how wrong he was in the years previous. A good 2009 did not make up for a bad 2008, 2007 and 2006 for Bill Miller, and it's silly to claim otherwise especially when the article states "Buy and Hold" as part of its four step plan.

    If you look at that article more closely, you'll see that Rich cherry picked a lot of data and then came up with the wrong conclusion.

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