Has Bill Miller Lost His Mind?

Bill Miller earned his stripes by beating the market for 15 consecutive years as lead manager of the Legg Mason Value Trust (FUND: LMVTX  ) . That's a tremendous accomplishment, especially when you consider that over five of those years, even Warren Buffett fell behind Wall Street's benchmarks. As a result, when Miller speaks, investors listen.

Reading Miller's recent market commentary, however, may leave you scratching your head a bit. That's particularly the case if you're not already a seasoned value investor. After all, we're suffering through one of the biggest credit crunches in decades. At the core of the problem is a slumping housing market and the two huge problems it brings with it:

  • People can't use their homes as ATMs to support their spending.
  • Home loans based on inflated values may very well turn out to be worthless.

Yet Miller's comments include the following: "I think the new leadership will be U.S., large-cap, dollar-based, and grow to encompass what no one wants to own today, especially financials and consumer." And: "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."

Is he off his rocker?
Buy financial companies during a credit crunch? Look at consumer stocks when the easy-money spigots have been turned off? Snap up companies whose stocks have fallen precipitously over the past year? Does that sound like the kind of sound thinking that would help you beat the market?

In fact, it's precisely the kind of thinking that will win out over the long run. People who invest in the stock market have two things in common:

  • They're in the market to make money.
  • They hate losing money.

As a result, people love to buy stocks that go up and want to dump the ones that fall. Unfortunately, none of us has the superhuman power to figure out which ones will rise or fall before it happens.

Pure genius
What we can do, however, is exactly what Miller is doing. We can look at where people's love/hate relationship with stock-price movements have knocked their prices far away from what the underlying businesses are really worth. And the farther away they're knocked, the better your chances to profit -- in the real world, with real money -- when things return to normal.

In fact, here are some pretty solid companies that hit Miller's criteria of being:

  • On the 52-week-low list.
  • In the financial industry.
  • U.S.-based.
  • A large-cap entity (over $10 billion).

Company

Recent
52-Week
Low

Trailing P/E
Ratio

5-Year Expected
Growth

Washington Mutual (NYSE: WM  )

$14.80

4.9

8.3%

Morgan Stanley (NYSE: MS  )

$47.49

5.9

13.6%

Allstate (NYSE: ALL  )

$48.90

6.2

7.9%

National City (NYSE: NCC  )

$16.43

7.0

8.5%

Citigroup (NYSE: C  )

$29.60

8.4

8.1%

Merrill Lynch (NYSE: MER  )

$50.50

6.0

10.5%

It's companies like these that Miller says have the best chance to outperform over the next five or so years. They're available so cheaply precisely because of the amazing fear surrounding the financial industry that has knocked their shares down to the bargain basement.

Get 'em while they're cheap
If you truly want to get the best of Wall Street over the long haul, you have to be willing to think like Miller does. You have to be willing to buy fundamentally strong companies that have fallen on hard times. When the rest of the market is selling because of an overall panic, it just might be the perfect time for you to do the exact opposite.

Contrarian thinking like that has led Miller to his amazing success. It's also how we've managed to stay atop the market at Motley Fool Inside Value. If you'd like to see all of our stock picks and research, join us today for a 30-day free trial. After all, contrarian investing really can pay.

At the time of publication, Fool contributor Chuck Saletta owned shares of Washington Mutual. Washington Mutual and National City are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


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