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Berkshire Hathaway
A Re-Look at Bill Miller

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By hartmanbirge
June 21, 2005

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For those who don't subscribe to Tilson's newsletter service (which I recommend you do) there is a very interesting interview this month with Bill Miller. The interview really goes in to how he thinks and tackles problems and I thought that many parts of it were quite interesting. About a year or so ago I had to do a case study on Amazon and Dell and compare and contrast the respective supply chains. My quest at the time was to determine what if any competitive advantage the supply chain design had for the enterprise as a whole and my conclusion was that both models afforded at least temporary advantages over any foreseeable competition. That said I also thought that it would only be a matter of time before Costco.com and Wal-Mart.com came along to ruin the day. I did not see a moat. Miller had some very interesting things to say about all this and one can't help but admire how he thinks....

What he says I think has to be interesting to any fans of Amazon or Overstock for that matter. "With the Internet it turns out that market shares, even early on, tended to be remarkably stable and tended to follow a power-law function, which is when company one is five times as big as company two which is five times as big as company three and so on. Which is why companies like Barnes & Noble have not really been able to get any traction against Amazon."

Furthermore,

"The market in these types of things always overestimates the competitive threat. Every time Microsoft announces something, some company's stock falls because Microsoft is going to kill them - but Microsoft hasn't killed anybody in years!"

I look at a company like Amazon or Overstock and I absolutely love the business model where it takes so little capital to run the operation and where future revenues will flow right to the bottom line. But there's always been the hang-up about moats and value. Miller addresses those concerns quite nicely I think and I can't help but re-think my underlying thesis. It's about power (survival of the fittest) in Miller's view which I would submit falls right in line with a lot of our earlier discussions on moats and Munger.

"All these nimwit analysts are constantly worried about the gross margins or the operating margins - effectively the efficiency of the conversion from one to the other. Bus as Jeff Bezos says, 'It's not about gross-margin percentage, it's about gross-margin dollars.' This ties into what you see happening in the natural world."

He also talked about mental prisms that some of us have and challenged them. One of those prisms which we've touched on here - when I talked about inverse speculation and I think it was Tode mentioning that value investors are all hoarding cash - is that cash is safe. Miller I think rightly points out that carrying cash has risk as well - it's just a different kind of risk. What if we don't get a "normal cycle" where everything goes down or if paper gets devalued etc. He challenges value investors in this regard - "Many value investors have a very particular view of when things are cheap and when they're expensive and they should hold cash. They portray holding cash as a risk reduction method. My view is that's just taking on a different risk."

If anything, Miller makes you think and perhaps I have been a bit too critical of him in the past. The unconventional thought process that he has is refreshing. My beef with him has always been that his picks very much would tie him to the economy and the market at large due to what I perceived was the need for robust growth for his picks to succeed. What happens to Nextel or IACI if the air goes out of the balloon? How could it possibly be that they hold up better than say BUD or KO with far-flung, diversified global enterprises? He addresses that concern in part by referring to "time arbitrage." Interesting. In the end I think that it still comes down to those three critical questions - what's the moat, who's in charge, and where's the value?

HB


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