Last Thursday evening, I heard Bill Miller, CFA -- recently honored as one of "The World's Great Investors" by SmartMoney -- speak at the Financial Analysts Seminar. What's more, I had the rare opportunity to meet with him briefly to discuss his stellar track record and his current thoughts on the market.
Meet Bill Miller
Bill Miller currently manages the Legg Mason Value Trust and Opportunity Trust Fund at asset management firm Legg Mason (NYSE:LM). The Value Trust has outperformed the market for 15 straight years. Of all the fund's features, the most striking is the turnover ratio, averaging 15%-20% annual turnover historically. Think about what that means. Miller is beating the market by holding stocks for an average of five to seven years. That's in direct contrast to the way most mutual funds are managed today, with turnover ratios over 100% (holding periods less than one year). The fund's performance is a great testament to the virtues of buy and hold, something we advocate here at The Motley Fool. It also gives evidence that Miller's performance can be attributed more to skill than luck.
Unique background
Miller's investment style is clearly iconoclastic and can be explained by his unique background among money managers. He has an undergraduate degree in economics, but no formal business school training. Indeed, during his speech, he talked of a background in philosophy rather than any financial training when he was younger. However, he did point out his CFA designation, which is well-respected in the investment industry (not to mention well-received at a CFA conference).
In terms of education, Mr. Miller agrees with Charlie Munger and stressed the importance of allowing multiple disciplines to enter your thought processes, especially in the investment arena. Even if you only get to Psychology for Dummies or Philosophy 101, knowing the basics is often enough to serve you well when framing competitive issues in industries, investor psychology, valuation, etc.
The current appeal of megacaps
Some of Miller's more insightful comments that evening dealt with the current market environment. His thoughts confirmed my speculation that the market for large-cap stocks is compelling; valuations have reached five-year lows, while growth prospects continue to be solid.
Interestingly, he described the current environment as favoring diversification over the focus bias he and other famous value investors have traditionally held dear. Traditionally, there are limited opportunities to find a stock trading at $10 (a generic number) that an investor believes is worth $50. But today, the market looks to be uniformly undervaluing a number of larger, growing companies. So he finds it as prudent to spread your chips across a number of those names rather than try to hit it big by picking a couple of possible winners. In other words, investors have traditionally had to pay a premium multiple to buy larger, more stable firms such as Dell (NASDAQ:DELL), Microsoft (NASDAQ:MSFT), Home Depot (NYSE:HD), and eBay (NASDAQ:EBAY). Now, however, all one has to do is pay below or near the market multiple. In essence, you get paid to diversify, since most large firms are trading at discounted multiples.
The funds Miller oversees hold, on average, 40 names and could probably be diversified further. Since the large-cap space is currently the most intriguing, he believes he could handle double the amount of assets -- or even more, since the space is large and very liquid. And since "megacap" stocks have been among the worst-performing domestic asset classes over the past five years, Miller suggests they now have the highest expected return. He asserted that finding the worst-performing areas over the past five to six years and committing capital to those areas can prove lucrative over time.
Stay tuned for Part 2, where Miller reveals where he's finding interesting ideas these days.
Dell, Microsoft, and Home Depot are Inside Value recommendations. Dell and eBay are Stock Advisor selections. Whatever your investing style, the Fool has a newsletter for you.
Fool contributor Ryan Fuhrmann is long shares of Home Depot but has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy . Feel free to email him with feedback or to further discuss any of the companies mentioned.
