Below is Part 3 of a five-article write-up regarding legendary investor Bill Miller, CFA, during the 2006 Financial Analysts Seminar, hosted by the CFA Institute. In this installment, we compare Miller's style with that of another legendary investor, John Neff, CFA, who also spoke at the conference.
Not your father's value investor
Though some believe that Bill Miller's style is very different from John Neff's, it is actually the same in many respects. Much like Neff, Miller described the term "value investor" as a misnomer. In one respect, Miller can be considered a value purist (very Foolish!), in that he believes a company's value is determined by discounting its future free cash flow back to the present, also known as discounted cash flow (DCF). However, he surmised that most "value guys" place a greater emphasis on market-comparable methods such as P/E (price to book), instead of performing the more theoretical exercise of creating and calculating a DCF.
His main point of contention -- perhaps the key to his stellar track record -- is that he believes that most value investors place too much emphasis on valuing the past business versus focusing on how a business will perform in the future. Decoupling the past from the future and focusing on what could reasonably be expected to happen is what Miller stresses to his fund management team. For instance, does Tyco's
A current stock idea
In contrast to Neff, Miller sees dividends as an unfavorable form of shareholder returns; according to his team's estimation, they are generally reinvested back into the market and earn, on average, only the market rate of return. While he does look at dividends, Miller said he may not be interested in a firm if it announced a big dividend increase, because that could imply that management is finding it difficult to locate compelling internal growth avenues. As he stated earlier, Miller's approach to investing is more focused on estimating the firm's growth in future cash flows over time -- though he did admit that a steady dividend policy could enhance management discipline.
Miller does not believe in blanket or systematic company stock repurchase programs. Instead, he recommends that companies investigate the rate of return and repurchase shares only if the stock is undervalued. He didn't agree with Dell
Free cash flow
When asked if he was interested in a company's quality of earnings, Miller responded that he does believe quality is important, but instead of relying on earnings, he focuses on a firm's free cash flow generation. As a follow-up, I asked him how he and his team calculate free cash flow. He replied that the most important thing is to consider how the company's owner would run his business, and calculate free cash flow accordingly. Though he didn't provide specifics, he stated that his team does make adjustments when calculating free cash for the companies it investigates.
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Fool contributor Ryan Fuhrmann is long shares of Pfizer, but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email Ryan with feedback or to discuss any companies mentioned further.