Bill Miller: Revenge of the Dunce?

July 28, 2009 at 4:15 am 7 comments

Dunce Trimmed

Bill Miller’s Legg Mason Value Trust Fund (LMVTX) was down more than -55% in 2008 and many people considered him the industry dunce – due in part to his heavily concentrated stock positions and stubborn belief of holding onto his sinking “Financial” picks. Unfortunately this stance cratered results to abysmal depths – earning his fund the infamous Morningstar 1-Star Rating. But let’s not forget Mr. Miller did not become stupid over night. From 1991 through 2005 he beat the S&P 500 every year before hitting a rough patch in 2006-2008. His previous 15 year streak was the equivalent of me hitting .400 off Randy Johnson – very few, if any, can replicate. So, is the dunce back? Thus far in 2009, his fund is up about 25% through July 26th, handily trouncing the S&P 500 by more than 14% (Morningstar). Miller remains bullish on his outlook for financial markets although he caveats his prediction with three endogenous risks:

“Rising interest rates, a sharp rise in commodity prices (especially oil), and policy errors.”

 

Miller also brings up a topic I have brought up on numerous occasions in my monthly newsletter, which is that investors are sitting on piles of low earning cash:

“Assets in money market funds recently exceeded those in general equity funds for the first time in over 15 years. In contrast, at the market peak in October 2007, assets in equity funds were more than 3x greater than the assets in money market funds. The return on this mountain of cash rounds to zero, which is good when stocks and bonds are falling, but far from optimal when they are rising. Although I expect credit spreads and risk aversion to remain well above the averages of the past decade, there is plenty of room for them to narrow and for equities to move higher as this cash gradually moves out the curve in search of better returns.”
Smart guy, but could use a little help in the hair style department.

Smart guy, but could use a little help in the hair style department.

The average investor is late to both coming and going from the game. Don Hays, Strategist at Hays Advisory Services, notes, “We believe all good news at the top, and we doubt and disbelieve any good news at the bottom.” I think Bill concurs when he states the following:

“The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won’t work. When the markets start up and the economic forecasts begin to be revised up — where we are now — the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained.”

 

Miller also makes some thoughtful points on the attractiveness of the financial sector, pointing to the disappearance of many competitors, appealing valuations, and rising pre-provision earnings. On the topic of inflation, Miller remains unworried about prices spiking up. He argues, logically, that rising unemployment and excess capacity will keep a lid on prices. True, however, with exploding debt levels and deficits, coupled with the insatiable appetites of emerging markets for commodities, not to mention spiraling healthcare prices, I believe inflation concerns may be here sooner than anticipated. Let’s not forget the stagflation experienced in the 1970s.

Read the Whole Bill Miller Newsletter Here

Bill Miller is still in a deep hole that he dug for himself, but I would not count this dunce out. Mean reversion is one of the most powerful principles of finance and if you ride Bill Miller’s coat-tails on any continued rebound, it could be a prosperous, memorable ride.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

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Entry filed under: Financial Markets, Profiles, Stocks. Tags: , , , , , , , .

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7 Comments Add your own

  • 1. Tony LeClair  |  October 12, 2009 at 4:08 am

    …clicked on your link @ Barrons this A.M….
    I read your Miller opinion and agree with your outlook. It would have been a tough call, if your were in the fund, long-term, to know it was time to get out, don’t you think?
    If you’re going to time the market, using any asset class, why would you pay for active management?
    I think you pay for active because you feel a manager is better than you at it (timing and selection). That would mean second guessing; too bad for many…
    plan to return here
    thanks
    have a great day
    Tony

    Reply
    • 2. sidoxia  |  October 12, 2009 at 2:39 pm

      Tony:
      Thanks for the comment. Agree with you – market timing is extremely difficult. With Miller’s style, you either live by the sword or die by the sword. He obviously won a lot of battles in beating the index for 15 straight years, but that didn’t lower the significant concentration risk that investors were taking with Miller’s strategy. His normal dollar cost averaging approach works well in most market environments, just not when you have 100 year flood. As I mentioned in my posting, Miller didn’t become dumb over night.
      Cheers,
      W.S.

      Reply
  • 3. The Porsche-Yacht Indicator « Investing Caffeine  |  December 17, 2009 at 2:02 am

    [...] him in the bottom decile of peers and forced him to relinquish four of his fund rating stars (See Bill Miller Revenge of the Dunce) [...]

    Reply
  • 4. The Invisible Giant « Investing Caffeine  |  January 18, 2010 at 11:03 pm

    [...] or outperform less dramatically over the next ten years. Just ask Bill Miller (see also Bill Miller Revenge of the Dunce article), concentrated value manager at Legg Mason, about mean reversion. Miller beat the market [...]

    Reply
  • 5. nym5590  |  July 23, 2010 at 3:04 pm

    According to Bill Miller, Large Cap stocks like XOM and KMB represent a once in a life time opportunity and have not been this cheap since 1951. To either refute or agree with Bill’s claim we will review a simple metric Earnings Yield.

    ** FCF/Enterprise Value = Cash Return** E Value = Mkt. Capt + LT Debt – Cash

    At the End of Q2 the SPX P/E was 15 equaling an Earnings Yield of 6.7%

    At the End of Q2 the 10-Year US Treasury Yield was 2.93%

    Read More at http://www.prudentstockinvesting.wordpress.com

    Reply
  • 6. BrokeByMiller  |  November 22, 2011 at 2:32 pm

    It’s now two years later and Bill Miller’s prediction of the recovery hasn’t occurred. His LMOPX, which was at 22 is currently at 6. Nice return on investment?

    Reply
    • 7. sidoxia  |  November 22, 2011 at 2:40 pm

      Too much concentration + too much risk + too much ego + bad timing = very bad performance

      ~WS

      Reply

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