Bill Miller is not your average value investor.
The term 'value investing' covers a multitude, and after many years of out-performance, Bill Miller's version of it has suffered badly during the crisis.
Background and early career
Born in North Carolina in 1950, William H. Miller III first became interested in investing at the age of nine, after quizzing his father about the financial pages. Having just earned 25 cents mowing the lawn, he liked the fact that a share could gain 25 cents in value while you slept.
He continued to dig into this subject, and by investing his holiday earnings during the bull market of the 1960s, was able to afford his first car while still in high school.
Miller graduated from Washington & Lee University in 1972 with an honours degree in economics, and joined the army as a military intelligence officer until 1975. During this time, he also invested money on behalf of his friends.
His wife, who also left the army that year, joined the Baltimore firm of Legg Mason as a stockbroker, while Bill went on to study philosophy at nearby Johns Hopkins University.
After a couple of years in industry, Miller joined Legg Mason as Director of Research in 1981, and co-managed the famous Legg Mason Value Trust from its inception in 1982. He assumed overall responsibility for the company's equity funds management group in 1990.
Investment style
While many value investors focus on measures such as price/earnings ratios (P/E) and dividend yield, Miller's philosophical training leads him back to the fundamental valuation of a business, its expected future free cash flow. Discounting these expected flows back to a present value at an appropriate discount rate enables us to estimate the value of a business.
These projections are sensitive to changes in assumptions about growth rates and discount rates, so Miller builds models to estimate a company's worth under a variety of possible future conditions. This is painstaking work, and requires a thorough knowledge of the business concerned.
The results can show that apparently expensive shares trading on high multiples may actually be undervalued. "We differ from many value investors in being willing to analyze stocks that look expensive to see if they really are."
His portfolio turnover is typically around 20%, implying a five-year average holding period. He is not concerned about short-term positions, and regards much news as noise. "The market is pretty good about incorporating the current state of affairs into stock prices or bond prices … if it's in the newspapers, it's in the price."
Rather than dumping a share on the first sign of bad news, his default position is to buy more and average down if he's convinced the company is a good one. This incorporates some ideas from behavioural finance, in particular that humans view losses as more significant than gains, treat recent events as more significant than more distant events, and tend to over-react to news.
But a genuine change in the investment case will result in a holding being sold. He will also sell if the business has reached fair value -- that is, if it will not provide a risk-adjusted excess rate of return over his time horizon -- or if he needs the funds to invest in a more attractive opportunity.
A voracious reader (see his recommended reading list below), Miller incorporates an eclectic blend of ideas and philosophies in the running of his funds. One area of interest to him is the way complex adaptive systems such as businesses grow and mature, and the importance of correctly identifying when a company must switch focus from revenue growth to efficiency.
Winners and losers
The Legg Mason Value Trust, under Miller's management, outperformed the S&P 500 every year for 15 years, starting in 1990, earning Miller an almost cult-like following.
Recent history has not been so kind, with the fund losing 55% in 2008 alone. According to a study by Bloomberg and Morningstar, he lost more money in the past three years than 99% of rival managers.
Several bad calls were to blame, including being heavily invested in financial stocks such as AIG, Bear Stearns and Freddie Mac. In April of last year, after the Bear Stearns collapse, he believed we had seen the bottom in financials. He was also bearish on commodities two years before their rally peaked last summer.
But over the years, his approach to value has drawn him to companies that other value investors would not have considered, such as Google, which he snapped up in large volume at IPO stage. He has also had big wins in the past with Dell, AOL and Amazon.
This year he's outperforming again, as financial shares have recovered significantly.
Current positions
Maintaining a heavy emphasis on banks and other financials. Miller is firmly in the bull camp as far as the coming years are concerned.
To quote from his report to shareholders a couple of weeks ago: "Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low. That's where we are now. The path of least resistance, as Jesse Livermore used to call it, is higher."
He is supportive of the government's TARP initiative, and expects interest rates to rise.
Whether this will see a return to his market-beating form remains to be seen.
Books about Bill Miller:
Bill Miller's reading list:
More investing greats:
John Bogle | George Soros | Ben Graham | Jim Rogers | Warren Buffett | Anthony Bolton | Jesse Livermore | Jim Slater | Charlie Munger | Peter Lynch | Carl Icahn | Philip Fisher | Ken Fisher | John Neff | John Templeton | Mark Mobius | Neil Woodford | T. Rowe Price
