Bill Miller built an impressive investment record in the mutual fund industry. From 1991 to 2006, his flagship fund Legg Mason Value Trust has beaten the S&P 500.
He was a maverick investor.
He bought stocks when they were out of favor. For instance, he bought a lot of banking stocks in the early 90′s. He also scooped stocks out-of-favor technology giants in the tech bust in 2002.
His investing approach was multi-disciplinary. He would talk to scientists in Sta. Fe Institute and tried to fit biological models in the financial markets. Cool, no?
Then came the unexpected event. As stock prices fell in 2008, Bill Miller doubled up on the financial stocks like AIG, Bear Stearns, Wachovia and Freddie Mac. Then, he started reporting losses and sustained a long period of under performance. From January 2008 to December 2011, his assets under management declined from $20.1 billion to $2.8 billion.
The rest was history. Miller never regained his status as an investing god. And he recently retired from the game.
(via leggmason.com)
Here are some key lessons we can take from the fall of Bill Miller.
-Good investing process does not mean good results. There’s a big portion of luck in financial markets. You could spend your time figuring out whether the stock is mispriced or not. The thing is, prices are pretty much random in the near-term. Sometimes, shit happens in the long run. Even if the stock is mispriced.
-Overconfidence. I wrote about it last year. It can be found here. Bill Miller was an investing god. So, he thought. He admitted that he did underestimated the magnitude of the financial crisis.
-Anchoring on stock prices and past events. Bill Miller had a huge success during the banking crisis of 90′s. He kept on telling investors that he made a lot of money betting on financials. Worse, he doubled down and moved the cash to these stocks. I don’t know what would happen had he spent time reading financials before buying.
-Expectations. I know Buffett is an expert at this. He spend a lot of time telling Berkshire Hathaway shareholders that results would be lower in the future. According to his report, Berkshire’s recent $24 billion gain was sub-par and investors were cool with that. Having a 15-year record beating the market is a tough act. You have to live up to your expectations.
-Capital preservation, not massive gains. He violated Buffett’s two rules in investing by investing in leveraged banks and short in capital: Rule #1: Do not lose money. Rule #2: Do not forget Rule no.1.
But of course, all is not lost for Bill Miller. His 15-year investment remains unbeaten up to this day.
