Morningstar Bill Miller Interview (April 2008)
Morningstar conducted an interview with Bill Miller a couple of months ago (April 24, 2008) and I remember viewing it and I think I linked to it on this site as well. However I didn't realize that there were multiple parts and I went through Youtube looking for the rest. Thanks goes out to Todd Sullivan's ValuePlays for bringing it to my attention.
Clip 1: Current market
Clip 2: Bill Miller Talks
Clip 3: Bill Miller's Brand of Value Investing
Clip 4: When to hold, when to fold
Clip 5: When concentration counts
I am a big fan of Bill Miller so I recommend the interviews, especially if you are a contrarian type who goes into beaten-down sectors.
The first clip is about the current market conditions (circa April). He feels that the credit market (say the CDS market) is too pessimistic (a view I also hold). As I have written numerous times, it makes very little sense for credit default swaps on highly rated institutions, such as G.E., Berkshire Hathaway, and so forth, to actually imply a non-trivial probability of default within an year. Bill Miller thought the market was undervalued (back in April) but obviously the market has dropped much further since then. He doesn't share the superbear views of the financial sector going into a prolonged slump. He says he buys 'franchise financials' who will survive and do fine after writing off bad assets, re-sizing the business, and so forth. He gives the example of Fannie Mae where he made 50x the returns over a decade. He points out that Fannie was thought to be bankrupt in the early 90's. The bears were claiming that if you marked the assets to market, the company was insolvent. Well, it didn't have to back then (accountants seem to be slightly smarter back then) and it did fine, as mortgages rolled over and it was able to generate profits on wider spreads. This sounds so oh-so-familiar to what is happening now to companies such as Citigroup, Fannie Mae (again some people say it is insolvent), Bank of America, and, of course, the monolines (who are thought to be insolvent according to some if everything was marked to market.) Unfortunately, the accounting profession seems to have lost some brain cells over the years and forces companies to mark assets to market now, causing huge damages and volatility during panic-striken times.
I share Bill Miller's views on what will likely happen over the next few years. Financials will rebound and although they won't have the profitability of the recent past, anyone buying the right ones at depressed valuations should make a killing. A lot of the financials are carrying huge mark to market losses on their books and even if a small portion reverses within the next 2 or 3 years, you are looking big profits.
The risk to Bill Miller's view (as well as mine) is if the future doesn't replay like 1990 and we, instead, end up with 1990 Japan. I have looked quite a bit at Japan (past and present) and I see little chance of that situation replaying in USA, Canada, and the rest of the developed world. If you had to pick a bearish repeat of the past, 1974 or 1929 looks more likely than 1990 Japan. The big point that bears keep ignoring is the fact that the US economy is still posting close to zero GDP growth, as opposed to a big negative number. The housing bust has been unfolding for almost 3 years now, and the Wall Street meltdown has been unfolding for about an year, yet the GDP growth, employment, corporate profits, and various other economic numbers, are poor rather than terrible. However, for what it's worth, the US stock market is in far worse shape than it seems. If it weren't for the strong performance of energy, things would be a lot worse. Markets held up by narrow leadership is often a recipe for disaster so it wouldn't surprise me if there are some big declines further ahead. Don't forget that the stock market and the economy are not closely correlated. The stock market had a massive decline from 2000 to 2002 but the recession was mild and one of the weakest.
The second clip talks about Bill Miller's views on why he is performing the way he is.
Clip 3 deals with why Miller differs from other value investors. The big difference is that he invests in technology companies a lot more than other vaue investors. One of the key revelations that made him consider tech was the fact that, although technology products change quite a bit, market share does not. Buffett says he can see Coca-Cola staying the same in 10 years but Miller points out that Microsoft will probably still have a similar market share in 10 years. So even though the products may change, the market share does not. If you look at technology this way, it is more akin to sectors that classic value investors prefer. Technology also has some big advantages such as very high returns on capital. The problem I see with technology is that there is too much momentum involved in them, and the sector often trades at ridiculous valuations.
The fourth clip talks about how Miller determines whether to hold or sell a stock. Essentially if the original assumptions (expected return on capital, valuation, business conditions, competitive position, etc) don't change, you hold on to them. He provides an example of Suncor, a Canadian oil sands company, where he sold the stock quickly after tax rate went up.
The most interesting clip is the fifth one dealing with the right position size within a portfolio. Bill Miller looks at risk adjusted long-term return. He says many successful investors have concentrated portfolios but portfolio concentration depends on the market environment. If the market has fat tail probability distribution, concentrated portfolios are attractive; otherwise, there isn't much benefit to be had from concentrated portfolios. Details aren't given but I assume what this means is that if there is a fairly good chance of making high returns on low probability events, a concentrated portfolio makes sense; and vice versa. My own read of this is that concentrated portfolios probably make sense during bear markets and less so during bull markets.
In the final clip, he also mentions that the hardest decision to sell is when something has rallied a lot. He gives the example of AES(?), which went from around $75 in 1998 to around $0.75 in 2002 (makes Ambac look normal ;) ). They bought a lot in single digit prices and when it went to $25, it was a tough decision on whether to sell or hold (the company itself was largely the same at $25--at least that's my read of what he was saying).
Clip 1: Current market
Clip 2: Bill Miller Talks
Clip 3: Bill Miller's Brand of Value Investing
Clip 4: When to hold, when to fold
Clip 5: When concentration counts
I am a big fan of Bill Miller so I recommend the interviews, especially if you are a contrarian type who goes into beaten-down sectors.
The first clip is about the current market conditions (circa April). He feels that the credit market (say the CDS market) is too pessimistic (a view I also hold). As I have written numerous times, it makes very little sense for credit default swaps on highly rated institutions, such as G.E., Berkshire Hathaway, and so forth, to actually imply a non-trivial probability of default within an year. Bill Miller thought the market was undervalued (back in April) but obviously the market has dropped much further since then. He doesn't share the superbear views of the financial sector going into a prolonged slump. He says he buys 'franchise financials' who will survive and do fine after writing off bad assets, re-sizing the business, and so forth. He gives the example of Fannie Mae where he made 50x the returns over a decade. He points out that Fannie was thought to be bankrupt in the early 90's. The bears were claiming that if you marked the assets to market, the company was insolvent. Well, it didn't have to back then (accountants seem to be slightly smarter back then) and it did fine, as mortgages rolled over and it was able to generate profits on wider spreads. This sounds so oh-so-familiar to what is happening now to companies such as Citigroup, Fannie Mae (again some people say it is insolvent), Bank of America, and, of course, the monolines (who are thought to be insolvent according to some if everything was marked to market.) Unfortunately, the accounting profession seems to have lost some brain cells over the years and forces companies to mark assets to market now, causing huge damages and volatility during panic-striken times.
I share Bill Miller's views on what will likely happen over the next few years. Financials will rebound and although they won't have the profitability of the recent past, anyone buying the right ones at depressed valuations should make a killing. A lot of the financials are carrying huge mark to market losses on their books and even if a small portion reverses within the next 2 or 3 years, you are looking big profits.
The risk to Bill Miller's view (as well as mine) is if the future doesn't replay like 1990 and we, instead, end up with 1990 Japan. I have looked quite a bit at Japan (past and present) and I see little chance of that situation replaying in USA, Canada, and the rest of the developed world. If you had to pick a bearish repeat of the past, 1974 or 1929 looks more likely than 1990 Japan. The big point that bears keep ignoring is the fact that the US economy is still posting close to zero GDP growth, as opposed to a big negative number. The housing bust has been unfolding for almost 3 years now, and the Wall Street meltdown has been unfolding for about an year, yet the GDP growth, employment, corporate profits, and various other economic numbers, are poor rather than terrible. However, for what it's worth, the US stock market is in far worse shape than it seems. If it weren't for the strong performance of energy, things would be a lot worse. Markets held up by narrow leadership is often a recipe for disaster so it wouldn't surprise me if there are some big declines further ahead. Don't forget that the stock market and the economy are not closely correlated. The stock market had a massive decline from 2000 to 2002 but the recession was mild and one of the weakest.
The second clip talks about Bill Miller's views on why he is performing the way he is.
Clip 3 deals with why Miller differs from other value investors. The big difference is that he invests in technology companies a lot more than other vaue investors. One of the key revelations that made him consider tech was the fact that, although technology products change quite a bit, market share does not. Buffett says he can see Coca-Cola staying the same in 10 years but Miller points out that Microsoft will probably still have a similar market share in 10 years. So even though the products may change, the market share does not. If you look at technology this way, it is more akin to sectors that classic value investors prefer. Technology also has some big advantages such as very high returns on capital. The problem I see with technology is that there is too much momentum involved in them, and the sector often trades at ridiculous valuations.
The fourth clip talks about how Miller determines whether to hold or sell a stock. Essentially if the original assumptions (expected return on capital, valuation, business conditions, competitive position, etc) don't change, you hold on to them. He provides an example of Suncor, a Canadian oil sands company, where he sold the stock quickly after tax rate went up.
The most interesting clip is the fifth one dealing with the right position size within a portfolio. Bill Miller looks at risk adjusted long-term return. He says many successful investors have concentrated portfolios but portfolio concentration depends on the market environment. If the market has fat tail probability distribution, concentrated portfolios are attractive; otherwise, there isn't much benefit to be had from concentrated portfolios. Details aren't given but I assume what this means is that if there is a fairly good chance of making high returns on low probability events, a concentrated portfolio makes sense; and vice versa. My own read of this is that concentrated portfolios probably make sense during bear markets and less so during bull markets.
In the final clip, he also mentions that the hardest decision to sell is when something has rallied a lot. He gives the example of AES(?), which went from around $75 in 1998 to around $0.75 in 2002 (makes Ambac look normal ;) ). They bought a lot in single digit prices and when it went to $25, it was a tough decision on whether to sell or hold (the company itself was largely the same at $25--at least that's my read of what he was saying).
There is almost nothing that Miller said that I agree with.
ReplyDeleteBut, to hedge myself, I have set a trend filter on his fund to make sure I jump on his bandwagon when the bloodletting stops and the trend starts to reverse.
That is assuming he's hasn't been fired before this bear market ends. The 2Q fund withddrawal would be quite telling.
In the meantime, watching his trainwreck of a portfolio and the daily NAV drop is quite entertaining. I'm really looking forward to how he explains himself in his 2Q commentary. I do hope, however, he would say something more than "it happened once before, so trust us, wait until next year!"
It doesnt' surprise me that you don't agree with anythign he says...
ReplyDeleteIf you are momentum investor (trend follower), you are better off following others...
You Main Man's #10 position as of 3/31/08 (Freddie Mac) has just cratered w/ a 20% drop today.
ReplyDeleteWhat does this mean? I dunno....the "intrinsic value" of Freddie Mac just gotten more attractive?
Buy! Buy! Buy!
Bill Miller is a monkey with a typewriter.
ReplyDeleteHe has underperformed the S&P 500 for the past 1-, 3-, 5-, and 10-year periods.
He loaded the boat on garbage stocks like Countrywide and kept holding them long after it was obvious they were toast.
If you follow any type of contrarian strategy, you will end up with failures, as well as period of underperformance. Holding Countrywide comes with the territory. If you don't understand that, you don't get his strategy. He isn't a Buffett or Charlie Munger type of investor who tries to avoid capital loss at all costs...
ReplyDeleteThe fact that his performance looks weak is due to his last couple of years. He returns have been horrible in the last few years and that's dragging everything down. But I say let's wait a few years and see how he does. Don't forget a lot of people said similar stuff when he was getting hit badly after the tech bust (he held a high concentration of tech stocks). But he came roaring back when the economy rebounded.