Friday, April 4, 2008 2 comments ++[ CLICK TO COMMENT ]++

Bill Miller Thinks The Worst Of The Credit Crisis Is Over

Bill Miller has been having a few poor years but things have been disastrous in the last few months. He has been overweight financials throughout this crisis and went into housing-related stocks way too early. Anyway, I respect his views and here are some comments he made at a Legg Mason conference:

(source: Credit crisis over says top fund manager, By Danielle Levy (02 April 2008). citywire (UK) )

Bill Miller of Legg Mason Investment Management believes the Bear Stearns bailout two weeks ago marks the end of the credit crisis.

The manager of the Legg Mason Value Trust, Legg Mason Value A Dis A USD and Louvre Gestion's America Value funds says that on hearing this news he ‘put fresh money into the pot’, namely his own funds, which he admits is something he rarely does. He says that the Fed’s opening up of the discount facility to investment banks has allowed spreads to come in, leading to a rebound in financials.

I have no idea if Bear Stearns is the big failure that caps the credit criss but markets have certainly calmed down of late. However, I personally don't think that this precludes the possibility of further declines in the broad indexes. One of the reasons I am bearish is because commodities have been holding up the market and I see them correcting in the future. Such a correction should result in the major indexes dropping further. But similar to Miller's thinking, I think some beaten-up areas (like financials) may have seen the worst.

Miller and co manager Mary Chris Gay are currently overweight financial services, technology and consumer discretionaries. Within the financials sector Miller singles out housebuilding stocks as an area he is investing in. He says that although the area attracts negative press, he believes the stocks are starting to outperform and points to the recent healthy performance of the index.

He has also increased his fund’s exposure towards financials with less risky balance sheets and a lack of exposure to structured products, and highlights the US Bank Corporation and Capital One as stocks to watch.

Moreover, he says investment banks such as Merrill Lynch and Lehman Brothers, may be ‘the next place to move’.

Some financials are probably beaten down too much but it is still somewhat risky. One of my concerns is that we may have seen a secular change in financials (no solid proof yet though). For decades financials have been one of the best sectors, generating enormous profits and contributing heavily to the economy. New innovations and increase use of financial products have helped the sector. But I wonder if things will be as good in the future, given the bursting of the mortgage debt bubble (and possibly other debt bubbles as well). Value investors will not invest based on some guesses on what may or may not happen in the future, but I personally do think about it.

Miller says the current market environment is not favourable for momentum investors and believes we are at a ‘tipping point’ for valuation strategies. ‘Our portfolio is as extreme as it has ever been,’ he says.

This is probably true. The market is not trending anymore and this may hurt momentum investors. Already a lot of people overloading on emerging markets are showing weakness.

Although Miller’s Value Trust held a large position in Bear Stearns, he says his portfolio has been worse hit by other holdings. Moreover, he says the mantra of investing in high quality names with steady predictable returns during times of economic uncertainty is not necessarily true for the current crisis. He points to his position in United Healthcare, which he says is down 25%.

One of the things I notice with high quality companies (even those I feel aren't so good) is that their valuations seem high. The S&P 500 forward P/E ratio is something like 15 (haven't checked recently though) and given that cyclicals are booming and hence very low P/E ratios, most of the sectors have P/E ratios higher than 15. The ones with low valuations are the beaten up ones such as consumer discretionary (retailers, homebuilders), financials (banks, investment banks, insurers), and real estate.

Unlike many who have given up on Bill Miller, I respect and follow him still. I follow him more so than someone like Warren Buffett because he actually expresses his opinions. Buffett, in contrast, hardly says anything and generally only invests in private businesses or large-caps/mega-caps (not my game).

I respect Bill Miller because he is a contrarian investor who bets on unfavourable stocks and he is one of the rare value investors who invests in technology stocks (very few value investors are capable of successfully analyzing tech stocks because they are complex and business conditions change rapidly). The investment that made me a fan of him (in hindsight mind you) is Amazon in the early 2000's. Very few would have made the case for investing in Amazon when everyone "knew" that dot-coms were all going to go bankrupt.

Bill Miller is also a concentrated investor so his thinking aligns with me. I'm still not sure if I'm cut out for concentrated investing but that's what I'm trying for the time being.


2 Response to Bill Miller Thinks The Worst Of The Credit Crisis Is Over

April 4, 2008 at 11:36 PM

Interesting contrarian view. His position on the homebuilders however does suggest a certain analytical detachment from conditions on the ground, which is a risky thing for value investors to have.

April 5, 2008 at 9:37 AM


I notice that one of the flaws with most value investors is that, by not paying attention to economics, they often miss issues like the housing bubble.

Other value investors like Seth Klarman, Bill Ackman, and Mohnish Pabri have also taken (paper) losses in retailers because they don't put much weight into overall economic conditions. I mean, even Warren Buffett has been hit badly with some of his picks like USG. If you considered economics, you would have avoided the retailers and building material suppliers like USG due to housing problems, weakening economy, etc.

Let's also not forget investors like Martin Whitman who are heavily into real estate and financials (although a big chunk of his real estate is at much lower prices from years ago and is in Asia).

Even some value investors in the online world that I respect (like John of have invested in retailers and taken losses. They clearly aren't putting too much weight on the economic-oriented data.

But I feel that many value investors don't put much weight into economic-centered notions ("what sees to be happening on the ground") because it is often misleading. If you actually thought about the housing mess, or the credit problems, or the commodity price increases, you would have a hard time putting money to work in any undervalued segment of the market--and undervalued stocks is what value investors seek!

If you look some of the hugely successful investments by superinvestors, you'll find that they ignore what you refer to as "conditions on the ground". When Buffett invested in Gillette (admittedly on sweet terms that small investors will never get), everyone thought the high-end razor business was going downhill with the popularity of disposal razors. When John Neff invested in Citigroup back in 1990(?), people thought was going bankrupt--not just Citi alone but people thought this was the end of the big profits from banks. When Bill Miller invested in Amazon in the early 2000's or Intel in early 90's, the industry outlook (not just company outlook but the industry itself) was very poor. Who would have thought a cyclical like Intel would not just grow in a boom-and-bust computer industry but become one of the largest companies?

So to sum up, I think you raise a good point but I feel that it is a flaw with value investing. By ignoring economics and the "sentiment" of conditions on the ground, they can end up being early or take losses. But by doing do, they can snatch up undervalued assets that you really can't justify if you put too much weight into top-down analysis.

(good post BTW... you touch on an important point that I have thought about)

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