Wednesday, July 30, 2008 8 comments ++[ CLICK TO COMMENT ]++

Bill Miller 2Q 2008 Shareholder Commentary

It has certainly been a tough period for Bill Miller. In his second quarter commentary, he shares his thoughts.

(source: Bill Miller Commentary, Bill Miller. 2Q 2008, Legg Mason Capital Management)

Mason Hawkins said, “Warren, I’m an optimist. I think this whole thing can turn quickly, and surprise people. Are you an optimist?” “I’m a realist, Mason,” the sage replied. Warren went on to say he was optimistic long term, and backed that up in a talk the next morning on the remarkable history of growth, innovation, and wealth creation the U.S. had produced over the past 200-plus years. He also offered a sober assessment of the current challenges we face, and said it would take some time to work through them.

He then made the perfectly sensible point that as we are all net savers, we should be happy if stock prices declined a lot more, so we could buy even better bargains.

Warren, of course, is Warren Buffett. Nothing new from Buffett, who has said in the past that it could take a while for things to recover. Warren Buffett is not a macro investor and isn't really good with his macro calls. But he does have a very sense of history and what is logical from a long term point of view. The problem I have with Buffett's point (that we could buy more) is that this isn't the case with everyone. For instance, I personally just don't have much more capital to add. Yes, young working class people like me are better off with the current situation (since our earnings are large relative to our assets; and lower valuations imply higher future returns) but it is still difficult to suck up and accept the notion that it's good to see low prices because we can buy more.

Having said that, contrarian investors live for months like now. I remember how just about the only things trading at really low valuations over the last few years were distressed companies. If anyone ever looked at my watch list (I didn't have a blog back then though,) you would have seen trashy companies like Spectrum Brands (SPC) or Celestica (CLS) or Nortel (NT). These were the type of contrarian opportunities that were available (as far as I was concerned--there are some sectors I ignore on purpose though.) In contrast, right now you can pick up historically solid companies for low valuations.

John Rogers, the founder of Ariel Investments, came in to see us last week. John has been an outstanding investor for 25 years or so, but like almost all value types, is going through one of his toughest periods now. His assets are down, similar to the experience we’ve had. He said it was the most difficult market he’d seen, a judgment I would have given to the 1989-1990 market, up until the frenzy erupted over Fannie Mae and Freddie Mac, which sent financials to what looks like a capitulation low on July 15. I am now in John’s camp.

Bill Miller is one of the few value investors who often goes out on a limp and makes specific macro calls. I'm highly respect him but most of his "off the wall calls" turn out to be wrong. This July 15 call might turn out to be wrong as well. Recall that Miller thought that the collapse of Bear Stearns was the bottom in financials a few months ago and it turned out to be wrong.

I am reminded of what John Maynard Keynes, himself a great investor, said once about investing, “It is the one sphere of life and activity where
victory, security, and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is when I should sell it.”

Keynes captures the truth quite well. Investing, if you look at it as a business, is one of the toughest businesses out there. Only a small minority actually make any money through investing. There are a lot of wealthy folks on Wall Street and Bay Street but most of them become wealthy through selling financial instruments (brokers), cutting deals (rainmakers), or from fees (fund managers). There are a lot of millionaire fund managers but they make most of their money through fees. I think if you take a somewhat contrarian path, it may lead to success--at least that's the strategy I'm pursuing.

It has been explained to me that it was obvious we should not have owned homebuilders, or retailers or banks, and that I should have known better than to invest in such things. It was also obvious that growth in China and India and other developing countries would drive oil and other commodities to record levels and that related equities were the thing to own. “Don’t you even read the papers?” was a common comment.

That is a point that I find annoying. There are a lot of people--bloggers, message board posters, journalists, investors--that claim that some of the things that happened were obvious. If everything was so obvious I wonder why they are not millionaires now. If you thought oil&gas were going to do really well, all you had to do was to put down $50k to $100k on some high-cost E&P--these have the most leverage to oil and natural gas prices (example would be oil sands companies or coal-bed methane companies)--and you would be a millionaire now (most of them went up 10x or more). Similarly, if you thought housing was going to go bust, you could have shorted homebuilders like Beazer, or building material suppliers like USG, or housing oriented retailers like Sears and you would have cleaned up easily. You wouldn't have made as much as going long (since maximum from shorting is 100%) but it would have been plenty. Of course, buying long-term deeply out-of-the-money put options would have made you a bundle (these options would have been so cheap on these high flyers).

Sir John Templeton died a few weeks ago, full of riches and honors, as he so deserved to be. The legendary value investor got his grubstake by famously buying shares of companies selling for $1 a share or less when war began in 1939. He didn’t know then that the war in Europe would spread to engulf the world, nor how long it would last, nor how low prices would ultimately go. He always said he tried to buy at the point of maximum pessimism, but he never knew when that was. He was, though, a long-term optimist, as is Mr. Buffett, as am I.

The only thing is... I'm not sure if we have reached the point of maximum pessimism...

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8 Response to Bill Miller 2Q 2008 Shareholder Commentary

July 30, 2008 at 10:39 PM

The inherent sheer arrogance of the man can't help to come out in a supposedly semi-mea culpa piece.

Was it "obvious" to bet against housing, financials, and retailers?

I remember throughout 2006 and 2007 when I was shorting housing stocks, retailers, the banks, the subprime, and the such, you simply CAN NOT AVOID the daily chorus of bottom-calling and derision of the doom-and-gloomers from Bubblevision talking heads and Wall Street analysts. It takes real stamina and endurance to ignore the incessant bullish chatter and focus on the trend and keep shorting and pressing.

I am also amused by his sour-grape comment about the supposed "momentum investors" or "trend followers" that all they have to do is read the newspapers and make excess return. But then again, I have never heard that Your Main Man is known for graciousness.

I do agree with him on one thing: the credit crisis WILL end at some point, but we are not quite there yet.

Sometimes, a bombed-out stock is indeed just CRAP.

July 31, 2008 at 10:16 AM

Since everything was so obvious before ;) what is the obvious investment right now? How about if we start benchmarking you?

July 31, 2008 at 2:20 PM

Easy. Cash.

July 31, 2008 at 2:33 PM

Allow me to explain my retort:

My personal allocation right now is 10% T-Bill, 30% 1-3Yr Treasury, 40% 3-7Tr US Treasury, 15% gold bullion, and 5% gold stocks.

I'm not sure if it's a good use of your time, but if you have nothing else to do, then benchmark this against ANY other asset classes or combination thereof.

July 31, 2008 at 3:48 PM

Is it fair to say you expect deflationary threats to be stronger than inflationary threats? Or do you expect to shift if inflation risks rise?

I'll go out on a limb and say that Bill Miller will beat you (starting now) over the next 3 years.

July 31, 2008 at 4:31 PM


What is this?

I am on holiday for a few weeks and almost the moment I return, after taunting us for months with your vaunted (yet nebulous) trend-following strategies you suddenly confess to being a secret contrarian?

I am amazed!

July 31, 2008 at 6:10 PM

I shorted profitably for about 2years until March this year, but then things got crazy enough that I don't feel I have the edge to keep shorting, so I went to cash. I thought that was clear in the my previous posts (and taunts). What happened in 2007 and early this year was a once-in-a-lifetime shorting opportunity that convinced me to give it a try.

I'll repeat again: shorting is incredibly tough and psychologically taxing. While I do mock You Main Man a lot and actively wish for his public humiliation, I don't _root_ for the whole system to do a deflationary collapse -- though I think there is a significant chance that it could.

The trend following models I follow are long-only. The models are all signaling sitting in cash. That's why I'm sitting in cash, except for a small gold position as a hedge against some real craziness.

Sitting in cash is pretty boring, hence I amuse myself by shooting my breeze here.

Btw, the trend following model I use is published as a paper ("A Quantitative Approach To Tactical Asset Allocation") by Mebane Faber on his website. It is very simple. I thought I've given you guys the link already (It's in one of the past reply to ContrarianDutch where I was especially sarcastic). The instructions about how the model works is pretty explicit. I can't help you if you choose not to read it.

July 31, 2008 at 6:19 PM

byw, Sivaram, if Your Main Main beat my allocation, that probably means the deflationary collapse I am afraid of has been averted. Which means that magical thinking and hoping for the best (otherwise known as optimisim) actually do work!

In that case, I have no problem w/ Your Main man "beating" me. We all get to be employed, live and eat.

HOWEVER, i have a feeling that if Your Main Man doesn't shape up in the next 12 months, he will get fired.

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