Sunday, December 7, 2008 4 comments ++[ CLICK TO COMMENT ]++

From the CFA archives: Bill Miller Q&A

I think I'm the last man standing when it comes to Bill Miller fans. Being a contrarian, I'm sure Bill Miller would agree that being the last faithful member of the fan club is actually a positive. Bill Miller is having an absolutely disastrous year. You are talking about negative numbers that are more hedge-fund like than anything seen in the mutual fund universe (you know, those over-leveraged hedge funds that lose 50%.) He was never a true value investor and hence many consider him as a value pretender. Perhaps the fact that he is not a true value investor is what attracts me to his thinking--sort of like Marc Faber or Jim Rogers, both of whom are macro speculators and probably can't even read a balance sheet (I'm exaggerating ;). Anyway, I have been going through the CFA archives and came across a Q&A with Bill Miller (I referred to speeches by Jim Grant, Marc Faber, and Jeremy Grantham in a prior entry.)

You can access the streaming audio by clicking on 'Launch' buttom near the bottom-right.

If you are a Bill Miller fan, this is a great Q&A. Even if you are not and think he is the second worst investor ever, second to me that is ;), you may find his thinking interesting. He covers a lot of ground and you can get a feeling for his techniques. One can also see how things would blow up this year given how he relies to probabilities and essentially swings for the home runs than trying to get base hits. There are also some gems including a story of a question Warren Buffett asked a bullish newspaper analyst. After hearing this, I'm more cautious about the newspaper industry. If you want to know why I consider Warren Buffett to be the best investor of all time, it is because of questions like these. One seemingly simple question that cuts to the point and accomplishes something that would have taken days of analysis.


Here are some notes on what Bill Miller discussed:


  • Looks at multiple valuation metrics, rather than the classical value investing method of looking at historical measures (P/E, book value, etc)... this is one of the key reasons that many do not consider Bill Miller to be a value investor.
  • Follows the philosophy that most games are won on home runs than on sacrificial bunts...cares more about how much you gain/lose rather than how often you are right/wrong... This goes completely against investors such as Warren Buffett and most value investors who are concerned about avoiding losses of any sort and try to get base hits.
  • Points out that dividend/share buyback policies have a huge impact on investing...how management allocates capital makes a big difference.
  • Relies on multiple techniques to evaluate investments... I think this is one reason Miller performs well with certain investments but also suffers huge losses when the market prices can't see through bubbles...
  • Thinks talking to management is useless for short term but can be helpful in the long run because you can get a feel for the business. He cites an example of asking Amazon CEO what he was spending his time on compared to prior year. Jeff Bezos said that he was concerned about financial issues the prior year but was now spending time thinking of the customer experience. This basically indicated that Amazon just switched from defense to offense...
  • Discusses his worst investment in terms of dollar losses and the speed of losses at that time (he lost $300 million in 60 days.) It happens to be none other than Enron, which he bought when it was distressed... You can see why some don't like Bill Miller's strategies. He basically invested in Enron with a calculation based on what the impact of that would be on the overall portfolio. That is, he optimizes the portfolio return rather than the individual investment. In contrast, most value investors would only look at securities alone and not give much thought to the total portfolio return (some investors such as David Dreman also seem to look at total portfolio but they are not concentrated investors so it isn't a big concern.) I think Miller's strategy works in the context of his overall strategy of swinging for the fences. However, it means you will end up with massive losses in some holdings... I suspect his investment in something like Fannie Mae or Freddie Mac in the last year might have produced an even worse result.
  • Regarding value traps, Miller says that most of them result from investors mapping past returns onto a different situation today. For example, pharmaceuticals may have earned x in the past 20 years but the situation now may be different. What happens is that the market keeps marking down the valuation to reflect the present and future fundamentals, whereas investors are still pricing on past (rosy) fundamentals. ... Value traps really scare me. I guess it scares a lot of people but you may notice that I tend to look at beaten-down stocks with low valuations (say something down 50% with a P/E of 8.) It's very difficult to say what is actually a value trap. This is one of the reason I never pulled the trigger on anything on my watch list (such as Sears, Torstar, and so forth.) I also am cautious about folowing someone like Prem Watsa because he invests heavily in companies that may be value traps (e.g. newspaper companies and forestry/paper companies.) Watsa's point is that ROE would revert back to the mean but that plays into Miller's point that the fundamentals may have changed.
  • Newspapers are a classic value trap. An insightful point he makes is that some industries face massive changes in such a short period of time that they are forced to adapt one way or another; newspapers in contrast have been facing a slow death that the industry hasn't been forced to change. I feel that he is bang on with this point. I think Miller's point may be even more insightful when applied to the American auto industry. The auto industry has faced such a slow death that they simply kept restructuring slowly over many years... anyway, regarding newspapers he cites a question that Buffett asked of a newspaper analyst:
    would newspapers exist if the Internet was developed first? You can see the skill and intelligence of Warren Buffett. No need to do complicated calculations or projections of the future, or read through volumes of financial statments. A simple question makes or breaks the investment.
  • Gives a funny example of a retailer called Celant(sp?) that he owned, which went bankrupt. Then it recovered and went up 20x or something and then went bankrupt. Then it rose something like 30x and actually went bankrupt again for a third time :)
  • Bearish on commodities... thinks commodities may make sense as an inversely correlated portfolio asset but you are trading returns for lower volatility... Agrees with Marc Faber that commodity demand may increase but feels that supply will make up for it (better technology, substitutes, etc). Faber was arguing that demand curve changes faster than supply curve so commodities were attractive. Although Miller doesn't say it, that also means that if demand goes negative, prices will decline significantly. This is what we are observing right now. Ironically, the bullish arguments for commodities is also what makes it a terrible investment right now... Miller does say that he made a mistake not overweighting energy based on a simple bounce after an economic slowdown (2000-2001).
  • A question was asked about Dell buying back shares when it is trading at something like 17x book value. This is a good topic that separates someone like Bill Miller from the classic value investors. Miller says Dell's policy in the past was terrible (was a transfer of wealth from investors to management and employees) but points out how buying back at current prices was fine even though it was 17x book value. He valued the stock at a much higher price so the fact that they are buying back now, even though it is above book, makes sense. This is a good point missed by many value investors. Book value is not a good indicator for a lot of technology companies.
  • Bill Ruane said that the best advice is to read Benjamin Graham (Security Analysis and Intelligent Investor) and read all of Buffett's letters... Miller thinks "better" advice which captures all that is to follow a Puggy Williams' (sp?), a card player, 3 key elements: know the 60-40 end of a proposition; money management; and know yourself... This shows how Miller relies far more on probabilities and portfolio management than classic value investors do.


Bill Miller is somewhat like John Neff (I'll see if I can check out his inteviews as well) than a hedge-fund-like investor or a pure bottom-up investor like Warren Buffett or Seth Klarman.

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4 Response to From the CFA archives: Bill Miller Q&A

Anonymous
December 8, 2008 at 4:08 AM

Here are some other miller webcasts:


http://www.leggmason.com/individualinvestors/resources/conference_call_replays.aspx

http://www.leggmason.com/thoughtleaderforum/2007/index.asp

The thought leader conferences have a bunch of miller talks in reference to other speeches.

hpm

December 8, 2008 at 10:36 AM

Thanks HPM...

(buy it like it's cold)
December 9, 2008 at 3:56 AM

The companies Buffett and Miller are willing to buy aren't as different as some readers might think.

Miller likes Amazon stock. But Buffett got +150% on euro-denominated Amazon bonds over about 6 years.

Miller bought Enron stock and lost 85+% of his money, but Buffett bought Enron bonds, and made +330% in 4 years. That's a four-bagger, also known as a home run.

The big difference between Miller and Buffett is that Buffett has avoided blowups better, for longer. Miller's 10-year dollar-weighted record is not looking good. He's going on 3 years of dollar-weighted results below the 96th percentile. If he doubles his money in four years, he's still going to have an unimpressive 15-year record.

It makes me think about football instead of baseball, because in football, you can go backwards. One fumble any time can destroy your whole drive and set you back 10 plays.

Seeing it happen to a bright, experienced investor makes me think about just how hard it is to overperform long-term with big money.

And I'm guessing Miller's triple bankruptcy company was Salant.

BILIC

December 9, 2008 at 10:48 AM

Good points BILIC...

Maybe it's the limitation of his mutual fund but one thing I don't see Miller doing, is to buy further up the capital structure. A lot of Buffett's moves in the last 20 years (but not in his early days) was to buy securities senior to common shares. For instance, some of his big investments have been in convertible bonds or convertible preferred shares (eg. Goldman Sachs, G.E., Gillette, Soloman, etc). I can see someone like Miller making a lot of money in bonds since most of the firms he looks at are distressed and the bonds likely have good yields.

Anyway, Miller has dug himself a huge hole. Although he has a chance to post high returns since, as he himself has said, the big negative return comes from 3 of his blowups: Fannie, AIG, and Bear Stearns(?); and the rest of the portfolio supposedly has performed in line with the market. But it's going to be tough.

I feel that Miller is way too optimistic. That's probably his personality but those guys can get hit badly. For instance, in the conference call that HPM references above, he seems to imply that everything will be back to normal next year because the government is throwing a lot of money onto the problems. Sure, there could be rally up to March as Marc Faber and others have suggested. But you cannot solve some of these problems with money. I think there is still further dissapointment to be had.

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