Has the market defeated Bill Miller?

William H. Miller spent nearly two decades building his reputation as the era's greatest mutual-fund manager. Then, over the past year, he destroyed it.

--The Wall Street Journal

The words and the chart above pretty much captures the story of Bill Miller, one of the top mutual fund managers in history. Thanks to Naked Capitalism, I came across this excellent profile of Bill Miller in The Wall Street Journal. I highly recommend the article to any Bill Miller fans or any contrarian investor.

I don't think we have seen too many portfolio managers collapse so quickly. As you can see from the chart, Bill Miller basically wiped out his multi-decade outperformance in a single year. Unlike many others who have posted bad returns, most of the loss is real impairments and he will never recoup any of that (my portfolio is also in a similar state :( ) He isn't going to "make up" the loss and can only look forward and try to beat the market in the future.

I am still a fan of Bill Miller but this is perhaps my strategies are similar to his. I just hope I don't end up like him ;) I think contrarians can learn some good lessons from his history. He suffered two problems that can severely harm his style of investors. The problems are obvious. The first problem is getting the industries wrong. The second is the price for being a concentrated investor.

As the article points out, he made his name investing in out-of-favour industries (financials in early 90's; technology mid-90's; large-cap growth in early 2000's) but the first lesson to learn is that if you are wrong, as he was with homebuilders, you will end up paying a big price. Contrarians generally don't get bailed out by the market (whereas momentum investors may get bailed out due to the Greater Fool phenomenon.)

One can contrast the problems of contrarians who are bottom-up, as Miller is, against contrarians that are top-down, such as Jim Rogers or Marc Faber. Since Miller is bottom-up, he can be hurt by misreading the macro environment (e.g. homebuilders) but he will pick up companies are extremely low valuations if he is right (e.g. tech stocks in mid-90's.)

The other thing that killed Miller was the fact that he is a concentrated investor. As is obvious, if wrong, concentrated investors will post massive losses. Miller's numbers look worse than it is because he is a concentrated investor. For instance, from what Miller was saying in an interview I linked before, most of his portfolio has performed in line with the market but the terrible numbers come from the 3 financial companies that went bankrupt. Any concentrated investor, including me, can attest to massive losses or gains this year.

Newbies developing their own style and strategies can look at Miller and see if they like his methodology. You can see a 20 year performance and make up your mind.

For what it's worth, I think Miller will beat the market in the next few years... assuming he manages to keep his job.