Monday, November 21, 2011 5 comments

How good was Bill Miller?

In my prior post on Bill Miller, a reader, McMath, posted a link to a chart at Economicpicdata that appears to make Bill Miller look worse than he actually was. The author at that blog picked some time around 1986 as the starting point and I feel that it misrepresents Miller's career.

Since I'm probably the only remaining fan of Bill Miller ;), I thought I would post what I think is Bill Miller's lifetime performance. I am reproducing below, a Morningstar chart for the Value Trust mutual fund (LMVTX) since 1982. Morningstar is very good with their mutual fund data (unlike, say, Yahoo! Finance) and typically computes real returns properly.

I believe Bill Miller started managing the fund in 1982 but it is not clear how much of the stockpicking was solely up to him in the early days. I really don't know and am ascribing all the performance to Miller. Furthermore, I am not sure if the chart below includes expenses (MER). I suspect it does, since Morningstar is very good at including the proper elements, but I am not entirely sure. (If anyone has more correct data, please provide it so that I can use that.)

Finally, do note that the returns shown below are not necessarily the same as what a fund investor would have earned. Depending on how much you invest and at what time period, it will impact the actual return.

Bill Miller's Lifetime Returns

In any case, Bill Miller's lifetime performance, if you invested $10k in 1982 is as follows (do note that this is a log chart):

(source: Morningstar.com. As of November 22, 2011)

As you can see from the chart, Miller outperforms the S&P 500 from 1982 to around 1991. Then he just keeps up with S&P 500 until around 1995. Then he outperforms until 2009.

Miller significantly outperformed the S&P 500 until his catastrophic bets during the financial crisis. Near the peak, roughly around 2006, $10k invested in S&P 500 in 1982 would have a value of $270k. In contrast, Value Trust had a worth of around $426k.

So, near the widest gap, which was roughly when Miller's 15 year streak of outperforming the S&P 500 ended, you would have earned almost 1.6x what the market (S&P 500) would have produced.

Unfortunately for Miller, his disastrous bets on financials—many of the key bets went bankrupt or were heavily diluted by government capital injections down to zero—gave back all his outperformance. He ends his career barely beating the S&P 500.

If you are a concentrated investor, like I am, and like Miller was, it would behoove you to pay attention to risk and avoid catastrophic bets as much as possible. Diversified investors can get away with a few blow-ups but concentrated investors can't. As you can see, Miller gave up 15 years worth of outperformance in two years!

Because of his blunder in 2008-2009, he will go down in history as just another mutual fund investor. But if he hadn't made such a catastrophic error, I honestly think he would have been at the lower-tier of the 'Investing Hall of Fame,' perhaps similar to John Neff or Peter Lynch. I personally treat him as a skilled investor.

Bill Miller is a way better investor than the skeptics would have you believe. He was a way better investor than you, me, or practically everyone reading this blog! But, he made tragic, unrecoverable, errors that will erase him from history. If he was younger, and had another 20 years, I think he would re-establish his outperformance.

If you strike out in the important game, you go home. Simple as that. Unfortunately, he struck out at the most important game in the last 40 years.

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5 Response to How good was Bill Miller?

Parker Bohn
November 22, 2011 at 8:42 AM

This is interesting stuff!

These questions about Bill Miller are not just academic; this stuff cuts to the heart of investing philosophy.

As an amateur investor, I spend a lot of time thinking about things like this, and I like to break down investing into two essential elements:

1) Skill - having knowledge and the ability to accurately value a wide variety of investments.
2) Accurately defining your circle of competence.

Bill has me beat hands down on #1. He probably knows 50 times as much about investing as I do. Maybe more. His knowledge is both broader and deeper than mine.

But I beat the pants off his performance over the last few years. I mean, I beat the market by a satisfying amount, but I really squashed Bill Miller's performance, simply because I beat him on #2.

If you think about it this way, is it more important to have a wide circle of competence, or is it more important to accurately define your circle of competence, regardless of its size?

I would argue that it is VITAL to accurately define your circle of competence, and for both me and for Bill, that circle did not include financials in 2008-2009.

The difference is that I knew this and Bill didn't. Unfortunately, no amount of skill can save you from this error, especially when you are doubling down on highly leveraged companies.

November 22, 2011 at 7:46 PM

Hi Parker Bohn,

Long time no speak; hope things are well. The circle of competence point is interesting. I wasn't around in the early 90's but, apart from a few financial investments here and there, I don't think Miller ever invested seriously in financials. I have no idea why he went so heavily into financials in 2008. I am not 100% sure but I think he invested in Fannie Mae(?) in the 90's but very few, including fans of him like me, ever think of him as having any expertise in financials.

His career also shows how big losses are lethal. You could wipe out many years worth of returns in one big mistake -- this happened to me when my Ambac disaster wiped out all my returns since I started investing about 5 years earlier. If it weren't for owning a high performer like Amazon, his return would have been even worse.

BTW, what would you say is your circle of competence? I know it expands for newbies but wondering where you are comfortable.

Sivaram Velauthapillai
November 22, 2011 at 7:54 PM

Here is a post I made on where I think my circle of competence a few years ago...

November 22, 2011 at 11:39 PM

http://alephblog.com/2011/10/09/we-eat-dollar-weighted-returns/

Read this, then defend Bill Miller. On average, he trailed the indexes on a dollar-weighted basis.

McMath
December 5, 2011 at 11:19 AM

His reputation should also take a hit for the Opportunity Trust performance which has been poor, with a negative total return since 1999.

http://quote.morningstar.com/fund/chart.aspx?t=LMOPX&region=USA&culture=en-US

A value manager that has underperformed the S&P from a start in Dec 1999 is VERY rare indeed. Just look at how badly his fund has done vs morningstars mid cap value index (or any other value fund).

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