Posted by: jhamon | October 11, 2009

Bill Miller, Value Investing Genius. Huh?

It's Miller Time, says Barron's.  Why?

It's Miller Time, says Barron's. Huh?

Lose 72% in 18 months and make the cover of Barron’s…  Is this a great country or what? 

Barron’s gushes about Miller’s rebound.  Read my “ciphering” below for more on that:

DON’T WRITE OFF Bill Miller quite yet.

The aggressive manager of the Legg Mason Value Trust, whose remarkable run of success preceded a more recent patch of dreadful yearly returns, is again near the top of his peer group in 2009. Through last Thursday, the Value Trust (ticker: LMVTX) was up a whopping 37.52% so far this year, putting it in the fifth percentile (top 5%) of all large blended-fund returns. It’s an amazing about-face from early March, when his fund had lost 72% of its value in a matter of about 18 months.

So let’s run the numbers.  If Miller was off 72% at his nadir, then:

  • that’s 28% of his high water, so
  • add his astronomical 2009 returns of 37.5%, thus
  • 28% * 1.375 -> Miller’s at 38.5% of his high water mark, and
  • In plain English, he’s still off 61.5% from his high!
  • He’ll need to post three additional stunning 37.5% years just to recover his losses. (38.5% * 1.375 *1.375 *1.375 = 100%).

Here’s a “Growth of $10,000” chart for Miller’s fund:

"Growth" of $10K in Bill Miller's Value Trust

"Growth" of $10K in Bill Miller's Value Trust. (Click for more...)

Now remind me again why Bill Miller’s a genius? 

Without a a 100% objective risk management process, it’s not a matter of if, but when, you will blow up.  Beating the S&P for 15 years means nothing if you’re below where you started from 10 years ago.  In inflation adjusted terms, his results are much, much worse.

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  1. Great post John. Shows how irrational investment performance can be without rational numeric measurement.

    Bottom line remains that it is very difficult to make a return over the long haul that exceeds the market. As I have reviewed my stock picks, I wonder how much return is simply the underlying trend vs. genuine insight on a specific stock.

    • It is hard to make money in the markets. It’s even harder when you give back all your gains and a little extra.

      Three rules of investing:
      1. Don’t lose money
      2. Don’t lose money
      3. See rules 1. and 2.

  2. Agree with the post, Miller has been blowing smoke for years. He USED to be a bread-and butter value investor. Now, he seems more apt to simply chase returns. How Barrons was fooled into putting him on their front page is beyond me. Are they really turning into cheerleaders? Who knows, maybe the joke is on us-after all, we ARE talking about it!

    What irks me the most is that Legg charges egregious annual fees (over 1.5%, last I checked). Yet, as a mutual fund, they collect regardless of their fund’s performance. Unlike a hedgie, they have no high water mark to hold them accountable for fund losses. Hence, another reason for guys like Miller to ignore risk management.

  3. Indeed.

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