The folks at Legg Mason must have some pull as Bill Miller features are making the rounds this week:
The Barron's article, in particular, seemed embarrassingly gushy for a manager who ranks in the 99th percentile for fund managers over 3 and 5 years. But investing is a long-term endeavor, right? Well, over 10 years, Miller's performance still ranks him in the 91st percentile. Yes, 91-99% of fund managers have outperformed Bill Miller over the last 3-10 years — why wouldn't this be worthy of cover stories and features?
In the value investing world, few figures draw as much controversy as Bill Miller. Many decry him as a growth investor in value sheep clothing. In the Barron's article, Miller states that "shareholders who stuck with us believed in our process and have seen us underperform; it has happened before." It may be instructive to contrast Miller's "process" to that of the acknowledged master of value investing, Warren Buffett.
Buffett has often stated that many years of great performance can be wiped out in a few relative moments of poor judgment — "anything times zero is still zero." In reality, it is quite difficult for a traditional mutual fund manager to lose EVERYTHING (every stock in the portfolio would have to go to zero) but dropping 72% over 18 months is probably as close as one can get. After famously beating the S&P 500 for 15 straight years, most of the investors in Miller's fund are losing money, thus illustrating Buffett's point.
Warren Buffett ran a hedge fund in his early days, delivering results every bit as impressive as Miller's famous streak. Yet he didn't explicitly set out to outgain his benchmark index. As he stated to his investors every year, Buffett thought the key to superior investment returns was to lose less than the Dow in bad years at the risk of lagging the market in good years. Using this philosophy, Buffett managed to outperform in both bull and bear markets in every year of his hedge fund operation.
For Buffett, risk considerations always outweigh reward prospects and in fact, he views the best investments as those which offer great reward with little actual risk.
By contrast, Bill Miller is known as an "aggressive, bold manager" according to a Morningstar analyst quoted in the article. In her report on Miller's fund, the analyst goes further to say she likes Miller's boldness, confidence and assertiveness, which are based on "thorough and creative research." While Miller, like every investment manager, talks about risk but one gets little sense that it is truly at the top of his priority list.
At the market lows, Bill Miller's Legg Mason Value Trust fund had lost 72% in the previous 18 months. Morningstar gushes over the fund's "fantastic 80%" bounce, "reflecting management's bold style" (note that Morningstar rates the fund 1 star despite the analyst's enthusiasm). Barron's lauds him for his 37% return this year. But Miller will have to deliver nearly 400% returns just to make up that 72% loss, a fact that is somewhat glossed over by the positive language in both these features as well as the Morningstar report.
Here at the Enlightened American, we follow Warren Buffet's approach: keep your losses down and everything else will take care of itself. Our 34% return so far this year very nearly matches Miller's 2009 returns but unlike Miller, we lost less than the market last year and stand in good position to begin growing our capital again if the market continues to hold up.
Readers can now follow all of our moves via the new Enlightened American Premium (EA-Premium) service. While we have beat the S&P 500 each of the last 3 years, I cannot guarantee that will continue if you subscribe to EA-Premium. What I can promise is that we will implement and refine an investment strategy/process that focuses on risk first. If we follow this approach over the long term, results will take care of themselves.
