bill miller

Pride Goeth Before the Fall

I have only read a few quarterly commentaries from Bill Miller but they have all been interesting and worth reading. For the most part I have learned something about investing from each report I have read.

I remember one he wrote for Q3 in 2005 that foretold his underperformance -- if you were paying attention. I wasn't at the time but in hindsight it is clear he was getting a little too prideful.

This report was right around the time of the Legg Mason buyout of Citigroup's money management business. He wanted to welcome new shareholders with a description of his process which included his thoughts on cyclical value (traditional value stocks) and secular value (growth stocks). He also included a story about his willingess to average down -- or keep buying more shares as a stock drops to lower his average cost. Someone asked him how does he know when a stock has fallen too far to average down -- his reply was when he can no longer get a quote.

This was partly said in jest but it was an accurate reflection of his views. Problem: it means he would never be willing to admit he was wrong or possibly worse -- that he was NEVER wrong. Either way that lack of humility is why he has underperformed and why I believe he will continue to underperform. His most recent note suggests financial stocks will be the winners going forward and that people are panicking out of their financial stocks including Countrywide Financial (CFC). He has the audacity to assume CFC is worth $40 rather than the $14 it is trading for. How he knows that CFC will even have the liquidity to survive let alone be worth $40 is beyond me. I wonder if Bill would use that valuation for CFC if he assumed mortgage originations equaled only half of their recent annual levels.

Bill has no energy, no consumer staples stocks and has 30% of the portfolio in consumer cyclical stocks (discretionary). The secular value investor has 0% in consumer discretionary stocks plus a bunch in energy -- could we be any more different in our views of the future?

time will tell who is right.

Regardless of what you think of my Bill Miller analysis, one critical point for value investors is to never ever have valuation be your thesis for buying a stock. If you say, I own stock XYZ because its cheap then when can you be wrong? if the news comes out bad and the stock keeps dropping but your thesis is I own it because its cheap then you can't sell. You have to give yourself an intellectual out for admitting defeat. Cheap stock is necessary but what you need for a thesis are catalysts for why the valuation will improve -- new products, improved pricing, new management team, etc. That way if those catalysts do not come to pass you have a legitimate reason for selling a "cheap" stock.