A new profile of Bill Miller hit the Wall Street Journal yesterday and boy is it a doozy. If I were teaching a course on behavioural investing, and had lost access to all of the curriculum’s text books for a week, I could probably get by just on pull-quotes from this piece.
Something happens to investors when they get around a stock picking manager who’s managed to string together a few years of market outperformance — they become giddier than a drunken bachelorette party hanging on the neck of a Vegas magician who happens by their table at the bar (I’ve seen this in real life, long story).
For the uninitiated — Bill Miller’s Legg Mason Value Trust shattered every record on the books by trouncing the S&P 500 for fifteen straight years between 1991 and 2005. And then the fund demolished all the benefit of that fifteen years of outperformance within a two-year period, between 2007 and 2009. It hardly needs to be said that the vast majority of the Value Trust’s assets came in toward the top of this record streak — meaning the average dollar invested became a loser even despite all the glory of the track record on its surface.
The entire article is hilarious — through no fault of the reporter, Kirsten Grind, or the subject, Miller himself — whom I regard as a brilliant, if flawed icon of the investment management business. The story here just inadvertently exemplifies every single flaw and fallacy of the investor mentality.
I mean, the headline alone:
And now, a running list of our flaws as investors — which find a way to manifest themselves even when we think we’re aware enough to get them under control:
1. We’re confusing brains with a bull market, ascribing some sort of meaning to Bill Miller’s “comeback”:
Over the last three years, though, Mr. Miller’s Legg Mason Opportunity Trust has outperformed 97% of the mutual funds in its category, according to research firm Morningstar Inc. It was No. 1 in 2012 and second-best in 2013. Its total return of 67% last year trounced the S&P 500 stock index’s 32% jump.
As though anyone making big bets on a concentrated portfolio in one of the greatest stock rallies of all time couldn’t have done this.
2. We’re acting as though Miller’s behaviour during the crisis wasn’t true of almost all long-only value managers:
Lots of mutual-fund managers took a beating during the crisis, but none so publicly as Mr. Miller. As his Legg Mason Capital Management Value Trust fund sank to the bottom of the rankings, fleeing investors shrank its assets to $US2.8 billion from $US21 billion. He refused to on shaken financial firms like Bear Stearns Cos. and American International Group Inc., which were then nearly wiped out.
With all due respect, value investors don’t cut losses when they’re running money in the public eye — they double down and “ignore price”, focusing on value and why “the market is wrong.” Third Avenue’s Marty Whitman blew up in the crisis, as did Fairholme’s Bruce Berkowitz, as did almost all of the other “legendary” value mutual fund managers.
3. We’re lauding Miller for his guts and having balls — with other people’s money:
His resurgence largely reflects more of the same: steadfastness in his beliefs, a stock-picking strategy dominated by big bets on beaten-down companies, and comfort taking risks that frighten away other investors.
4. Investors, who fled the fund en masse, are back to throwing money at Bill Miller, now that he’s gotten his groove back.
Opportunity Trust brought in a net $US189 million last year, the fund’s first increase since 2007, and money has kept coming in so far this year, boosting total assets to $US2.2 billion.
Classic performance chasing behaviour. He’ll be back up at another peak in AUM just as his performance is about to mean-revert back down to the category average or just as the global economy is once again set to explode into a million pieces again. Dollar-weighted mutual fund returns are always hilarious.
5. This time is different:
Since the horrible losing streak, Mr. Miller has read a pile of books and research papers about crises in hopes of getting a better grip on what happened.
That should do the trick.
6. No comment:
Before the crisis hit, he attracted $US1 billion to $US1.5 billion a year in new investor money. Legg Mason didn’t publicly disclose his pay, but Mr. Miller’s annual salary likely topped $US10 million. In 2006, he bought a 235-foot yacht called “Utopia.”
Bridget Hughes, a mutual-fund analyst at Morningstar, says Mr. Miller was “so famous” among investors, “and then everything just fell apart.”
The Morningstar analyst quoted neglects to mention that Value Trust’s backward-looking rating on the fund at the time was undoubtedly “Five Stars”.
7. Industry professionals aren’t immune either — Legg Mason got out of “the Bill Miller business” at the bottom and left him with a smaller role at the firm and a less important fund to manage:
Value Trust rebounded sharply, but it was too little, too late. In 2011, Legg Mason named a successor to Mr. Miller, saying the move was part of a long-term succession plan hatched before the crisis.
8. Bill Miller is betting big once again:
He says he is trying to take advantage of “blindingly obvious” trends. One-third of the Opportunity Trust fund’s portfolio is invested in financial firms, with another 14% tied to the housing market.
If it works out, he will be a genius again and double his assets under management. If it doesn’t, well, brokers will “manage the manager” by firing the fund and just start recommending a new one. There’s very little downside for everyone involved. Except the investors.
Same as it ever was.
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