The Fall Of Bill Miller


After beating the S&P 500 every year from 1991-2005, Legg Mason’s Value Trust fund is down 58% over the past year. The collapse has more than wiped out the fund’s record streak: Value Trust is among the worst-performing funds in every period tracked by Morningstar: 1-year, 3-years, 5-years, and 10-years.

The fund’s assets under management have fallen from $16.5 billion to $4.3 billion, taking Legg Mason’s fees down with them. Since most of the $16.5 billion arrived near the end of the streak, moreover, most of Value Trust’s investors have done even worse.

Portfolio manager Bill Miller sat down with Tom Lauricella of the WSJ this week to discuss his demise. Bill is a brilliant man, and unlike many clobbered fund managers, he takes responsibility for what happened.

As is often the case with such stories, Bill’s experience over the past year is cast as a series of “mistakes”–in contrast to the brilliance he displayed in the preceding 15 years. We think the more profound lesson is to look at Bill’s experience alongside that of many other legendary fund managers who have eventually destroyed themselves and their records. Once you do this, it’s hard not to come to the following conclusion: No strategy works in all markets, no strategy works forever, and no strategy can prevent the eventual onslaught of mean-regression.

Put differently, outsmarting the vast majority of other traders year after year is a tough business, especially when you’ve got to cover 200+ basis points worth of fees and transaction costs while you’re at it (And outsmarting the vast majority of other traders is the only way to beat the market–this is a zero sum game).

In any given year, any given trader has a 50/50 shot of winning, and, with those odds, it’s a certainty that some folks will put together some awfully impressive track records. No matter how long a streak continues, however, a single bad year can pull the entire record back into mediocrity (or worse).  Thanks to the unavoidable tendency of most investors to place too much weight on past performance, moreover, the longer a streak continues, the most assets will be around to get clobbered if and when it ends. 

In short, as Bill himself would no doubt be the first to say, past performance is no guarantee of future results. In fact, quite the opposite: stocks and funds that have done well in the past are more likely than average to do worse in the future. You have been warned.

Tom Lauricella:

William H. Miller spent nearly two decades building his reputation as the era’s greatest mutual-fund manager. Then, over the past year, he destroyed it.

fuelled by winning bets on stocks other investors feared, Mr. Miller’s Legg Mason Value Trust outperformed the broad market every year from 1991 to 2005. It’s a streak no other fund manager has come close to matching.

Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets. Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares continued to fall, he argued that investors were overreacting. He kept buying.

What he saw as an opportunity turned into the biggest market crash since the Great Depression. Many Value Trust holdings were more or less wiped out. After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it…

“The thing I didn’t do, from Day One, was properly assess the severity of this liquidity crisis,” Mr. Miller, 58 years old, said in an interview at Legg Mason Inc.’s Baltimore headquarters…

“Every decision to buy anything has been wrong,” Mr. Miller said over lunch at a private club housed inside Legg’s headquarters. In the 16th-floor dining room, Mr. Miller sat with his back against the wall, a preference he says he picked up as a U.S. Army intelligence officer in the 1970s. “It’s been awful,” he said.

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See Also:
Bill Miller Calls The Bottom Again