The WSJ had an article about Bill Miller's fall (a nod to IndexUniverse). You probably know most of the story. He had excellent, SPX beating returns for a very long time by buying when others were afraid. He also made concentrated bets on certain stocks like Amazon.com (AMZN) and quite a few financial stocks that either failed or came close to failing.
In the article were also some interesting tidbits that I think are more useful than the bigger story. First is a comment from Chris Davis who recounted telling Miller that "one of my (Davis') goals is to just be right more than I'm wrong." Miller told Davis "that's really stupid, what matters is how much you make when you're right. If you're wrong nine times out of 10 and your stocks go to zero -- but the tenth one goes up 20 times -- you'll be just fine. Davis said he could not live that way and neither could I.
The article also talks about his buying more and more of all the financial names, like Bear Stearns, as they went down. It seems pretty clear that he really believes (maybe now it would be believed) in buying more as they went down. This was a contributing factor to his success, and make no mistake he was wildly successful for a long time, and also a contributing factor in his..what should we say..fall from grace or whatever.
Miller's approach is 180 degrees, I think, from what I do and what I've been writing about. Davis' just be right more than I'm wrong is something I believe in and have mentioned on the blog probably 100 times. There is obviously an element of philosophy embedded in this. I don't ever want to try to have to explain to someone why he's down 58% in a down 38% world as the WSJ says Miller is and more important than that I don't ever want to come anywhere close to derailing anyone's financial situation in that manner (obviously my role is different than that of a fund managers so this might be apples to oranges).
A building block; if you buy an index fund and hold it for 30 years chances are you'll be somewhere near 10% annualized. If it actually worked out that way then the 10% annualized would include all the bulls, bears, booms and busts. So all the TV coverage, all the bytes on the internet and all the worry and you could just own an index fund for 30 years (assumes proper asset allocation) and probably make out ok if you saved enough. Of course you'd be down 40% right now which is why I am not a fan of indexing.
With that as a backdrop I think it makes sense to seek out simple ways to add long term value. This includes a defensive strategy when appropriate and overweighting dividends for most of the cycle. Chances are you have your own ideas about all of this but investing can be simple. While I would say that simple is not the same as easy there are things that can make it easier like not making big bets in terms of stocks selected (if you use individual stocks), countries, sectors or cap sizes. If you use funds and you are unsure then you need to look under the hood of the funds you own.
From what I can tell Miller was extremely overweight financials at the wrong time. I wrote about underweighting the sector because of the yield curve and I guess Miller did not do this. Obviously he knows about the theory (inverted curve bad for financial stocks) and ignored it. I believe that the inverted curve is a pretty reliable indicator (because it impedes access to capital which would seem to be very important for a bank). Heeding reliable things that you find might make investing a little easier for you.
Personally I think Miller's saga is a great learning tool.
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34 comments:
I don't think he ignored it. I think he thought it was simply creating buying opportunities.
Did the banking industry implode the last time we had an inverted curve? Or the time before that?
Is there anything really remarkable in his approach? He took on more risk and usually got compensated with a larger reward. It's bound to happen that risk will one day bite you in the ass. I like your idea of outsized returns by minimizing risk, or at least inline returns without the stomach churning. It should be a theme most adopt. However, most people look at the returns and ignore risk.
Another popular strategy is the dogs of the dow. Again, they're buying the high beta stocks of the dow and since most of the time the dow goes up, they're rewarded. Except for when it doesn't, like this year and it gets taken out to the tool shed.
I hate being wrong. I largely stay away from individual stocks to avoid risk.
ETF are ideal in my mind, but I buy some mutual funds as well
I am down 3% for the year and unhappy with my performance. Down 38% is not acceptable to me. If I were down 58%, I hope the walls were well padded.
I'm taking little bites of the dogs of the dow now. Unless we head into uncharted territory I find it hard to believe that an Alcoa or an IP is going to be in single or close to single digits.
I thought the "experts" said everything was priced into stocks. Yet we get a jobs report and it's, oh my God! That leads me to believe that they don't think it's going to get worse before it gets better, and that is cause for concern.
Hey, we have a down 3% guy. I"m free!
I would not expect up 10% per year anytime soon (like before 2020). This is mostly important for people over 50 as younger investors should just keep investing.
People over 50 mostly need to think about working more and spending less. Kind of mean reversal for spending excessively in their younger years.
The 11% Guy,
can you please explain "11% Guy" and the following comment
"Hey, we have a down 3% guy. I"m free!"
Roger. With the interest curve short end at 0% and the long end in the 3%-4% range, do we now have a normalized interest curve? Considering buying a total bond market product such as AGG, but the "normal," though incredibly low, rates just don't seem right for a long term investment. Also, was there any follow-up to the question you asked a week or so ago concerning whether or not we are in a bond market bubble? Your thoughts on the incredibly low bond yield interest rate environment we are currently in and at what rate a bond product such as AGG will be attractive would be appreciated. Thank you.
to the 3% guy
A while back I made the comment that I was down 11% this year and it was not well received by the usual suspects here.
So, you're only down 3% and that makes you the guy in the barrel.
I'm a conservative investor. You must be mostly cash or a very good stock picker.
Miller was never really a "value" investor, he just bought momentum when it was temporarily interrupted... his portfolio over the time he established his reputation was full of large, widely held names and his outperformance (which was slim in many years) was largely due to his focused portfolio of these names... but in interviews with him you never heard about balance sheets, free cash flow yields or any of the other mantras of value investors... it was always "I THINK this stock is going to recover and do well"... his utter ignorance of energy even though many of those companies were fountains of cash further underlined his lack of attention to the basics of value investing... and his venturing into financials without realizing how utterly hostage they were to the hostile credit market seals the deal...
I think rather than write off value investing because of Bill Miller, its a better thing to look at his process (or lack thereof) and understand that it was not that sound even in the years that he was attracting huge inflows due to his "Godlike" stockpicking...
A better comparison for Miller than the S&P would be Ken Heebner, who follows the same heat seeking, focused approach... although he has been burned this year, over time there is really no reason for attributing any skill whatsoever to Miller at any point in his career...
Ajw
anon 7:55, not so fast one that one, the biggest up years were in the 1930s.
anon 8:22 didn't I address that yesterday?
Miller has a good long term track record, so when he's upside down the averages it's easy to throw rocks. I don't have any money in his fund.
One twisted plus is that his and most funds will emerge froom this melt down with capital loss carryforwrds that will make them more tax efficient than ETFs for a few years IMHO.
Though not advertised as such, I believe Bill Miller is a "value quant". These guys use formulas to buy when prices are down, often ignoring the macro environment. They then wait for mean regression of prices. To them , the more a stock is down, the greater the mean regression and profit. Many of his worst picks (AIG,BSC,FNM,FRE) were formerly considered "high quality " stocks; many had A+ quality rankings by S&P for many years. The downfall of these (closet) quants imo is the fact that they ignore the potential "fat tail" events..2008 has been the ultimate fat tail event for the financial markets (which in retrospect shouldn't have been THAT surprising given the various asset class bubbles we had coming in). Thus the lesson as I see it (and as Roger keeps driving home) is to have some kind of strategy to deal with these fat tails, whether it is to raise cash using a simple technical parameter like the 200 day moving average or have some kind of insurance such as out of the money puts etc...
Andrew L
Roger, this is from Anon 8:22. Yes, you addressed bonds yesterday. However, my questions are: What interest rate makes bonds a good long term investment; for example, 10-year treasuries in the %5-6% range? Or, alternately, what event or events would indicate long-term rates have peaked; for example, Fed rate goes to some unusually high rate, such as occurred during the early 1980's, and what might that unusually high rate be? Thank you
there are too many variables to arbitrarily toss out a number. under certain conditions 5% could look great or lousy. at 10% i'd probably back up the truck but it depends on how things unfold. i'm fairly transparent so I'm sure I'll blog about it as we go.
I don't understand why one would buy treasuries for no or negative gain. Savings accounts and jumbo money market accounts, both FDIC insured, are paying as much as 3.35%. I can transfer money between my savings and trading account in a flash.
Would someone explain?
3% guy already has the moniker seg from advocating selling everything in the first half of july 07
well I bought back in to early and I am rather heavily invested right now. I was up 13% early in the year but have suffered losses the last few months. Still I see a rally over the next few months especially with all this negativity, large unemployment numbers, etc.
What do you expect a bottom (intermediate or final bottom) to look and feel like?
3% guy
I don't know what a bottom looks like or feels like but what the heck is going to happen when the senate nixes the beg 3 bailout?
Roger,
I think the 1930's will not be similar to today unless the S&P goes down 90%. I suspect that is virtually impossible.
1966 to 1982 is a better comparison to today or possibly Japan.
I acknowledge there can be huge up years along the way (some big down years as well). BUT, in the end when you average out the gains between today and 2020 they will be MUCH less than 10% per year.
When the most die hard commenter's on this blog are gone and you are constantly only getting 2 or 3 comments per day because everyone has given up on the market (ok maybe a little hyperbole), then the market will be an excellent investment.
anon 7:55
Who says the senate will not give the beg 3 money?
I really think the battle is in the details. At best the senate could require the beg 3 to file a prepackaged bankruptcy before getting access to money.
I do not know if the senate will be that successful. I suspect it will fail and then be renegotiated and then the beg 3 will get money.
I hope bankruptcy will be a requirement for the beg 3, but I am skeptical politicians will do anything right concerning autos.
seg
IMO a bottom will be met with much doubt. In terms of price I think the bottom is in, I think we will go down to it a couple of more times and maybe breach by a little, or not, but I have thought for a while we are in a stumble along the bottom that could last until next spring.
Right, congress telling a business how to control spending and be competitive. That's just a hoot.
This just in...
NEWS ALERT
from The Wall Street Journal
Dec. 11, 2008
The current recession may turn out to be the longest and most painful downturn since the Great Depression, according to economists in the latest Wall Street Journal economic-forecasting survey.
On average, economists expect the downturn to conclude in June 2009, marking an 18-month duration, the longest postwar period of decline. The economists on average said the unemployment rate will peak at 8.4% in response to this recession, as pain in the labor market extends into 2010.
[sigh]
predictions
[/sigh]
I like Hussman's quote:
"....but to say that this is “the worst economy since the Great Depression” is like blowing up a crate of dynamite on the Nevada Proving Grounds and saying it is the worst explosion since the detonation of the atomic bomb there."
I hope the WSJ is right, but I don't think economists can tell time with a watch.
Reference the WSJ article noted above by The 11% Guy (here is a link):
http://online.wsj.com/article/SB122894049567595513.html
Isn't this really good news (economists predict recession to end Jun 09), as conventional wisdom states that the market turns up 6 months or so before the end of the recession. Add to that Roger's price bottom call (comment at 10:45 AM). Am I being a Polly-Anna? Maybe the bear is close to being over.
JCarr
This morning Bernstein and Rosenberg were on CNBC. They observed, I think correctly, that what we are witnessing is a credit implosion (using this rather than 'recession').
The other credit implosions in our recent memory are the Depression and Japan. Both were long recoveries, but also had rallies (significant) within them.
Miller's approach was classic "this is what worked in the past, it ought to work now". Frankly, this has not been a good year for the heretofore luminaries in the investing world.
I'm still of the mind that conventional wisdom applied to this market will prove to be neither.
I am done, another 100k loss for my account tomorrow if the futures hold. The street has lost all credibility.
I am very worried at the futures and lack of agreement on the auto makers next steps. This is pointing to a terrible Friday. I believe this is the worst point my confidence has hit since the melt down started. I really don't know what to do now. Roger do we ride it out of go to cash?
Stop screwing around with futures?
From downstairs:
Senate Republicans killed the auto bridge loan. Unless Bush releases the TARP funds to the big three car companies, we're in deep shit.
It's going to be a dark day in the stock market Friday.
Roger, I asked a couple of questions downstairs ("Bonds") about treasuries. Can you respond?
"The street has lost all credibility."
What credibility has "the street" ever had?
For an example of an SRI mutual fund that has outperformed the broader market this year, see recent article on the Global Investment Watch blog...
http://globalinvestmentwatch.com/2008/12/11/happier-employees-make-better-employees-bets-one-mutual-fund/
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