Bill Miller, long considered one of the greatest individual stock pickers and value investors in the field of investment services, has been getting a lot of bad press lately.
It’s not like the bad press isn’t justified.
His flagship fund, Legg Mason Value Trust (LMVTX), after being the leading performer of managed mutual funds and outperforming the S&P 500 for fifteen consecutive years, has fallen to being one of the worst-performing mutual funds this past two years.
One would also think that his extensive years of experience, education and knowledge would have given him better insight into the finances of the companies in which he’s invested your money, especially after marketing those qualities on his LMCM bio:
Bill Miller currently manages the Legg Mason Value Trust and Legg Mason Opportunity Trust mutual funds. Legg Mason Value Trust is the only mutual fund to outperform the S&P 500 for 15 consecutive calendar years, period ending 01/01/06. Over the years, Bill Miller and his team have received numerous accolades for their management record and distinct style, which focuses on a detailed understanding of businesses and their intrinsic value.
However, Mr. Miller does accept full responsibility for his failures and is shouldering the blame. But, in his defense, some of the responsibility for his losses was out of his control, and should be attributed to the rampant and widespread fraud created through the securitization of debt.
Not many truly knew (and still don’t know) how to value these complex mathematical derivatives (CDO, CDS, MBS, SIV) and no one knew how extensive their use in leverage had become. Not only was Bill Miller fooled, but we were all fooled by the criminals who created, marketed and allowed these so-called “investment” vehicles to become so pervasive. No one is immune to this degree of fraud.
BUT, on a positive note, Bill Miller’s failures serve as reinforcement of what I continuously promote and write about on my blog:
- Learn how to manage your own finances and investments. No one cares more about your money than you do, and you can manage it better than most others could manage it for you.
- No one can consistently outperform the markets. As such, invest the bulk of your retirement portfolio in diversified low-cost index mutual funds or ETFs, for the long term.
- Live below your means, pay off your debt, keep an emergency fund in place and invest in (play) the stock market with only a small portion of your portfolio, or with money that you can afford to lose.
Simple, age-old advice, but powerful stuff if you apply it.
Comments 6
Even the super-rich aren’t immune to massive fraud.
Bernard Madoff arrested over alleged $50 billion fraud
It looks like he “Madoff” with everything.
Posted 12 Dec 2008 at 2:34 pm ¶GTC,
Mr. Miller is yet another example of the perils of averaging down which he steadfastly did with the financials all the way down. FNM, AIG, FRE, et al.
He now joins a star studded cast which includes Nick Leeson of Barings, Yasuo Hamanaka of Sumitomo, Meriweather & his band of nobel laureates at LTCM in the averaging down Hall of Shame.
I would argue that the fact that the vehicle he was trading was going down was ample warning enough that something was amiss. We always find out the reason afterward, WCOM, Enron, etc. Bill Miller was fooled because he let himself be fooled. He prayed at the altar of the Fed that Greenspan/Bernanke always had his back
Continued success in your trading and your blog.
HD
Posted 19 Dec 2008 at 9:58 am ¶Yasuo Hamanaka
Nooo, not Hamanaka too!
Thanks for stopping by HD. I agree that “averaging down” can be perilous, but so can most other strategies if not used appropriately.
Stock prices don’t always drop because something is amiss. As long as one has an understanding “why” a stock has dropped, averaging down can pay off in the long-term.
It goes without saying that Bill Miller should have had better insight than the average schmo investor like myself. Warren Buffett spoke about the problems of complex derivatives many times beforehand, so it’s not like we were totally oblivious.
However, it’s easy to forget the behind-the-scenes hucksters who created and promoted these investment schemes and I wrote this to help make sure we remember that these criminals partially contributed to his (and most others’) losses.
Posted 19 Dec 2008 at 2:42 pm ¶Mike,
I would humbly agree to disagree on averaging down. Strategy is inherently built on stock weakness which invalidates stop loss management which is the ONLY thing that can save you.
IMO averaging down destroys untold numbers of accounts hence my belief it is the cancer of the investing world.
That said, fraud, deceit and thievery will always be present in the markets and to blame them for our losses, even partially, means will are trying to absolve ourselves of responsiblity which we must ALWAYS shoulder.
We did put the trade on ourselves no?
Bill Miller was 100% responsible for the losses of his fund. He was free to sell out at any time, in the case of Fannie Mae, he had $68 points worth of exit opportunities and ignored all of them.
The “why” of a stock dropping always is evident after the fact, akin to when there is smoke their is usually fire somewhere and tis best to leave for safety and return later.
Great post, as it should foster much worthy discussion..
Merry Christmas and All the best,
Posted 20 Dec 2008 at 11:29 am ¶HD
What good would American be if we all agreed? No one would ever become smarter and there would never be any growth. Without the ability to politely disagree, we might as well learn to love vodka and speak Russian.
I see you feel pretty strongly about the “cancer” of averaging down. Because you’re a technical analyst, I can understand where you’re basing your opinion.
I can’t say that I haven’t lost money (and learned a good lesson) mistakenly averaging down in the past. But, Bill Miller did make a long and successful 15-year career of accurately averaging down. I think his mistake this time laid in believing that this downturn was due to the same reasons as previous downturns, and didn’t look quite closely enough at the root cause. Maybe one day he’ll share his reasons.
You wrote..
The “why” of a stock dropping always is evident after the fact, akin to when there is smoke their is usually fire somewhere and tis best to leave for safety and return later.
To paraphrase that damn republican Ronald Reagan, “there ya go again”. The reason for a stock’s price drop isn’t always evident after the fact. There are plenty of fundamentally sound companies that are trading at multi-year lows based mostly on economic fears.
Sometimes people pull the fire alarm when someone’s just ‘blowing” smoke. It could be a great strategy to buy some of these stocks while they are on sale, and before others decide they are now “safe” to buy. But, maybe Scott Adams has the best strategy.
Thanks for the holiday wishes HD. Merry Christmas to you and your loved ones too.
Posted 20 Dec 2008 at 5:04 pm ¶I think Elvis presents a good review of the pros and cons involved in averaging down.
Averaging Down: Good Idea Or Big Mistake?
Posted 22 Dec 2008 at 6:56 am ¶Post a Comment