Image Credit: Chris Rand, “Star falling into the aurora over the Kewaunee River,” Wikimedia Commons
By Jason Zweig | November 18, 2011
What’s the difference between a hero and a goat? Just ask Bill Miller.
The once-revered mutual fund manager announced Thursday that he will step down in April as lead manager of the Legg Mason Capital Management Value Trust. In a business that thrived for decades by nurturing the cult of the star stock picker, no star had sparkled more brightly than Mr. Miller’s — or fell to earth with such a thud.
Each year from 1991 through 2005, Mr. Miller’s fund outperformed the Standard & Poor’s 500-stock index — a streak of 15 consecutive calendar years, unmatched by any other manager, even the great Peter Lynch, the former pilot of Fidelity Magellan Fund. Had you invested $10,000 in Mr. Miller’s fund at the beginning of that period, you would have had $98,079 at the end, versus $51,354 for the S&P 500, according to Morningstar.
Steadfast in his convictions and imperturbable under pressure, Mr. Miller was the ultimate iconoclast. He ran a fund with “value” in its name that feasted on technology stocks that no other fundamental stockpicker would touch. He bought Amazon.com during the Internet bubble. He bought Google in its initial public offering, when it was considered insanely overvalued by many.
Your garden-variety fund manager studied economics in college, got an MBA and went straight into money management. Mr. Miller, by contrast, worked as an Army intelligence officer, pursued a Ph.D in philosophy and was chairman of the Santa Fe Institute, a think tank devoted to the study of complexity in nature and society.
Ask Mr. Miller what he did for a living and he would tell you, “We think about thinking.” A discussion with him might cover astrophysics and ant colonies, meteorology and baseball, the science of poker playing, and “enantiodromia,” or the restoration of balance.
Warren Buffett isn’t Mr. Miller’s only intellectual hero; he also reveres philosophers Ludwig Wittgenstein and William James. As Bruce Greenwald, a professor of value investing at Columbia Business School puts it, Mr. Miller “was always more interested in being the smartest person in the room than the richest.”
Yet Mr. Miller was blindsided by the financial crisis. The more his financial stocks went down, the more shares he bought. Mr. Miller once quipped that the only time he would stop buying more when a stock’s price fell was “when we can no longer get a quote.”
What had worked for him brilliantly in technology and industrial stocks over the previous two decades failed dismally during the crisis. “Our philosophy has always been to go in and buy the disrupted sector,” Mr. Miller told me Thursday, “but it didn’t work the last time.”
Over the full stretch since Mr. Miller became lead manager of the fund in 1990, he has gained an average of 9.39% annually, versus 9.14% for the S&P 500 — even after his fund’s hefty annual expenses of nearly 1.8%.
What if Mr. Miller had stunk first and become a star later, instead of the other way around? “If he’d achieved the same results in the opposite order, people would be lionizing him now,” says Christopher Davis, chairman of Davis Advisors and a friend and competitor of Mr. Miller’s.
To the panicked investors who fled Mr. Miller’s ghastly 55% loss in 2008, however, his longer-term performance means nothing. The assets at Mr. Miller’s flagship fund have shrunk from $20.8 billion in 2006 to $2.8 billion today; investors have yanked out well over $10 billion.
How likely is it that another fund manager will rack up a streak like Mr. Miller’s? “It’s going to be much more difficult” with short-term trading dominating the market, he told me.
For Legg Mason, the collapse in Mr. Miller’s performance has vaporized hundreds of millions of dollars a year in fee revenue, a loss that has been well-noted by every other fund company. After this, pigs will sprout feathers before another major fund company makes a star out of another manager.
Rack up big losses — or big gains — in obscurity and no one notices. Lose a lot of money once you are a star and no one will forget.
Source: The Wall Street Journal, https://www.wsj.com/articles/SB10001424052970204517204577044570430299472
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For further reading:
Books:
Definitions of BACKTESTING, CRASH, FORECASTING, OVERCONFIDENCE, PANIC, RISK, in Jason Zweig, The Devil’s Financial Dictionary
Chapter Four, “Prediction,” in Jason Zweig, Your Money and Your Brain
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