The Man Who Beats the S&P: Investing with Bill Miller
Summary
Lowe wrote a profile of Bill Miller during the run in which his Legg Mason Value Trust beat the S&P 500 in each calendar year from 1991 through 2005. The book was published in 2002, in the middle of that streak.
The substantive content concerns Miller's definition of value. He rejected the identification of value investing with low price-to-earnings or low price-to-book ratios, arguing instead that value means paying less than the present value of future free cash flow, which can be true of a company trading at a high multiple if the growth is durable. On that basis he bought technology and internet companies including America Online, Dell and later Amazon, which put him outside the value community of the time. Lowe also covers his interest in complexity theory and the Santa Fe Institute, his concentration in relatively few positions, his willingness to average down, and his low portfolio turnover.
The book is admiring and written before the outcome. Miller's fund lost roughly two thirds of its value in 2008 after large positions in financial stocks and homebuilders, and he underperformed heavily in the years around the crisis, which reframes the earlier record. Statisticians also pointed out that the calendar-year streak was partly an artefact of measuring in January-to-December windows.
Read it for the argument about what value means, which was ahead of its time and has since become the mainstream position, and discount the treatment of the streak as evidence of skill.
Key takeaways 7
- Value means paying less than the present value of future cash flows, so a high accounting multiple does not make a stock expensive.
- Low price-to-book and low price-to-earnings screens select for businesses in decline as often as for bargains.
- Miller bought technology and internet companies on value grounds while the value community treated them as untouchable.
- A concentrated portfolio with low turnover is the practical consequence of holding a genuine differentiated view.
- Averaging down is correct when the analysis is unchanged and wrong when the price fall is information.
- Miller drew on complexity and adaptive systems research to argue that competitive advantage can persist longer than models assume.
- A fifteen-year run of calendar-year outperformance is weaker evidence of skill than it appears once measurement windows are varied.
Who should read it
Investors interested in the argument that growth and value are the same calculation, who should read it against an account of Miller's 2008 losses.
About Janet Lowe
American financial journalist and biographer of Charlie Munger, Benjamin Graham, Warren Buffett and Bill Miller.
Damn Right! is the standard full-length life of Charlie Munger, built from interviews with Munger, his family and his partners, and the Graham volumes put writings and lectures that had gone out of print back in circulation. The books supply the biographical record behind quotations that circulate everywhere else without sources.
Where it sits in the reference 2
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