by David Goodboy
Bill Miller is back on a winning streak. Once a hero of Wall Street with an enviable record of 15 straight years of beating the S&P 500, he suffered the same fate as everyday investors during the financial crisis, and has since failed to return to his former level of success.
A Truly Exceptional Track Record
Most funds have difficulty just beating the S&P 500 in any given year. To do so for multiple years in a row is even more impressive. So it’s crazy to think that Bill Miller beat the index for 15 years straight while working at Legg Mason. These returns are simply unparalleled in the mutual fund world. His track record even outperformed Fidelity’s legendary Peter Lynch.
However, his well-tested value investing strategy of buying stocks at a discount was no match for the crashing stock market. Convinced his holdings would bounce back, Mr. Miller kept averaging into positions and the market kept proving him wrong.
From 2007 to 2011, his Legg Mason Opportunity Fund plunged over 50% as large bets on troubled financial stocks failed to turn a profit.
Things got so bad that Bill left Legg Mason after 30 years to launch his own investment manager, LLM.
He purchased Legg Mason’s stake in LMM, an investment adviser that he and the company jointly own, in August 2016. Bill Miller currently manages $1.8 billion in assets.
Now that the bull market has come roaring back, Bill Miller’s stock picks are back on track, with his LMM Investments climbing back up the performance ladder. The Opportunity Trust Fund is higher by nearly 14% this year, crushing the S&P 500’s 8% return over the same time frame.
Bill Miller’s Stock-Picking Strategy
Bill is a long-term value investor in the tradition of Ben Graham and Warren Buffett, but with one crucial twist.
He focuses entirely on U.S.-based companies, believing his edge is greater with domestic stocks. He does not avoid growth stocks and exhibits a contrarian bent.
However, unlike Buffett, Bill Miller’s picks show a preternatural acceptance of risk. He firmly believes in embracing risk rather than avoiding it. He states, “One consequence of the financial crisis is extreme risk aversion, evident in near-record-low bond yields. Since the crisis, risky assets, such as stocks, have done better than “safe” assets, such as government bonds. It is my opinion, and it looks likely to continue for many years.”
Bill Miller also believes firmly in conviction and concentration rather than broad diversification in the stock market. He explains, “risk aversion has led many equity mutual fund managers to become closet indexers, as they fear the loss of assets and employment should their returns fall below those of the benchmark. If you go with an active mutual fund, pick a conviction manager who has what the academics call “high active share” — that is, his or her portfolio looks very different from the market.”
Now let’s take a closer look at Miller’s 2 most promising picks:
Valeant Pharmaceuticals Intl Inc
Down over 50% in the last 52 weeks, this stock is testing Bill Miller’s talent. Shares plunged nearly 90% in March 2016 due to the triple whammy of weak earnings, a short-selling campaign, and a drug price investigation.
But Bill Miller firmly believes the business will soon be back on track and the share price will double within two to three years. He views the company as a “slow growth” opportunity that will soon start to perform.
He thinks Valeant’s divestiture program and R&D investments will turn the ship around. Eventually, he states, the company will reveal a new business model that will return it to profitability.
Amazon is the company that has supercharged Bill’s performance this year. Sticking with his philosophy of buying value and stocks that have fallen out of favor, he started building a long option position in the stock back when investors doubted AMZN’s value.
Proving his conviction and risk-embracing nature, Miller’s long call option position exceeded $200 million in the autumn of 2016. He held just under $12 million in actual Amazon stock at the same time. As you know, calls can expire worthless if the strike price is not reached by expiration. Talk about risky!
His investment thesis is based on the fact that Amazon is a retailing juggernaut often dismissed by investors. Bill states, “Amazon, on the other hand, is attacking retail — U.S. retail alone is worth $5 trillion, 10 times the size of the global market Google and Facebook are competing for. This is a part of the reason why I believe that people are underestimating the profitability of Amazon in the long run.”
Again, the payoff has been huge, with Amazon shares up 30% in 2017.