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Bill Miller Q2 Report


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Among the few professional fund managers I follow, Legg Mason's Bill Miller is one of my favorites. His quarterly reports are real good reads, and his most recent one is no exception. I've attached it for anyone interested.

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Guest kawikaho

Really??  I'm no fan of Bill Miller or Nygren.  The fact that they did not see the housing bubble makes me question them as value investors. 

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Really??  I'm no fan of Bill Miller or Nygren.  The fact that they did not see the housing bubble makes me question them as value investors.  

 

In all fairness, not many people did (including Buffett). Miller's fund got hit hard last year, but most money managers did. Miller has always been largely a buy & hold guy, so he's not someone who typically sells all his stocks heading into a recession.

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Really??  I'm no fan of Bill Miller or Nygren.  The fact that they did not see the housing bubble makes me question them as value investors.  

 

In all fairness, not many people did (including Buffett). Miller's fund got hit hard last year, but most money managers did. Miller has always been largely a buy & hold guy, so he's not someone who typically sells all his stocks heading into a recession.

 

The thing that bothered me immensely about Miller was that he bought stocks with large parts of his portfolio that had huge risks that he couldn't possibly have understood.  I mean he bought large slugs of Freddie and Fannie as the market was getting unstable, there were huge signs of government intervention etc.  There's no way he could have understood what was on their balance sheet.  No way.  The big disappointment I had with Nygren was that he bought such a huge slug of wamu.  I mean once again, did he really understand the balance sheet?  Maybe he did.  Did he even think about the risk of a run on the bank?  I'm not sure if he did or not.  Also, it was his biggest position.  Was that really the best possible idea he could have come up with?  Very disappointing IMHO.

 

Fairholme also got hit hard but none of the positions were permanently impair the way that Miller's were.  Almost the same with TAVFX (except for MBIA and I htink there was another one there too..).  So to me, everyone got smacked unless they used puts or got some CDS.  But the ones who got hit cause they bought something they didn't understand were the disappointing ones to me...

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Guest kawikaho

I think they were too busy looking at the green trees in a dying forest.  Besides, they reminded me of the dot com hoorah cheerleaders, but instead of the web, it was housing and the mortgage finance companies they were pumping.

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is it really possible to understand a bank balance sheet (including Wells Fargo,USB, etc.) ?

.

.

That is why it is easier to evaluate "local" or "regional" banks.  You are more familiar with the local economy and better able to evaluate the reserves.  You can also check out management as to reputation, etc.

You can do drive by's on the local projects that are in trouble and see who the lender is.

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Unless applied with a PURE quantitative method with diversification such as the Walter Schloss way, value investing is AN ARTFORM.

 

Bill Miller tried to do what an artist do while he should have been sticking to the Schloss method of pure Grahamian Value.

 

He is a pretender.  That's just my opinion.

 

Among the few professional fund managers I follow, Legg Mason's Bill Miller is one of my favorites. His quarterly reports are real good reads, and his most recent one is no exception. I've attached it for anyone interested.

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bargainman and yudeng,

I feel the same way. A lot of (pretenders) got hit hard last year. The bad part is a lot of them did not even understand the true risks and claim that they did not foresee the meltdown. They still are not ready to accept that it was either their ignorance or arrogance that resulted in those failures. I am only referring to cases where there was real risk of permanent impairment.

 

I have always felt Bill Miller was given unnecessary hype and attention by the media. And they dont talk much about folks like Bob Rodriguez (FPA Capital) who has a real record of absolute returns. I have tremendous respect for FPA folks as they never clamour for clients money and just focus on absolute returns. As a result of their holding a lot of cash (close to 40% for the most part), they lost a lot of clients. Its very similar to what Seth Klarman does. I was surprised when FPA folks took a huge position in Circuit City (could never understand why they did that even though they predicted the meltdown). Compared to them, Bill Miller never believes in holding much cash (believes that they can get away with relative value investing).

 

Another one that comes to mind is Rich Pzena (Pzena Investment Mgmt). They took a huge position in Lear Corp which was a highly leveraged firm. He kept harping on normalized earnings and multiples in 2007-2008. They even successfully blocked Icahn's takeover attempt for about 38$ (saying that it deserved much more). I know that a lot of others also invested in them (including me for a short duration) when it sold off to about 18$. Mohnish had a position too and made some money. The point is anybody who says they did not see the risk of GM or Ford going bankrupt is either ignorant or arrogant. There have been countless articles in the media for the last 4-5 years which suggested that. But to have a position in a company like Lear (even now) should raise red flags about that investor's acumen.

 

Cheers.

 

 

The thing that bothered me immensely about Miller was that he bought stocks with large parts of his portfolio that had huge risks that he couldn't possibly have understood. 

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In hindsight,  i was quite disappointed at the picks of Irwin Michael of ABC, and his results  and feel he was a bit like Miller, overrated in the bull market. I didn't expect anyone to foresee the meltdown, especially to the extent it happened, but you need extreme due diligence and conservative purchases with margin of safety and I don't think he has done that. These managers seem more interested in buying something that might fly,  than preserving capital.

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The thing that bothered me immensely about Miller was that he bought stocks with large parts of his portfolio that had huge risks that he couldn't possibly have understood.  I mean he bought large slugs of Freddie and Fannie as the market was getting unstable, there were huge signs of government intervention etc.  There's no way he could have understood what was on their balance sheet.  No way. 

 

yup, bullseye, imo.

 

i enjoy reading his letters. they're full of interesting insights & unique, inter-disciplinary perspectives. its just that the conclusions that he sometimes draws & anchors his investment choices to are REALLY fuzzy-wuzzy.

 

this part of his letter for instance strikes me as being group-think, tho miller believes it is a contrarian view:

 

<<Our friends at GaveKal Research3 have reminded us there is a certain rhythm to the remarks surrounding recessions and recovery. The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won’t work. When the markets start up and the economic forecasts begin to be revised up — where we are now — the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained.

 

The data from the recent ISM4 reports on employment and production are consistent with an economy that has stabilized and should turn higher this quarter. The very dramatic inventory liquidation of the past nine months could set the stage for a considerably stronger set of GDP5 numbers than currently forecast as inventories are rebuilt. This should in turn lead to better payroll numbers and underpin a stock market that appears poised to move higher.>>

 

miller might be right here, but i dont think he gives enough weight to the opposite scenario.

 

i think this commentary from The Contrary Investor pinpoints the risks brilliantly:

 

<<We’ve been discussing this with regularity and continue to believe it’s a key focal point ahead, so it should be no surprise to anyone that household leverage contracted again in 1Q.  We now have the two largest quarters of back-to-back contraction in nominal dollar household leverage on record.  In fact, at least over the near six decades shown in the chart below, this has never happened two quarters in a row.  We continue to believe and emphasize that THE most important watch point in the current cycle is the character of the household balance sheet recession.  And as we have maintained for many a moon now, the household deleveraging cycle is still in its early stages.   Unfortunately labor market and wage pressure of the moment make it very tough for households to "hurry" the needed deleveraging process.  The longer the labor markets remain weak, the more drawn out will be the household deleveraging process, and by default the longer it will take for the rate of change in consumption to recover adequately to spur self-sustaining macro economic growth.  Throwing in an increased household savings rate does nothing to brighten the consumption picture.

 

As marked in the bottom clip of the above chart, never in the history of the data have we seen the year over year change in household debt fall into negative territory.  1Q was a record breaker on that front.  This is completely unique to post war US economic experience.

 

We’ve asked the question a number of times in the recent past as to whether the US has encountered a point of secular change in US consumption patterns.  The bottom clip of the above chart simply reinforces this curiosity.  Consumption that quite necessarily has been intertwined with and dependent on household leverage.  The retail sales increase for May at the headline level was completely driven by rising gasoline sales due almost entirely to price.  Core non-auto and gas retail sales did not look good.  The discretionary components of the retail report were collectively weak at best.  We need to keep a very sharp eye on the following relationships as we move into 2H 2009.  Historically consumer confidence has led rate of change improvement in core retail sales by literally a month or two.  We have the upturn in confidence.  The rate of change upturn in retail must come now, or we are looking at perhaps what would be one of the most important divergences we can think of in terms of implication for forward US macro economic expansion.  You already know personal consumption expenditures account for 70% of recent GDP.

 

Likewise another corroborative relationship of importance is between that of the year over year change in non-auto and gas retail sales and monthly nominal body count payroll employment trends.  The two have moved in directional harmony over time.  For now, headline payrolls have been getting less bad, but we have not yet seen the character of less bad in core retail sales trends.  Again, this needs to improve now or the divergence relative to historical experience will be all too apparent.

 

Just a quick very long-term picture of life update below and we’ll move on.  We’ve never seen anything like current experience over the past six decades.  A secular demarcation line?  We'll see.

 

You’ll remember that above we mentioned the importance of the inventory rebuild issue.  Sorry to drag you through the household debt and retail sales trends above, but this is what we have been leading up to.  First, it’s the underpinning to the “green shoots” concept and the bedrock upon which the “second half recovery” hopes have been pinned upon by a good number of Street cheerleaders for well on a number of months now.  But more importantly, we believe it’s a fundamental driving force for emerging market equity performance.  Let’s face it, who would benefit most from a macro domestic and really global inventory rebuild cycle?  The emerging market manufacturing community.  Emerging market equities were blown from the sky last year anticipating and discounting an inventory cleansing cycle of meaning.  This year they have risen from the ashes trying to strongly discount a global inventory rebuild cycle of substance.  Although this is a pretty darn simple statement, emerging equities and commodity sectors in general are dependent fundamentally on the whole issue of an inventory rebuild.  So, as we look into the second half and try to assess potential change in equity sector leadership, or reinforcement of what is existing leadership, following the character of inventories and sales becomes critical.   

 

As you can see in the bottom clip of the chart below, yes, inventories have been and continue to be drawn down meaningfully by the month over the last seven months.  The ultimate reversal of this is the case for the inventory rebuild so widely anticipated by investors as of late.  But the top clip suggests the potential for a different outcome that we believe relates directly back to household deleveraging.  Yes, inventories are falling, but sales are falling right alongside inventories, leaving the inventory to sales ratio to this day quite near the highs of the current decade and not far off the recent spike peak.>>

 

 

unfortunately i cant post the fantanstic charts that accompany the above. but you can see them & read the rest here:

 

http://www.contraryinvestor.com/mo.htm

 

its a great site.

 

 

 

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Miller's and Michael's performance in 2008 was extremely crappy that's for sure.

 

However, with Miller, I think I see his reasoning because it's been noted that he studies gambling theory. It's like he's looking at a coin flip situation where the odds are in his favour, let's say something like 60/40 (60% win, 40% lose). Each position he takes, he believes he's taking the winning side. I'm sure he wants a large margin of safety, but it is now obvious that he was willing to play more marginal situations. His bets were probably made on situations like some 60/40, maybe some 55/45, possibly some 50/50. He probably also made some errors, so they may have placed some bets on some negative expectation positions where the odds were against them. I think he figured that risk of ruin was low, even in 2008, which off course back-fired performance wise. I don't think he was trying to completely understand every single position he took.

 

It's like Miller was playing in a poker game, got a little bored and started to play marginal hands hoping that they would hit and provide the big payoff.

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2 notes about Miller.  One is that his 15 year record is supposedly a fluke of the calendar.  Apparently it's because the end date was a particular month that he just happened to beat the S&P for 15 years in a row.  If you look at other months supposedly he doesn't beat consistently (just read that somewhere I didn't do the math myself).  Second, I'm pretty sure I have heard him write or say something along the lines of what you're saying.  Freddie and Fannie I think were either zeros, or were going to go up 10x supposedly.  So that's why he made the bet. Problem is that a lot of these companies were correlated to the same thing, so a number of those zero/10x big bets went bad. 

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I think it's too easy to be critical of Miller, or some of the other managers who got hammered last year.  Munger got hammered in 1973 and 1974, yet virtually everyone on this board would invest with him based on what they know of him.  He was also a Graham student, but tweaked his philosophy to encompass intangible competitive advantages.  Miller is not entirely different. 

 

Miller also runs a plain old mutual fund.  The fund industry operates on the premise that a manager isn't doing his job if he's holding cash, and that compounds their problems in bear markets.  I think those that got hammered, simply did so because they were afraid to hold cash and they probably had some correlated risk.  Whether it's luck or skill, we can't take away from his 15-year streak.  Cheers!   

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Guest kawikaho

I think it's too easy to be critical of Miller, or some of the other managers who got hammered last year.  Munger got hammered in 1973 and 1974, yet virtually everyone on this board would invest with him based on what they know of him.  He was also a Graham student, but tweaked his philosophy to encompass intangible competitive advantages.  Miller is not entirely different. 

 

Miller also runs a plain old mutual fund.  The fund industry operates on the premise that a manager isn't doing his job if he's holding cash, and that compounds their problems in bear markets.  I think those that got hammered, simply did so because they were afraid to hold cash and they probably had some correlated risk.  Whether it's luck or skill, we can't take away from his 15-year streak.  Cheers!     

 

I agree, but, I read his thesis on why the homebuilders were good value plays a year ago.  It just boggled my mind how someone who thinks in terms of value saw housing as still a value proposition.  Nygren too. 

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What Miller missed was the macroeconomic effects that lead to the crisis.  Sam Mitchell described this at this years FFH Shareholders dinner.  Most value investors don't pay attention to macro factors and it cost them in this case.  However, in their defense, in most cases the macro look provides opportunities (cheap stocks) rather than an actual tradable warning signals.

 

Packer 

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