In brief
Bill Miller is co-founder and current chairman of US investment group Legg Mason Capital Management. He rose to prominence during the 2000s for consistently beating the US stock market with a blend of contrarian value and growth strategies.
Background
Miller and his partner Ernie Kiehne set up Legg Mason Capital Management and served as portfolio managers of the Legg Mason Capital Management Value Trust from its start in 1982 until Miller took the reigns as manager in December 1990.
Between 1991 and 2005 Miller cemented his legendary reputation by guiding the Value Trust to a record 15 consecutive years of beating the S&P 500. In 2012, and after 30 years in charge, he retired from the Value Trust but continues to run Legg Mason’s Opportunity Trust.
While some industry commentators concluded that Miller’s remarkable record was simply down to chance, others have given him more credit. In his book, More Than You Know: Finding Financial Wisdom in Unconventional Places, Legg Mason’s chief investment strategist Michael Mauboussin, insisted that “long streaks typically indicate skill”. Miller himself told the Wall Street Journal that the 15-year streak had been “maybe 95% luck”.
Investment strategy
Miller has been described as a contrarian, value-oriented investor whose strategy focused on buying cheap stocks and holding them for the long term, subscribing to the same value school as Ben Graham and Warren Buffett. Some analysts have contended that his investments also owed a great deal to “growth” strategies. Indeed, Value Trust’s performance was supported by a basket of tech stocks, including the likes of Amazon and Dell.
In a report to Value Trust investors in 2002, Miller acknowledged that a year earlier he had changed his approach in response to the funds underperformance in three of the previous four years. He observed that “the traditional value style, based on low price-to-earnings (p/e), low price-to-book, or low price-to-sales, while delivering solid long-term results, was also subject to uncomfortably long droughts.” After reviewing the data, he concluded that “the conventional wisdom about value investing was wrong”.
He went on to claim that the source of excess returns had little to do with pure accounting factors such as low p/e or low price-to-cash flow, but instead had more to do with changes in the return on capital. “Low p/e stocks usually had low valuations because they had…
