5 ideas from an investor who beat the market for 15 consecutive years
Challenging Conventional Wisdom in the Market
For even the most seasoned investor, Bill Miller is a name that is relatively unheard of.
When you think of investing gurus, he’s far from the first name that comes to mind (that’s a title that belongs to the Oracle of Omaha).
What’s unknown to most is that he has beaten the S&P500 for 15 years in a row (a record that few others hold).
A short introduction
Miller joined Legg Mason in 1981 as an analyst. He took over sole management of the Legg Mason Value Trust in November 1990, which turned out to be a perfect time to invest.
He described the feat as “a large degree of luck, and maybe some modicum of skill.
To him, skill requires staying in the markets long enough without blowing up your investment account.
5 Best Ideas from Bill Miller
1) The asymmetry of past information and future value
The value of any investment is the present value of future free cash flows coming from that investment.
The difficulty is predicting with a reliable degree of accuracy what those free cash flows will be.
Using the past to predict what the future may be only works to a certain extent, applicable only to a select group of companies (e.g. Coke (KO), McDonald’s (MCD))
High growth companies do not fit into this criteria.
"As I tell our analysts, 100 percent of the information you have about any business reflects the past, and 100 percent of the value of that business depends on the future".
2) Value traps, and how to avoid them
Value traps are like a wolf in sheep’s clothing. They appear nice and harmless, until the facade comes off.
Many value traps are deceiving. They appear undervalued based on regular metrics like P/E, P/S or whatever B.S.
The problem is they’re no longer the beast they used to be, hence they’re no longer cheap.
Fundamentals have changed, and when they do, the share price will often reflect this.
Miller has suggested to instead focus on future returns on capital, not what the past return on capital has been.
Quick tip: A look at stocks at 52-week lows, while not perfect, is a good starting point for identifying value traps.
"The problem is that in most value traps, the fundamental economics of the business has deteriorated. And the market is gradually marking down the valuation of those to reflect the fundamental economic deterioration".
3) Active management is required for outperformance
While I’ve always been an advocate of not monitoring our investments too much, some level of active management is still needed if we want to beat the market.
This year alone, I have made about 5 to 6 purchases (both buys and sells) so far.
There are times to be active, and there are times to be passive. The trick is to know when the appropriate time is for each action.
"To have a prayer of outperforming, an investor must have some active management".
“By lengthening the time horizon for thinking about a company’s results three to five years out rather than one year out, you increase the probability that you will outperform.”
4) Assessing and talking to management teams
Social media only shows the good and dandy stuff in people’s lives. But life is never smooth sailing.
Bad things do happen, it’s just not as visible on socials.
There are parallels when it comes to management teams.
You only understand them better through contact with them for an extended period of time.
Even then, it’s just on the surface.
“I think if you owned a company for 3, 5, 10 years and had a lot of extensive contact with the management, you can learn a lot from the nuances in the way in which management answers questions, the way they think about strategy, and so forth.”
"Rarely will managements tell you how bad things are. But you understand that going in. So, you’re really trying to understand how they think about the business and how their views may have changed in recent years".
5) Some advice on investing
Investing can be so simple, yet so difficult at the same time.
Ultimately, it boils down to 2 things:
Human psychology and
Probability
"Number one: knowing the 60/40 end of a proposition. Number two: money management. And number three: knowing yourself".
1. 60/40
Knowing the 60/40 end of a proposition involves investing when the odds are in your favour.
Just like in life, there is never 100% certainty in investing.
We don’t need 100%, we just need 60%.
2. Money Management
Drawing from a poker analogy, this means bet sizing.
Being the greatest stock picker counts for nothing if your bet sizing is incorrect.
To read: Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.
3. Knowing Yourself
We are our own worst enemy.
Knowing ourselves, controlling our emotions and reactions to adverse situations is arguably the most important skill to develop in life and investing.
I hope you enjoyed reading this piece as much as I did writing it.
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