Over the years I've poked fun and tried to dissect the unraveling of Bill Miller's (from Legg Mason) once sterling reputation. The other day there was this post at Market Beat that dug into the history of his position in Eastman Kodak (EK). I did not know he owned the name until Monday--my interest here is more about what not to do from a big picture behavioral standpoint so I don't keep very close tabs. I probably saw EK listed there but skipped right over it looking at the financial names.
EK is a large holding in the Legg Mason Opportunity Fund (LMNOX) which is the "other" fund. The Market Beat post has this fund down 37% YTD which is an astounding number in a down 8% world. I looked at the holdings on Morningstar (understand they can be dated and changes may have been made since the last disclosure) and the holdings are truly astounding. Aside from EK which was down 55% YTD there is Genworth Financial (GNW) down 61% YTD, MGIC Investment Corp (MTG) down 81%, Monster Worldwide (MWW) down 67%, Boyd Gaming (BYD) down 51% and several others down not quite 50% this year.
Astounding.
While I do not know concretely what is going on here there are a couple of things that seem plausible to me. I've always picked on him for always having such a heavy exposure to financial stocks. The latest from Morningstar has him at 32% in the sector. He essentially went down with the ship on several names a few years ago but the thing that is most baffling is that he appears to not even be a little skeptical of the sector.
I don't know how someone comes through the last few years without being a little skeptical about the sector and that is just generically speaking. When you layer on the pounding his funds took in financials you might think he'd have a little bit of introspection and at the very least lighten up some. Maybe he is less exposed than he used to be but at 32% he is two and half times the S&P 500's weight.
The other thing that I think might be going on is the idea that everything that gets crushed becomes a good value stock. This is referred to as value traps. While the market is not infallible I am inclined to think that a multi year decline from $90 to $20 for a company where it is very easy to envision the extinction of the primary product might be a useful message from the market.
This is what happened with Kodak. It was at $92 in February 1997, it traded between $21 and $34 for many years in the last decade and has since imploded again. I know they have products but when was the last time you bought anything from them? I am pretty sure the last time we used film in a camera was in 2003, we went to Kauai with film and a digital camera. After that digital only.
Everyone gets things wrong, I have in the past and will in the future--so will you and that is ok. I have no idea what his process is but I think a big part of a potentially successful process needs to include mitigating the consequences for when we are wrong. Avoiding 32% in one sector would be a good place to start.
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8 comments:
I think sometimes it's hard to teach an old dog new tricks.
You cannot generate outperformance without taking risks, which will generally lead to a different portfolio percentages. So most of fund managers are closet indexers or you take your chances. Now how you take those chances can mke you a star or a fool. BTW " What do you call a rogue trader that makes money"- MANAGING DIRECTOR
All the best Roger.
Mark
Is/Was someone making money shorting this fund? Or can holding it have good tax implications for some people?
Otherwise - O.U.C.H.
Sorry, but there's just one comment that comes to mind:
Meanie!
Don't you think this poor guy feels bad enough? Can't you see how much weight he's gained over the past several years? Jeez, have a heart, Roger...
- aagold
ha, i'm pretty sure this site is not on the Legg Mason radar
Agreed with Anon at 7:39.
Miller has an investment strategy that is pretty far from the usual path. It seems to have worked for quite a few years, but isn't now. It's not unusual for a strategy to have a long period of time, even years, where it doesn't work. You either have faith, or give up and start over. If the idea is solid eventually it should outperform again.
I consider myself a value investor along the lines of Miller, and will tolerate significant drawdowns, but there are times I would give up. This is one of those times.
Hi Roger,
The investment philosophy of Bill Miller could be described as "Buy it cheap relative to a modestly optimistic view of future earnings prospects."
Value investing starts with the concept of "margin of safety." Miller did well during a period of incredible economic growth, where borrowing was temporarily rewarded.
But when a less benign environment arrived, the lack of a margin of safety really cost his investors. Worse, he was such a large percentage of the ownership base of the firms he held that as he got withdrawals, his own selling reinforced bad short-term performance. What was self-reinforcing on the upside, became self reinforcing on the downside --> call it the Miller bubble.
I don't think you are off at all here, Roger. One more note: if you calculate his dollar-weighted returns, they are negative. He lost a lot of money for people who bought into his management solely on reputation after 15 years of beating the S&P 500.
Miller never was a value manager in my mind, because no true value manager out performed the S & P during the Index Bubble Years of the late 1990's. At that time, the true value guys were getting money taken away or worse yet, getting fired. That was the time of GE, PFE and KO etc., selling at 30X +.
I fact, I see the polar opposite today, with many of these same stocks more profitable, and undervalued than anytime I can remember, with nobody showing up to buy them. Greed 1999, Fear 2011.
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