How Did Bill Miller Go This Wrong?

Includes: KODK, XLF
by: Roger Nusbaum

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 (NYSE:GNW) down 61% YTD, MGIC Investment Corp (NYSE:MTG) down 81%, Monster Worldwide (NYSE:MWW) down 67%, Boyd Gaming (NYSE:BYD) down 51% and several others down not quite 50% this year.


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 okay. 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.