Bill Miller On Timing Buys In Housing Stocks

From Bill Miller's latest quarterly letter to investors (.pdf - 7/30/07) in Legg Mason Value Trust [LMVTX]:

The Legg Mason Value Trust slightly outperformed the market in the second calendar quarter, rising 6.49% compared to 6.28% for the S&P 500. This brings our year-to-date returns to 4.8% compared to the S&P’s 7%.

Our returns this year, compared to the market’s, are primarily due to our exposure to housing and housing-related securities, and our lack of exposure to energy. A few thoughts on both are in order.

Owning housing stocks in the midst of the worst housing market in at least 15 years, and one where the problems may linger until 2009, may prompt a reaction similar to that one client had when we bought a company in the midst of a scandal: don’t you read the papers? At LMCM we actually try to buy low and sell high, and you don’t buy low when everything is great and the headlines reflect it. Usually, but not always, when you read about some industry or company having the worst time since some period of years, or even decades ago, you will find that buying that industry or company when it was going through those difficulties proved quite profitable if your time horizon wasn’t measured in days or months. The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade.

We were clearly too early in buying these stocks in late 2005 and 2006—and if you are early enough, that is indistinguishable from being wrong—thinking that the US housing experience would be similar to that in the UK and Australia, a correction from inflated levels that would be over in less than two years, that is, just about now. The very poor housing fundamentals, now exacerbated by a subprime loan collapse and the continuing upward repricing of adjustable-rate mortgages made in the past few years, show no signs of improvement. But the market looks forward, and by the time those signs are tangible and evident, the stocks will likely be a lot higher. If we did not own housing or housing-related stocks (such as Countrywide Financial), we would be buying them now, amid the panic selling currently underway. That said, just because we own them does not mean we won’t sell them if we think we can improve the portfolio’s long-term risk/reward profile by doing so.

Comments

[Uncle Bill]

Wow. Buy low, sell high? You said to buy BZH, CTX, PHM, and RYL on Aug. 6, '06. Here's how you were doing until this report: BZH, down 67%; CTX, down 23%; PHM, down 49%; RYL, down 22%. Hey, you were just early. Here's how you've done since you reiterated that buy in this letter: BZH, down 39%; CTX, down 32%; PHM, down 21%; BZH, down 28%. Overall since your August report: BZH, down 80%; CTX, down 47%; PHM, down 59%; RYL, down 44%. That's simply amazing. It would be interesting if you would tell us what metrics caused you to make these decisions.

[DominoesFalling]

Anyone who has had any real estate knowledge should have known that this downturn in housing at the top of a bubble was not your typical RE downturn and that there would be more legs down. The RE market has still not discounted this downturn entirely so there is more to come. For anyone suggesting that now is the time to buy is either ignorant or trying to raise the market so to sell into it. Bill has lost all creditablity.

[ErnieMontague]

In other words, we screwed up and while we think this may be an opportunity, our screwups may get so bad we HAVE to sell them.

[NoFate]

Using IYR as an example, housing looks parabolic until it hit February 2007 and finally started dropping. In 4 years it rose from $40 to $95 and it is now back down to $75 (which takes us back about a year). So you are down about 20% ...so what! Housing is UP about 100% and rents are flat!

Anyway, THIS is where you are calling a bottom? What if we get a RECESSION? Hell, even if we don't housing is likely to keep dropping!

Finally you provide these comments without a shred of evidence to back them up. No facts or even circumstantial evidence?? What are you ...Republican?

[NoFate]

I just noticed XHB on your post which is home builders, not the REIT index. They have dropped further ...still not enough though. Consider that there is a 9.5 month inventory of unsold homes and it is still growing ...we are gonna have more houses than we need for the next 5-10 years. Half these guys will go out of business ...the other half will end up at $5/share.

[Ralph F]

Bill Miller is a very, very smart guy with astonishingly good long term performance. So "aren't you dumb" doesn't seem a very meaningful response to this excerpt from his letter to shareholders.

Instead, I'd be interested to know if the last sentence means that he's now re-evaluating his earlier analysis, and what data that analysis was based on.