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.