Bill Miller: Credit Panic Ended With Bear Stearns 25 comments
Bill Miller
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From Bill Miller's First Quarter 2008 letter (.pdf) dated 4/23/08, to investors in Legg Mason Value Trust [LMVTX]:
After an awful quarter in which our fund dropped 19.7% compared to a loss of 9.4% for the benchmark S&P 500, we have begun to perform better. In the first few weeks of the quarter, the S&P 500 is up just over 5% and we are up a bit more. Our lead widens if you look back to the Monday the Bear Stearns rescue by JPMorgan was announced. While neither I nor anyone else knows if our period of underperformance is over, it ought to be, if valuation begins to matter more and momentum less in how the market behaves.
To put our results in some context, in our 26-year history, we have outperformed our benchmark 20 calendar years and underperformed 6 calendar years. Since I assumed sole management of the fund, we have outperformed 15 years and underperformed 2 (the last 2 obviously). On a rolling 12-month basis, we have outperformed 60% of the time since inception, and 68% of the time since I took over. Our relative performance this past quarter was the worst in our history, as we trailed the market by just over 1000 basis points. We have had 3 previous quarters where we trailed by over 700 basis points, 2 of which were in the 1989-1990 period which I have previously likened to this in terms of the economic and market backdrop. We have had 3 worse quarters in absolute terms: the quarter the market crashed in 1987, the 9/11 quarter, and the third quarter of 1990...
For planning purposes, here is my forecast: I think we will do better from here on, and that by far the worst is behind us. I think the credit panic ended with the collapse of Bear Stearns, and credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs. Valuations are attractive, and valuation spreads are now about one standard deviation above normal, a point at which valuation-based strategies usually begin to work again, and momentum begins to fade (there is no evidence of the latter yet, as the old leaders continue to lead). Most housing stocks are up double digits this year despite dismal headlines, a sign the market had already priced in the current malaise. I think likewise we have seen the bottom in financials and consumer stocks, but not necessarily the bottom in headlines about the woes in those sectors. Although the economy is likely to struggle as it did in the early 1990s, the market can move higher, as it did back then.
The wild card is commodities. If commodities break, or even just stop their relentless rise, equity markets should do well. If they continue to move steadily higher, they have the potential to destabilize the global economy. We are already seeing unrest in many countries due to the soaring prices of rice and other grains. Oil has rallied $30 per barrel in the past 8 weeks on no fundamental news, save only the same stories about fears of supply disruptions. The typical fundamental drivers at the margin, such as global economic growth, miles driven, and seasonality, would all suggest prices similar to those that prevailed in early February. But none of that has mattered. I agree with George Soros that commodities are in a bubble, but it also appears he is right when he describes it as one that is still inflating, and we still have the summer driving and hurricane season with which to contend.
Top Ten Holdings of the Legg Mason Value Trust as of March 31, 2008 : Amazon.com Inc. (6.5%), The AES Corp. (6.4%), JPMorgan Chase and Co. (5.0%), Aetna Inc. (4.9%), UnitedHealth Group Inc. (4.5%), Yahoo Inc. (4.4%), eBay Inc. (4.2%), General Electric Co. (4.0%), Sears Holding Corp. (4.0%), and Federal Home Loan Mortgage Corporation (3.5%).
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This article has 25 comments:
Bill Miller of Legg Mason is a perfect example of what is wrong with the mutual fund industry and all the conflicts of interest.
He is actually a lousy money manager who got "lucky" by managing money during the greatest bull market of the 20th century, and with the help of companies such as Morningstar, they made him out to be some genius.
During bull markets any bonehead can beat the market.
It is during bear markets, or not so great markets, that truly good money managers excel. Bill Miller's Legg Mason Value Primary may have beaten the S & P during the 2000-2003 bear market, however it did by just a hair each year. Meaning Miller was paid millions to essentially lose 40% of his clients money over that time period while getting paid MILLIONS of dollars.
That is not money management. How many of you out there have that 100 foot yacht, and a bank account worth 100 million from collecting fees from the money you manage, regardless if you are a lousy manager?
Bill Miller got lucky betting on a few stocks at a time and that works in bull markets. It is becoming obvious thru the previous bear market and today's lousy market that Bill Miller's "fame" is nothing more than hype, enabled by the media and Morningstar.
Bill Miller's Value Trust is exactly where it was around 1998. Thats right, he has been paid millions over the past 10 years and essentially those in his fund have made nothing, unless you were lucky enough to get in, in 2003. And even there he is on his way to breaching those levels. All that money he was paid and the fund has a 10 year annualized return of less than 4% which is less than a percent more than the
S & P 500 over the same period.
The man is given to much credit for a lousy job and should be "returning money" to investors out of his own pocket for his lousy performance.
"Fake-Value" investing did well for years and peaked in 2005 and won't come back anytime soon.
I guess he will sit on his big bets like S,SHLD,EK,AET,C,UNH,an... wait till the "stupid" market catches up with his illusionary "value".
Iconically it's more likely fundamentals will catch down to market prices IMO.
Is he still waiting for the market to recognize the value of BSC at $200 and CFC at $80?
At least he can't average down forever as his funds have outflows.
Bill Miller proved in recent years he can not differentiate between "Real Value" a cheap "Value Traps".
beanieville.blogspot.c...
Choke snort
"For planning purposes, here is my forecast: I think we will do better from here on, and that by far the worst is behind us."
and a quotation from an earlier article (November '07)from the same author as he discussed Countrywide Financial (CFC) that currently trades in the $5 range.
"The price action on both sides was driven by emotion -- first fear, then relief -- and was hardly the result of a careful analysis of Countrywide's long term business value. That, by the way, we think is in the $40's compared to its current price of about $14-15."
seekingalpha.com/artic...
Why Gold is still looked on as a commodity as opposed to its role in monetary matters remains a mystery. Habit?
Hope does spring eternal among the wishful thinkers.
who needs this looser ?
I suggest read his letter carefully before hitting the publish button. Look at his top ten holdings - I'd buy each one of them except AMZN and he bought AMZN when it was cheap.
And when we step wisely and our holding soars. We don't have to take 1-1/2 percent off the top, we can let it ride.
But Miller may make a point. When the other wise guy investment bankers saw Bear Stearns annihilated, and then turned over to a commercial, regulated bank....they may have given them pause to not turn on their fellow investment bankers.
They realize if they go back to being sharks, like they were withj Bear, they could wind up eating themselves.
The one important takeaway is that secular bear markets are punctuated by powerful bull trap rallies driven by the type of sheer speculation in which you engage. Just look at the Nikkei 225 over the last 18 years - there have been a total of 6 powerful rallies, the last of which saw prices rally more than 100% before rolling over (see Figure 2 tradesystemguru.com/co.../ ).
So while I can't blame you for talking your book, let's see if for what it really is. You're a salesman selling your views to encourage suckers to buy the same book or perhaps help you exit yours...
I think Bill Miller is smiling because he has made a very decent living as a Chief Financial Officer. If you follow his link for Legg Mason’s First Quarter 2008 results, my observation is there is no advantage in investing in these funds compared to the S&P 500 when considering expenses. He points out in the newsletter that in the last 26 years the Legg Mason funds have outperformed in 20 years and underperformed in 6 years.
If you look at the current portfolio:
Stock April 25 price 1 year range
AMZN 80 60-102
AES 18 16-24
JPM 48 36-53
AET 44 39-60
UNH 34 33-59
YHOO 27 19-34
EBAY 31 25-41
GE 33 32-42
SHLD 100 85-194
FRE 28 17-68
The Bill Miller critics will point to his picks compared to the high number and the Bill Miller followers will make comparisons to the low number in the 1 year range. No one’s mind will change and Bill will keep smiling, especially if some people think he is in the same class as Warren Buffet.