Bill Miller on This Tough Market 65 comments
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Legg Mason's (LM) Bill Miller and many other seasoned pros are having trouble in this market. So am I. So, probably, are you. Mr. Miller reminded readers that it is at the end of a string of dismal months that future rates of return are highest, yet the smallest number of investors is interested.
Mr. Miller issued his second-quarter letter earlier in the week, from which I took the following excerpts:
[Warren Buffett] then made the perfectly sensible point that as we are all net savers, we should be happy if stock prices declined a lot more, so we could buy even better bargains. That is a point Charlie Ellis elaborated on in his fine book, Investment Policy, a few years back. As a matter of logic, it is irrefragable. As a matter of psychology, I think most of us value investors think we have plenty enough bargains already, and may not be able to handle that many more. Or more accurately, our clients may not be able to. We are value investors because we are persuaded of the logic of buying shares of businesses when others want to sell them, and we understand that lower prices today mean higher future rates of return, and high prices today mean lower future rates of return.
The best time to buy our funds or to open an account with us has always been when we've had dismal performance, and the worst time has always been after a long run of excess returns. Yet we (and everyone else) get the most inflows and the most interest AFTER we've done well, and the most redemptions and client terminations AFTER we've done poorly. It will always be so, because that is the way people behave.
This is the only market I have seen where you could just read the headlines in the papers, react to them, and make an excess return. I have used the mantra to our analysts that if it's in the papers, it's in the price -- which used to be correct. Indeed, it borders on cliché in the business that by the time something makes the cover of the major news or business publications, you can make money by doing the opposite. There is solid academic research to back this up. But in the past two years, you didn't need to know anything except to sell what the headlines were negative about (anything related to real estate, the consumer, or finance) and buy anything that was going up and that everybody liked (energy, materials, industrials).
It has been explained to me that it was obvious we should not have owned homebuilders, or retailers or banks, and that I should have known better than to invest in such things. It was also obvious that growth in China and India and other developing countries would drive oil and other commodities to record levels and that related equities were the thing to own. "Don't you even read the papers?" was a common comment.
While I am quite aware of our mistakes, both of commission and omission, when I ask what is obvious NOW, there is little consensus. If there is something obvious to do that will earn excess returns, then we certainly want to do it.
Is it obvious financials should be bought now, having reached the most oversold levels since the 1987 Crash, and the lowest valuations since the last great buying opportunity in 1990 and 1991? Or is it obvious they should be avoided, since the credit problems are in the papers every day and write-offs and provisioning will likely continue into 2009?
Is it obvious energy stocks should be bought on this correction in oil prices from $147 to $123, a correction that has wiped 25 points off the prices of companies like XTO Energy (XTO) and Chesapeake Energy (CHK) in just a few weeks? Or is it obvious that oil had reached bubble levels at $147, and that buying the stocks here, down 30% from their highs, is akin to buying homebuilders down 30% from their highs in 2005? If you had bought Tesoro Petroleum (TSO) or Valero Petroleum (VLO) when their prices broke late last fall -- remember the Golden Age of Refining story that took Tesoro from under $4 to over $60? -- you would be looking at losses in this year greater than if you had bought Citibank (C) or Merrill Lynch (MER).
I do think some things are obvious: it is obvious the credit crisis will end, and it is obvious the housing crisis will end, and that credit markets will function satisfactorily and house prices will stop going down and then start moving higher. It is obvious that the American consumer will spend sufficiently to keep the economy moving forward long term. It is obvious that the U.S. economy, already the most productive in the world, will get even more productive and will adapt and grow. It is obvious stock prices will be higher in the future than they are now.
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This article has 65 comments:
Value investors hate to concede defeat. As the old adage goes.."Cut your losses and let you profits run". Losers average losers.
The cheap, tend to get much cheaper in the final run. You just wait and see.
The U.S. is in a secular bear market until 2016. Has been a bear market since 2000.
You have to make good trades to make $ in this kind of market. Buy and hold may or may not beat inflation.
Look at the last 60 years: 1950 to 65, bull market; 1965/80, flat/bear market; 1980/2000 secular bull; we're in the next flat cycle. And that's only beginning from 1950. If you go further back, you get the same picture since 1870 or so (since we record stock prices).
So, this thing is going nowhere for another 7 to 10 years. Doesn't mean you can't make money, it just means you can't make money by buying the market and waiting, in other words "there's no beta", you got to go out there and earn your upkeep (or that of your clients). Plenty of bear market rallies to come, enjoy the parties but stay close to the door!
No sooner had financial stocks gotten up off the mat than poor existing-home sales body-slammed them.
The abrupt halt Thursday to the relief rally that started last week underscored how little confidence investors have in the sector. Many feel they can't get a handle on bank balance sheets.
Details that emerged earlier this week from Bank of America's purchase of Countrywide Financial help explain why that is the case. The deal's numbers show that big losses could still lurk in banks' closets.
If so, their loan portfolios are worth far less than the stated values, and reserves taken against possible losses are inadequate. And if bank capital is overstated, firms could again be forced into dilutive capital raising.
Turn to Countrywide -- and the huge amount by which Bank of America wrote down its assets. In second-quarter results out earlier this week, Bank of America said Countrywide's equity available to common stockholders, or its net worth, on a market-value basis at June 30 was just $100 million.
To put that in perspective, Countrywide had $172 billion in assets at the end of June. Plus, Bank of America paid $4.1 billion for the firm, once the country's biggest mortgage lender.
How could Countrywide's net worth be just $100 million? When a financial firm is acquired, the purchaser applies market values to all its assets and liabilities. Banks normally hold a big portion of their loans at historical cost with a reserve set aside for potential losses.
At Countrywide, this marking to market of its loan portfolio resulted in a $9 billion hit, which was on top of about $5 billion in reserves. This, along with some offsetting items, took common equity to $100 million from $8.4 billion.
The new market value was equivalent to about a 15% average mark on the firm's nearly $100 billion loan portfolio, David Hendler, an analyst at CreditSights, said in a research note. The mark was driven by low market values for home-equity, option-adjustable-rate mortgages and subprime assets.
Granted, such a mark is a point-in-time estimate based on all the assets being sold. In reality, banks offset credit losses over time with earnings. And most big banks wouldn't face anywhere near as severe a market-value hit.
Still, the reduction in the value of Countrywide's loans raises the question of what would happen to other banks if they similarly marked loan portfolios to prices they could fetch if sold in the market today. Typically, banks create reserves equal to 1.5% to 3% of those portfolios, but the prices applied to Countrywide's loans show those set-asides could be too low.
Applying a mark of 5% -- more aggressive, but still well below Countrywide's -- at Citigroup, J.P. Morgan, Wells Fargo, Wachovia, Washington Mutual and Bank of America results in 10% to 30% reductions in the banks' stated book values. Push the mark to 7.5% and book values are 20% to 50% below stated levels.
"That is why you see so many banks trading at such a discount to book value," says Craig Emrick, a bank analyst at Moody's Investors Service.
That explains why many investors didn't think share prices were irrationally low in the beginning of July. It also shows why markets could again plumb those lows if bank losses exceed current expectation
The financial services industry thus far has acknowledged $300 billion in losses but the bottom has yet to be found. How does $1 trillion grab you? This mess will not begin (underlined) to fix itself until the real value of the American economy has been determined. In the process FNM and FRE should be placed into receivership, their management scoundrels fired and both GSEs dissected into manageable entities.
As for buy and hold, those of us in our sixties will find it challenging to await 2030 or whenever. IMHO cash, TIPS and very short duration foreign bond funds (PIMCO has one) are the safest places to be for at least the next several years.
Whether this calculation is exactly correct or not, it is prudent to recognize that there is a significant probability that we are in the middle of a secular bear market. In bear markets, successful investors do not invest in indexes, but rather emphasize sector and stock selection, as well as dividends.
As a retired fellow ( who will sign up for Social Security at age 66, hopefully on March 1, 2009) I shudder to think what will happen to all those people who are being foreclosed on , those employees who are losing their jobs, those young people who can't find decent jobs, etc.
Eight years of a Republican administration, a former Senator named Phil Gramm ( The Enron Loophole Genius ), and a Republican Congress have resulted in the mess we are in.
For one solution to one problem, go to:
www.stopoilspeculation.../
to sign a petition to help lower oil prices.
Also, STOP SCREWING AROUND IN HEDGE FUNDS AND SPECULATION.
If some predictions come true regarding lower stock prices, bank failures, more bankruptcies, it is possible that we will see a recession of five years instead of two years.
People like the former CEO's at CFC, WB, Merrill, Fanny, Freddie,etc. who became multimillionaires could care less about the small investors who trusted them who have now lost money investing in their companies.
In November, toss out the politicians ( incumbants )who screwed up.
I will...it's how I intend to get my revenge.
"Investors need to avoid managers who "believe the market is wrong and they are right," says Mark Salzinger, editor of the No-Load Fund Investor newsletter. In a radio interview, Salzinger defined that type of manager as one who is unwilling to bend, losing objectivity about what is happening in the market, and falling in love with investments in their portfolio. Accordingly, Salzinger said he would sell Bill Miller's Legg Mason Value Trust"
I have posted about the 25-year cycle.
The excesses of a generations can not be corrected in a few months.
Have you been out much lately???? How often are you at the grocery store or the mall? When was the last time you mingled with the middle class?
Are you as removed from the Average Joe as our current politicians?
Because if you step outside, and start conversing with the waiter at your favorite restaurant or the guy that cuts your grass or the woman who cleans your house or your child's nanny or teachers or the guy the student ringing up your drycleaning bill...they will tell you that "their" world is falling apart.
That is the only chart I need to follow when I invest.. Talk to the people in the street, watch the patterns emerging, notice the small things... like the increase in coupon usage at the grocery... these things will tell you more than any fancy chart and a you will know it 4 months faster than any other investor.
That's why I am long on Gold and Silver. I see worry and fear headed to panic as we reach the cold dark months of winter.
It will be the behavior of these Average Joes and their hard earned nickel that will determine this market...not the "well heeled" investors as they speculated could cure us on CNN last night.
LONG TERM INVESTMENT IN STOCK IS OVER THAT WAS NOT NOW
THE MARKET HAS CHANGED.
EXAMPLE THE RESULT OF LONG TERM INVESTMENT MSFT, BA, GE,
T, ALL GOOD STOCKS YOU WOULD NEED TO HOLD THESE STOCKS FOR PERHAPS 10 YEARS AND IF YOU ARE LUCKY MAKE 5%
I COULD ACHIVE ON DAY TRADING A RETURN OF 40% TO 80%
THE MARKET NO LONGER MAKE SENSE AS XOM EARNINGS GO UP OR COP EARNINGS GO UP THE STOCK GOES DOWN.
SOME BANKRUPT COMPANIES SUCH AS AIR LINES WHEN OIL GOES DOWN THEIR STOCK GOES UP.
JOSEH FOSTER USA UK.
My father is a disabled veteran, who currently lives on his $1500/mo disability check and is waiting to collect Social Security in 8 months. He isn't a complainer and certainly isn't a slacker, but all he talks about now is the cost to get to the VA hospital and the 25% increase he has seen in his grocery bill.
I would rather read anything by Jason Kelly than the crap dispensed by his commenters, drawn like horseflies to honey.
I would rather read anything by Jason Kelly than the crap dispensed by his commenters, drawn like horseflies to honey.
Final note: I see Legg Mason is building a huge monument to itself on the Baltimore waterfront right now while investors are fleeing your funds. Aren't you embarrassed? You should be. People are paying you to be a professional money manager, not a clever sophomore psychology major with a chip on his shoulder.
investmentscientist.co.../
Bill is guessing, he doesn't have a clue.
I admire your conviction and hope you make a lot of money from your strategy. Personally though I am not so sure that I can predict a bottom, and would rather invest more conservatively by purchasing some of the good companies that are currently available at low prices rather than try to make high risk predictions like you are doing.
And yes that includes some financials. Some are too risky, others are much less so.
I just found this shareholder letter from Miller dated May, 2006 from an post right here on Alpha. Enjoy. Miller was calling a top if commodities based on a few newspaper headlines as well as a rally in banks based on his learned take on how financials have behaved in the past. The final quote is killer: "I'd rather own C with a capital C (Citigroup) than commodities. Check back in five years." C was trading @ $48 at the time, and Miller in the same posts scoffs at those calling for a gold move to $850.
My only question is how this guy still has a job??? Exactly how putrid does your performance have to be as a fund manager to be shown the door? From what I understand Miller has underperformed something like 99% of the industry the past several years. Egads, man, do the gracious thing and retire--your day is obviously done.
seekingalpha.com/artic...
everyone here has vested interests. buffett would like us to be a value investor as it will help put a foundation under value stock especially what he owns. the gold boys continue to rain doomsday predictions to drive us towards buying gold. here is a news flash, you can always jump on these buses if they start moving. why invest in something not moving?
This is one of the few times in the past 50 years that so many industries have been hit with so much trouble at the same time: Auto, Finance, Mortgage, Housing/Construction, and now Retail, is starting to hurt too. The American consumer seems to be running out of cash but the plastic may keep us out of a full blown recession. We won't know until 2009. What you have been suggesting and seeing is real. America does not have the economic scale we had just 25 years ago. When you export your jobs, run a 700 billion dollar trade deficit and have stagnant wages for 15 years it is very alarming when the economy slows down. One has to ask ones self what industry(s) will pick things back up. In 1981 it was autos and construction. In the 1990' it was high tech. In 2008 it is????? We do not have the economic scale anymore and so many industries are crushed it will be a waiting game. I have a hunch that the turning point comes the end of next year. I think GM will do much better in 2009 and I think most real estate markets will begin to finally bottom by Q3, 2009. There is light at the end of the tunnel. This light is simply dim because our trade and economic policies have been very, very stupid.
My zip code constantly ranks in the top 10 for income in the nation - however - the people who work in the stores, the restaurants, the lanscape companies, the grocery stores etc....drive to get here for these jobs.
When the guys are cutting my grass and it is 100 humid degrees and I am in the kitchen on my laptop running my business in the air conditioning, I usually step outside to offer up some bottled water to give these guys a break.
This is just one opportunity I take to hear what is going on in these guys lives. Things are TOUGH!!! They don't have $460 to fill their tank every month to drive to work. They have started carpooling recently. They are not complaining about carpooling... it is just a sign that things are changing... At some point, you run out of options when you are their level of income - and it happens quickly.
We have 2 apple trees. We hadn't got around to picking them yet. They asked me if I would mind if they picked the apples and take some home. I told them to go ahead. Three weeks later they are picked clean! I am grateful because I was glad that someone could use them, but this didn't happen in years past.
I am just saying that there are signs everywhere.
I have a cleaning lady who comes once a week that has driven for 5 weeks without getting her window fixed in her vehicle. She has plastic taped all over it. I had given her an advance to get it fixed but she said that she needed that money for groceries because prices had gone up so much!
She takes my Sunday coupon section home with her each week as well as my parent's when she cleans their house. I have a daughter who likes going to McDonalds. We know the people that work there and they have confided that the way they can afford to eat there is they eat the "mistake orders". No joke.
My Dad has Alzheimer's and is on Medicare, but still his medications were $1,650 last month!!! He is in the "black hole" of medicare.. I am grateful that we can afford to pay for these drugs but most Americans can't. Senior citizen's are going without air conditioning to save money and dying of heatstroke.
If I drive 20 miles in any direction things look terrible. Sure if I stay in my picture perfect suburb, my paradigm could look very different... I think that this is what a lot of people are doing. Because if I take a look at a very limited circle of friends and business associates the world looks just wonderful. But I refuse to keep blinders on to the rest of my world and the struggle for survival that goes on around me.
Everybody needs to take a really hard look very quickly and make some contingency plans just in case you are wrong.
For the next 12 to 18 months credit will continue to tighten. Hundreds more banks will be shut down. The Fed will let inflation eat away at all our net worth through 2008 and well into 2009 - or at least until there's pressure on wages (and people with jobs right now are just grateful to have them). It's going to be hard to make money, let alone preserve captial, for a long time. But the world as we know it will not end. We're just all going to have to pay a price over the next few years for the war(s), allowing the dollar to weaken so much, and our increasing lack of ability to generate jobs that pay well in the private sector here at home. This is the reality and I don't see how it can be avoided. We're in a secular bear market for years to come. Pure value style investing (mutual funds) are a very small proportion of my portfolio and will remain so for a long time.
Any speculators willing to take on this CD???
That's absolutely right. The problem for financials is that the core business -- good loans to good credits -- does not justify their multiples. And there is the copetition of the bond market. Good credits just go there. Why bother with a bank?
The result is that banks, to achieve returns, have to go to risky areas (unsecured credit card, investment banking, etc.) where they do not have a competitive edge and where they face inordinate risk.
Buying a bank for a little more than book (and after being comfortable that book is for real) is about all that I would spend to invest in this sctor.
Miller has it all wrong, and is a stopped clock.
LordDarley
If CFC were the exception and not the rule in Miller's portfolio, I'd be willing to cut him some slack. But the fact is the guy appears only to dig in his heels ever deeper into these losing trades and simply doesn't know when to throw in the towel and admit his "big picture" thesis has been dead wrong. His picks have been simply horrendous (S, YHOO, C, WM, CFC) and I have yet to see him admit to even a glimmer of doubt that that his theses and strategies are deeply flawed. Being 2-3 years early in picking a bottom in the financials is simply inexcusable for a so-called professional, and Miller deserves to manage nothing but his own problematic ego going forward.
seekingalpha.com/artic...
There is no reason other American companies cannot emulate them. If Ford and GM can overcome the current liquidity crunch, I see no reason why they cannot compete effectively in the North American market, as they do in the rest of the world. I live in Europe and Ford offers one of the most interesting line up of cars here. I am even tempted to buy the new Mondeo.
All is not lost. The future is not predetermined. American can make a comeback. Just after we pay back our loans, bonds, credit cards, etc. either through savings and hard work or through inflation.
No investor "gets rich" in a few months except, possibly, by sheer accidental dumb luck. Investors by definition are looking for long-term income streams from productive enterprises that can build and grow good businesses. In other words, an investor's profits come from the dividends he'll be receiving 10 years from now, not from a 300% run-up in the stock price next week.
Speculators and traders, on the other hand, may well get rich in a few months. It's possible to get rich in a few minutes; many traders correctly identified the short-term bottom in financials in July, and those who immediately made large leveraged long bets raked in huge returns. In this market, though, it's mostly about agility - trends come and go like lightning. And most of the money is made or lost overnight and over weekends thanks to the flood of news released while markets are closed. If you're agile, willing to take risks, and right more often than wrong, volatility is your friend. Will most traders be "rich by x-mas"? Probably not. But that would be true regardless of market conditions. Making money in a bear market is no more or less difficult than making money in a bull market. The real danger today comes not from the bears, whose actions are well-understood, but from the politicians, whose actions are random and often contrary to both common sense and basic economic theory. The best system in the world can be confounded by government meddling, and the worst can be buoyed. Or vice versa. One never can tell.
Financials have bottomed...They may drift down from current levels and stay flat in order to absurb their massive dilutions, but they have bottomed.
Housing has been dropping nationally for two years. It was reported this week that seven major markets saw month over month price increases. Las Vegas, Southern California, and Miami, which saw declines of 25% or more will not see prices fall another 25% from current levels. The stock market will anticipate this recovery.
European institutional investors, who have seen their currency double against the $US since 1998, and their stock markets outperform the S&P 500, are salivating at the mouth to buy dirt cheap $US denominated stocks. We're beginning to see this in M&A activity with buyouts of BUD and DNA.
Sovereign wealth funds are loaded to the rim with petro dollars and will continue to reinvest those funds into the global economy.
BRIC countries have $2.5Trillion (Yes Trillion) in reserves. Their economies, while slowing, continue to grow at a blistering pace. If their economies were to slow dramatically they have the capital to invest and grow their way out of a slowdown.
Oil did reach $150, but that spike will lead to the biggest tech boom the world has ever experienced. The tech boom of the 90's was driven by the U.S., Europe, and a few developed Asian economies. The coming alternative tech boom will include all of the above and China, India, Central & Eastern Europe. Once the capital, expertise, and energy of Silicon Valley is behind a trend, there is no turning back.
Finally, global markets are off more than 25% from their highs. If you cannot look forward through this market to see the opportunities after a 25% global correction you never will. Don't expect a major move in the market prior to the U.S. election, but come November have your seeds planted for a significant 4th quarter rally.
My free website's members portfolios and records are more "buffetlike" .sorry Mr Miller
I also like Kelly's comments. She conducts sampling of consumer sentiment in a direct fashion. In my business of Consumer Healthcare marketing, it's part of our business to conduct primary research on consumer sentiment as it relates to Health. LACK OF RESEARCH KILLS and many that visit this respectable forum are succeptible to the 'encapsulation' effect.
Ecapsulation whether you are in an ivory tower or part of the janitors club is part of human nature. Conducting sentiment research on consumer/Main St. over several months shows 1/2 our population going off a financial cliff in short order. Interested in a sector to invest in? Call CEO's and discuss general market problems and solutions. Too busy to call? Shame on you! Perhaps for some it may be better to head to Tahiti now...
Back to Bearfund's point: Policy or lack thereof in Washington over the next four years will determines if the USA becomes a Banana Republic or if we see the next Bull start in 2013.
dodd.senate.gov/index....
We do have plenty to sell foreigners in metals, agr, etc but to accelerate exports cheaper energy makes worlds of difference. The last oil spike/shock caused a lot more damage to our economy then you may understand. For that, read history to self-educate.