The Difference Between Buffett And Bill Miller: No One To Answer To

Includes: BRK.A, BRK.B, IBM, LM, WFC
by: Smead Capital Management

Two watershed events were announced in the last two weeks. First, Warren Buffett disclosed a massive amount of open market purchases of U.S. large-cap stocks. Second, Legg Mason (NYSE:LM) announced that Bill Miller is "stepping down" as chief investment officer of his firm and as manager of the Value Trust. These are two of the greatest stock pickers of all time and the change in direction for both men is driven by who they answer to and how favorable investing could be in the U.S. large-cap space going forward.

In 1999, at the Allen and Co. event in Sun Valley, Buffett warned how poorly technology stock investments would do going forward and how muted U.S. large-cap returns would be from 1999 to 2016. He explained how the Fortune 500 companies were trading at 30 times profits and that profit margins were at the high end of historical ranges. Therefore, he laid out an incredibly difficult road for those who pick large-cap U.S. equities.

Buffett runs a holding company in which he is the largest shareholder. In effect, he answers to no one. When publicly traded U.S. large-cap stocks got way overpriced in the late 1990's, Buffett shifted to private equity purchases of entire companies. He bought all the outstanding shares of General Reinsurance and Geico. He made numerous smaller acquisitions like Mid-American Energy. Buffett got his investments away from having the prices quoted every day and allowed his publicly traded portfolio to become a minority of Berkshire's (NYSE:BRK.A)(NYSE:BRK.B) assets. He continued that approach in 2009 by buying all of Burlington Northern and recently bought Lubrizol.

Bill Miller beat the S&P 500 index for 15 straight years making his shareholders, his parent company and himself very wealthy. The last five of those years included much less spectacular returns between 2000 and 2005. He ran relatively concentrated portfolios and was adored by the media. The index has gone nowhere for 12 years and Miller answers to shareholders. They have expressed their disappointment by driving Value Trust's assets down to $2.8 billion from a peak of $20 billion. Bill stepped down voluntarily or was asked to. Either way, it is exactly what happens at the end of a stretch where investors have been massive net liquidators of U.S. large-cap stocks.

Buffett has no career risk and no one to answer to. He told Becky Quick on TV that he feels U.S. large-cap stocks are undervalued relative to other asset classes. He bought $10.7 billion of IBM (NYSE:IBM) and added to Wells Fargo (NYSE:WFC). His underling, Todd Combs, bought shares of numerous U.S. large-caps for Berkshire as well. Buffett is happy at these prices to get back into public shares priced every day.

In 1999, Buffett felt that two things beside market levels could affect overall stock prices. He said that a drop in government interest rates from 6 percent to 3 percent would double the value of stocks. He also said that high sustained profit margins would positively impact stock prices. Both of those have happened. Lastly, stocks have done worse than Buffett expected despite these facts.

We believe putting this all together for U.S. as contrarians means one thing. The time to net liquidate U.S. large- cap equity is over because Bill Miller is being given up on and Warren Buffett believes the risk reward in these stocks is very favorable. In our opinion, it is time to buy a concentrated portfolio of U.S. large-cap stocks. We suggest you do this while avoiding the BRIC trade, in case you have someone to answer to.

Disclosure: I am long WFC.

Disclaimer: The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

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