What We Can Learn from a Legendary Fund Manager’s Retirement

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Rick Wilking / Reuters

Bill Miller, Chairman and Chief Investment Officer of Legg Mason Capital Development, leaves the morning presentation at the 26th annual Allen & Co conference in Sun Valley, Idaho July 9, 2008. .

In the end, Bill Miller was doing what he had always done. But it stopped working, and now the legendary mutual fund manager is retiring. His inglorious departure from Legg Mason Value Trust offers a telling lesson in the perils of blindly sticking to what has succeeded in the past.

Miller is a rare fund manager who outperformed the S&P 500 for 15 consecutive years, 1991 through 2005. Not even Peter Lynch could match such a run. Had you invested $10,000 with him at the start of that period it would have become $98,079. That’s called knocking the cover off the ball. In the same period, $10,000 in the S&P 500 would have grown to just $51,354.

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But things went very wrong for Miller after that, especially when the financial crisis hit and he failed to comprehend the depth of the problems at banks and the severity of the recession. He began loading up on falling bank stocks much too early and in 2008 his fund lost 55% of its value. The investor exodus began, and fund assets that had totaled more than $20 billion in 2006 today stand at just $2.8 billion.

Miller, who is leaving the fund in April, is a contrarian. He buys stocks of good companies when they are down and no one wants them, and then waits for the rebound. There’s nothing easy about that. But there is also no denying that he entered the fund business at the perfect moment for a manager who relentlessly buys on dips.

Miller launched Value Trust in 1982. A wretched 14-year stretch for the stock market was ending. Stocks were beaten down across the board and the greatest bull market of our time was about to launch. For the next 25 years anyone who bought the market’s dips and held on did well. Even severe pullbacks in 1987 and the early 1990s proved relatively fleeting. Miller excelled.

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But the investment world turned upside down after the financial crisis of 2008. While Miller was buying cheap bank stocks, they kept getting cheaper. He was betting heavily on the sector to spring back to life, a prospect that even now – nearly four years later – seems distant at best. As Miller told The New York Times:

“The crisis was the biggest mistake we made — not understanding the systemic nature of what was happening. … We had it completely wrong.”

It would be simplistic to say that all Miller did was buy dips, though that was a big part of his strategy. Miller is a tireless and extraordinary stock picker. He’s an intellectual who was an Army intelligence officer and once headed up a think tank that studied complex forces in nature and society. Others tried his style and didn’t do anywhere near as well.

But by figuring his style would work forever, Miller stumbled. The financial crisis and Great Recession changed how investors view the markets. They’ve seen too much wealth wiped away and have now endured more than a decade without stock gains. Treasuries are in demand; not IPOs. And it’s likely to stay this way until the economy shows real signs of lifting.