The Hindu Business Line : Investment Nuggets

Known for value investing, Bill Miller manages the portfolio for the Legg Mason Value Trust fund. Miller strongly believes that any stock can be a value stock if it trades at a discount to its intrinsic value. For 15 consecutive years between 1991 and 2005, his fund outperformed the S&P 500 index. The two factors to which he attributes this success are: Exhaustive security analysis and portfolio construction. Miller also serves as chairman of Board of trustees of Santa Fe Institute, a leading centre for multidisciplinary research in complex systems theory. Individual investors have lots to learn from his value investing principle. Below are some of his key sayings:

“I often remind our analysts that 100 per cent of the information you have about a company represents the past, and 100 per cent of a stock’s valuation depends on the future.”

“The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don’t always accurately reflect your weight, the markets don’t always accurately reflect that information. Usually, they are too pessimistic when it’s bad and too optimistic when it’s good.”

“What we try to do is take advantage of errors others make, usually because they are too short-term oriented, or they react to dramatic events, or they overestimate the impact of events, and so on.”

“Value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain … Sometimes growth is cheap and value expensive... The question is not growth or value, but where is the best value …”

“You never know for certain, but the nature of value traps is, they tend to have certain characteristics. Typically, one is that the valuation of the business or the industry is lower than its historical norms. The company or business normally has a fairly long history, so the historical normal valuations provide a lot of comfort. Therefore, when you get down toward the lower end of these valuations, people find them attractive. The trap comes in when there’s a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price. They are a good example of where historical valuation metrics aren’t working.”

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