Few mutual fund managers can come close to this former Legg Mason portfolio manager’s 15-year market-beating record. Below he discusses lessons he has learned, plus his firm’s top ten holdings.
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In the pantheon of successful mutual fund managers, Peter Lynch is perhaps the most famous, running Fidelity’s Magellan fund from 1977 to 1990 and racking up a 29.2% annualized return over his 13-year tenure as manager. Just as Lynch retired from his gig in Boston, in Baltimore, Legg Mason’s Bill Miller III took up the torch of producing market-beating returns. An Army veteran and former philosophy PhD student at Johns Hopkins University, Miller started co-managing Legg Mason Value Trust in 1982 and took over as solo manager in 1990. With smart early investments in hyper-growth stocks like America Online and Amazon.com, Miller’s annual performance topped the S&P 500 Index for 15 straight years from 1990 through 2005. A stubbornly overweight position in financial stocks going into the 2007-2009 recession humbled the hot-hand manager, who eventually stepped down as manager in 2012.
Just after departing Legg Mason, Miller was on the verge of scoring his biggest win. Attending an informative lecture in 2012 prompted the stock market superstar to allocate 1% of his personal portfolio to Bitcoin at prices averaging around US$700. Bitcoin now trades near US$60,000 per coin of the blue-chip crypto asset.
Today, Miller’s son, Bill Miller IV, runs Miller Value Partners, which is focused on value stocks and manages the Miller Income mutual fund and two ETFs: Miller Value Partners Appreciation and Miller Value Partners Leverage. The younger Miller is the chief investment officer and principal owner. Total assets under management are approximately US$290 million. In 2023, the partnership sold the Opportunity Trust, with more than US$1 billion in assets, to Patient Capital Management, headed by longtime Legg Mason analyst and manager Samantha McLemore.
Miller, now 74, shares insights on how he beat the market for a decade and a half and assesses opportunities in the current market.
You said that you came to Legg Mason in 1980 with a negative net worth and making US$39,000 a year. Things are much different for you now, so could you share what made you who you are and what people could learn from it?
I grew up in South Florida and came from what could generously be called modest circumstances. My dad’s last job was as a cab driver. When I was nine years old, I saw him reading the paper one day, and he had the paper open to what turned out to be the stock pages, which are not in the papers anymore. They were, back then, and just numbers and letters, so it didn’t look like the comics or the sports – the stuff in the newspaper in which I had an interest. I said to him, what’s that, and he says that’s the financial page, and I asked why are you looking at that? I think it was probably something like General Motors that he pointed to and said, that’s a big car company. They make Buick, Cadillac and Chevy. That number is what it would cost to buy one share of it. I said, what’s a share? He said it’s a little tiny piece of the business. If the company does well, it will go up, and you can make money. I told him, ‘I want to learn about stocks because I want to make money, but I don’t want to do any work.’ If you own the S&P 500, over time, it goes up by itself, but if you want to do more than what the market does, then that does take work, a fair amount of it.
You were an Army Intelligence Officer. Can you talk about what you did in the Army and how it influenced your intellect?
I got a low draft number in 1969 and was headed to Vietnam as a rifle platoon leader but was diverted after Infantry School to Military Intelligence for six months of specialized intel training, and spent the balance of the next several years in Germany. The war ended in 1975, and I got an early release. I went to Johns Hopkins to get a PhD. in philosophy. I had to take a job, so I worked at a food brokerage place as a part-time accountant, and eventually I got on at Legg Mason, and Chip Mason decided to start a mutual fund (Legg Mason Value Trust). He wanted somebody to eventually take over as director of research; I got that job and learned the ropes of the investment business from the inside. The 1981-1982 period was a really bad one in the market, but then [Federal Reserve Chairman] Paul Volcker cut rates, and the market took off. By the end of 1983, of all the public mutual funds, we were the single best-performing one and then money started to flow in. Peter Lynch’s Magellan fund was No. 2 to us, and even for the four-year period, going to 1987, we were still No. 1, and Peter was No. 2.
What were you looking for? What kind of characteristics of companies were you searching out? What kind of a style would you ascribe to it?
Ernie Kiehne [Legg Mason Value Trust Co-manager] was very much what I call an accounting-based value investor, so the visible accounting metrics are what were driving him, like sales per share. He would say earnings come ultimately from sales, so the more sales you have, the more potential earnings you have, even if you’re not demonstrating them. When Ernie stepped into the background, and I took over, I looked at what all the academic literature on investing showed about what drove stock prices and company valuations. I read about Buffett, who was beginning at the time to look for good businesses at fair prices and companies that would have long-term sustainable competitive advantages.
I found that companies that traded at discounted valuations – P/E, price to book, price to cash flow – typically did so because they had low returns on capital or highly variable returns on capital. They were only mispriced if those variables changed, if the return on capital went up, or if the growth rate went up. They weren’t mispriced unless somebody else came along, bought them and took out a lot of costs. You wanted to have companies with high return on capital, incremental capital, free cash flow and smart capital allocation. I began to spend much more time on companies that were statistically cheap, but where there was a reason to believe that those variables would change, not just buy them because they were cheap and hope that they changed.
One of your early scores in the 1990s was IBM when Louis Gerstner was in charge, and then you identified some early IPOs like Amazon, and you owned Dell. Which of your investments in those years do you consider your best triumphs, and why did you get into it?
Each one of those represents something different. IBM was a great growth stock that had fallen on hard times. I didn’t have technical knowledge, but I saw that IBM had a free cash flow yield of 10%. Even though the company was losing money for the first time in its history, it generated 10% of the market cap in free cash flow because it had much more depreciation than capex. IBM had gotten too capital intensive, but Gerstner cut all that back, so for at least the next five years, even if they don’t make any money, they’d have the same amount of free cash flow. They had a 10% free cash flow yield and junk bonds were yielding about 6%, and I said, this isn’t a junk bond; it’s the largest, most important computer company in the entire world, and it’s got a bulletproof balance sheet and won’t keep losing money forever.
Free cash flow yield is the single best predictor of future rates of return. It’s not the growth rate of earnings. Also, if a company with a high free cash flow yield is buying back shares, its stock is cheap. Those two things together over like a 20-year period are worth around 1,200 basis points a year on the market. Almost nobody does that.
In 1996, Dell traded at five times its earnings and grew about 35% a year. The personal computer business was exploding. Microsoft had the operating system, and Intel had the chips. Dell was considered a commodity producer; it was the low-cost PC assembler. That meant the higher-cost producers would go out of business over time, and there’d probably only be three or four left. Dell would also do well because they were direct to consumer, so we bought a fair amount of Dell, and we made 50 times our money. It went from five times earnings to 40 times earnings and continued to grow 30% a year for the next five years.
Amazon was different. I’d gotten to know Jeff Bezos a little bit, and I was very impressed with the way that they thought about the business and what they were doing. We bought it on the IPO [in 1997], and it doubled. Then we sold it. I watched it go up and up the next couple of years, and we bought it back. Our initial buyback price was US$88 a share in 1999, almost the peak, and on a pre-split basis, it went from US$88 to US$6 in 2002. We bought it all the way down. Our average cost when we finally stopped buying it was like US$9 because we bought a lot of it. So, the best investment decision I ever made was buying Amazon on the IPO, and the worst was ever selling a share of Amazon. It was a retailer, but Amazon didn’t have stores. They had warehouses and shipped directly to the customer. That was Dell’s model. Amazon’s metrics didn’t look anything like Walmart or Home Depot. They were exactly like Dell – same operating margins, same gross margins, same low-cost overhead, same high inventory turnovers.
Bitcoin would probably be your single best percentage return on investment, but it’s not a stock. It’s a cryptocurrency. How did you get into Bitcoin?
I bought Bitcoin around US$200 at the start, and I think my average cost from 2012 to 2024 is around US$700. It’s the only economic entity where the supply is unaffected by the demand or the price. Currencies, for sure, but even gold – there’s a certain amount of gold that we produce every year. If gold was US$10,000 an ounce or US$100,000, there’d be a lot more gold coming to market because mines that were uneconomic would be economic, but if Bitcoin is US$100,000 or US$1 million, the supply is fixed, so it becomes supply and demand. At the most basic level, all you have to believe is that the demand for Bitcoin will grow faster than the supply.
What got my attention was this guy named Wences Casares, who spoke at the Allen & Co Sun Valley conference in 2012. Bitcoin had gone from, call it, a nickel in 2010 to US$200 in two years. He said the reason you don’t own it is that it’s brand new, you don’t understand it, and you don’t see what purpose it serves. Then, he’s like, I come from Argentina, and my family’s been there 150 years. We’re quite prominent, and we’ve been bankrupted by the government three or four times by inflating us out of wealth, seizing our assets and nationalizing things. There’s a lot more risk in owning the currency and transacting in it because you always lose all your money by doing so. Casares was an early internet investor, owning one of the first internet service providers in Argentina. He said this thing is different. He said it is a new technology that is, in effect, digital gold, but better. You can send it instantaneously anywhere in the world at no cost, so it can’t be seized. He said, I would suggest you consider putting 1% of your liquid assets into Bitcoin and then forget about it. You could lose all your money, but look how much it’s gone up in the last two years. You have nothing that has gone up as much as Bitcoin in the past two years. I said, let’s have lunch together and talk about this thing. Bitcoin is an insurance policy against financial catastrophe, against inflation, against the types of things we saw during the pandemic. The Fed had to flood the system to keep the Treasury market functioning, but nobody had to come in and bail out Bitcoin. You can’t bail it out. I would predict that within the next three to five years, a majority of advisors will advise people to have 1% to 3% of assets in Bitcoin.
What was your biggest disappointment over your investing career, and what did you learn from it?
I would say that in an individual stock situation, the biggest one was Kodak (KODK), a great company that’s been around 100 years, totally dominant, high growth, all the things you want. Still, there was a technology transition from film to digital. Kodak had invented the first digital camera, and they were the incumbent in that space. Kodak got to around eight times earnings in 1999. People were going nuts on anything tech and telecom, and Kodak was getting slammed because it wasn’t in that space, and it was going to be superseded. It had a 4% or 5% dividend yield, a high return on capital and 80% gross margins, so we bought a decent position and then I got to know the management. I also spent some time with George Fisher, former CEO, who’d been the CEO of Motorola. I got convinced that this thing was really good, so we probably put 5% or 7% into it. One of the things from a portfolio management standpoint that I would tend to do over would be to take a 3% position or something, and if it got cut in half, then I would buy it back up to a 3% position, and if I didn’t have enough confidence, I would sell. It went through a very brief period where it doubled, and then it went to zero. It would have been a whole lot better if it had done that over the course of two years rather than five or seven years.
I would say that the biggest lesson I learned is that these technology transitions are very tricky, especially if it’s secular change. You’ve got to be very careful about that. We got that right on Netflix, by the way. We bought Netflix when it was mailing out DVDs.
Your portfolio took some hits during the financial crisis in 2008. What happened there?
We stayed with financials way too long and just didn’t realize the level of dysfunction that was going to happen. We were the second largest holder of Bear Stearns. All the time David Einhorn was being right [Einhorn is well-known for shorting Lehman Brothers before it collapsed], we were being wrong, but we came out of that. We bought a lot of Wells Fargo, JPMorgan and Bank of America when the government came in and we made a boatload of money on those things.
If you could give your 20-year-old self some advice about investing, what would it be, and what kind of books should a person read to become a better investor?
One of the books that came out recently by Morgan Housel, who wrote The Psychology Of Money, is Same As Ever. It reminds me of Jeff Bezos at our investing conference in 2003 when somebody asked him how technology is going to change in the next 10 years. Jeff said, I don’t know what’s going to change. He basically said he could only guess, but what’s not going to change is people won’t want slower deliveries. They’ll want faster delivery. They won’t want higher prices, they want lower prices. They don’t want worse customer service, they want better customer service.
My first bit of advice is do not try to forecast the market or the economy. No one can. It is much more important to understand what is happening than to try to guess what will happen. The second thing is that if you’re an investor you basically need to have an edge, like poker. There are only three sources of edge in capital markets: the information edge, the analytical edge and the behavioural edge. It’s like a mosaic, putting stuff together in certain ways where things become clear to you and get a probabilistic scenario that maybe this is more likely to happen than not. It’s what we did on Amazon. We had no information anyone else didn’t have, but we put it together differently, and we thought we weighted the information differently, and the same thing with Dell and Netflix.
It’s much easier to have a behavioural advantage, and that’s basically what Daniel Kahneman and Amos Tversky got their Nobel Prize for explaining. Loss is twice as painful as a gain is pleasurable. People are much more likely to overestimate risk than they are to underestimate it, except when prices are rising, and they underestimate risk because they’re watching it go up every day. How risky can it be?
Ignorance is not an advantage in the investment business. You want to have a wide circle of competence, as Warren Buffett would say, and that comes from reading widely. I used to read Reminiscences Of A Stock Operator by Edwin Lefèvre every year. The Money Game by Adam Smith I think is great, and so is William Green’s Richer, Wiser, Happier. There’s one about idiosyncratic CEOs called The Outsiders. Chapter 12 of Keynes’ General Theory Of Employment, Interest and Money is a must read, along with Jason Zweig’s new edition of Benjamin Graham’s The Intelligent Investor, especially chapters 8, 9 and 12. I’d also suggest Broken Money by Lyn Alden, who’s an engineer by training.
Among purely philosophical books, I’d say The Will To Believe by William James is excellent, along with James’ Pragmatism, which is a series of lectures he gave in 1907. Then there’s Louis Menand at Harvard and his book, The Metaphysical Club, which is the best intellectual history of the United States ever written.
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