Bill Miller: a monkey and his typewriter

Legendary investor Bill Miller of the Legg Mason Value Trust beat the S&P 500 for 15 years in a row, through 2005.

Genius, or monkey on a typewriter? If we assume that performance is completely random and half of all portfolio managers beat the index in any given year, the laws of probability say that in any given 15 years, one in 32,768 portfolios will have a perfect streak.

Are there that many mutual funds out there? No, perhaps 9000 or so. But the 32,768 figure is in any given 15 years. Bill Miller started managing the fund in 1982, meaning he's had 11 different possible 15-year streaks of full calendar years (1983-1997, 1984-1998, ... 1993-2007). Divide the 32,768 by Miller's 11 chances, and one in 2979 portfolio managers should accomplish the feat with that many opportunities.

Further, Miller likely benefited from growth in assets under management. As his fund put up strong performance, more investors bought his fund, pushing it from a small fund in 1990 to a behemoth in 2005. This meant he constantly had more money to invest in the stocks he already owned, pushing them ever higher.

But even if several portfolio managers could be expected to beat the S&P 500 over that time frame, Bill Miller could still be a genius, right? Performance like that could be due to brilliance rather than randomness. Let's see how we'd be doing if we bought Miller's fund at the end of 2005 (Miller in blue):



Ouch! That's gotta hurt! Miller's fund is down almost 40% while the S&P 500, the Dow Jones Industrial Average, and the Vanguard Value Index are flat to up 10%. Miller's recent performance is so bad that he now lags the S&P 500 for the trailing 1-, 3-, 5-, and 10-year periods.

What brought Miller to this point? Let's see what he held as of 12/31/2007. A Who's Who of disasters:
Countrywide Financial
Washington Mutual
Bear Stearns
KB Home
General Motors
UPDATE 7/12: I forgot to mention Freddie Mac!
Verdict: monkey. LMVTX LMVRX LM


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