The fascinating story of Bill Miller and the lessons learned that every investor should be aware of...
A Story with Hidden Meaning
Bill Miller has a fund manager status equivalent to being a rock star. His achievement of beating the benchmark S&P 500 index for 15 straight years (1991 to 2005) as the Legg Mason Value Trust manager is incredible.
To put that in perspective, only about one-quarter of managed funds are able to beat the market in any given year; the odds of doing it 15 years in a row are astronomically low.
However, Miller's fortunes soured when he made leveraged investments in Bear Stearns, Freddie Mac, and other hard-hit financial stocks during 2008. These bets were based on the assumption that the Federal Reserve would swoop in and help. However, this didn't play out as much as Miller expected.
Miller's fall from grace is characterised in the movie The Big Short, where a fund manager based on Miller debated Steve Carell's character on stage at an investment conference. Portrayed as a comically overconfident character, the film's Miller arrogantly defends his bet on crippled investment bank Bear Stearns even as the stock plummets and fellow investing pros—clutching their Blackberrys—literally run for the doors.
Miller's flagship fund tumbled 55% that year, and an investor exodus slashed his assets under management from around $77 billion to $800 million. The heavy losses, coupled with a recent divorce settlement, meant Miller's personal fortune shrunk by nearly 90% in a matter of months.
And yet today, Bill Miller is a billionaire once more. His return to glory is thanks to two bold investments in Amazon and Bitcoin, both long-held through periods of adversity. Miller is reportedly the largest shareholder in Amazon outside of Jeff Bezos and ex-wife Mackenzie Scott and his position in Bitcoin is up over 5,500%.
Despite the dot-com bubble bursting, the GFC, divorce and a pandemic, Miller has been able to continue to invest and achieve incredible wealth.
Miller's strategy is not replicable. It would be remiss to suggest cloning Miller and expecting that you will get enormous returns. However, Miller and other super investors can teach us many hard things about massive returns
What Lessons Can We Learn?
The hard thing to learn about massive returns is that you will inevitably suffer losses and drawdowns along the way. Failing nine times and having a big win on the tenth effort is about as good as it gets in a lot of things – investments, relationships, careers, etc.
It's hard to learn that you can be wrong more than half the time and still make a fortune. It's easy to scold high-profile fund managers when some of their picks crash. But being wrong is part of the process and doesn't rule out strong returns overall. Peter Lynch once said, "If you're terrific in this business, you're right six times out of 10." In any portfolio, whether indexed or active, the majority of gains will likely come from a small minority of stocks.
It's hard to learn the exponential effect of time. Do you know that approximately 99.7% of Warren Buffett's wealth has been built after the age of 52? Compound interest blows people's minds. The most significant shortcoming is the failure to understand the time component - you must let time do the magic and not interrupt the process. Time is the exponent that does the heavy lifting, and the common denominator of almost all big fortunes isn't returns; it's endurance and longevity.
It's hard to learn to overcome adversity. Recessions, downturns, corrections and tough times are never fun. The good news is that in their wake, something positive happens. The hardship will separate the wheat from the chaff and those who can "handle hard well" from those who cannot.
It is impossible to know how long this challenging economic period will last or how severe it will be. Investing is an endeavour in delayed gratification; the greater the delay, the greater the gratification. The past century has been filled with long stretches of little to no market returns (e.g. stretched in the 1930s, 1970s, and the 2000s) — each ending with what became the beginning of the most powerful bull markets in history. That's no coincidence.
It's hard to learn that investing has a high correlation between pain today and reward tomorrow. The greatest comfort when enduring a period of no returns is awareness that, with each passing day, the odds of future success stack a little higher in your favour.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.