Not long ago, Bill Miller who serves as the fund manager of Legg Mason Value Trust mutual fund (LMVTX) issued the fund’s semiannual letter to shareholders for 2008. Miller laments the fund’s poor performance over the last year (July to July), down 34%. Famously, Miller’s fund beat the S&P 500 index a bunch of years in a row. However, as a Fortune magazine article points out, Miller doesn’t provide much guidance for how his fund (or investors) can return to the glory years going forward.
I disagree. The old maxim “Actions speak louder than words” can no doubt be applied here. Throughout this troublesome market, Miller has spoken loudly by adhering to his investment principles. A few of those principles, distilled beautifully by Janet Lowe in her book The Man Who Beats the S&P, are to:
Observe, but don’t forecast, the economy and the stock market. The market has so many players all using different bases from which to compete and adapt to one another. This results in unpredictable short term movements in the economy and the market. There is no simple formula that can predict these movements. Forecasting is folly. However, observing these movements and behaviors provides investment insights.
Seek companies with superior business models and high returns on capital over time. Over long periods, companies meeting these criteria have proven to provide high returns to their shareholders.
Buy businesses at a large discount to the central tendency of their true value. In true value investing style Miller always provides himself a margin-of-safety. In his latest letter, Miller points out that Financials now provide this margin-of-safety as the market prices of these companies are at all time lows compared to their underlying economics. However, remembering that “forecasting is folly”, the performance of these investments in the short term cannot be predicted. Over the long term they should do well.
Sell when 1) the company reaches fair value; 2) you find a better investment or bargain; 3) the fundamental logic for the investment changes. Miller sells to when it maximizes the returns of his portfolio. Most investors, amateur and professional alike, sell at the most inopportune times, like now when the market is depressed.
I doubt Miller will ever be able to duplicate the previous success he enjoyed with Value Trust. But if investors hold fast to his fund or his principles, they should do well.