Miller says Legg fund 'clearly wrong' on energy, homebuilding stocks

[FRED]

Miller says Legg fund 'clearly wrong' on energy, homebuilding stocks
Aug. 3, 2006 (bizjournals.com)

Famed Legg Mason fund manager Bill Miller told investors Wednesday that his fund had a "dreadful" second quarter and made two key mistakes: loading up on homebuilders' stocks too soon, and staying away from energy stocks too long.

Miller's Value Trust fund has beaten the Standard & Poor's 500 index for 15 straight years. But the fund's value dipped by 5.67 percent in the second quarter, while the S&P declined only 1.44 percent.

Still, Value Trust is hanging tough on its key holdings, Miller and assistant portfolio manager Mary Chris Gay wrote in their quarterly letter to shareholders. "It is our willingness to own securities which other people regard as wrong which historically has been part of the long-term success of the fund," Miller and Gay wrote, adding that "in order to do better than the market longer term, you must be doing something different."

Value Trust snapped up homebuilding stocks too early, Miller and Gay wrote. When investors began selling off the stocks late last year on real estate slowdown worries, the fund jumped in, expecting the sell-off to be followed by a return to strong performance. The managers still believe homebuilding stocks will rebound, but the stocks have dropped much more than they expected in the short term, they wrote.

Miller and Gay also called not owning energy stocks a decision they were "clearly wrong about," echoing a late-2004 letter in which Miller said not jumping into energy stocks was a mistake. In hindsight, "only scattered Stone Age tribes in the Amazon, the comatose, or newly arrived aliens from Alpha Centauri" don't know that energy stocks are a ticket to profits, Miller and Gay wrote.

AntiSpin: Legg Mason has a strong track record and this goof is likely just a speed bump on a long road of future S&P besting performance ahead. The poor decisions they refer to in their comments are further evidence that while it's necessary to be willing to own "securities which other people regard as wrong," in order to beat the crowd it's also necessary to do so not only because the crowd dislikes said securities but because the crowd has clearly mispriced them. In this case the crowd was right: housing down, energy prices up. The folks at Legg Mason should be worried that the crowd still likes equities generally as much as they do, given the stagflationary environment. Some day the crowd will love equities and hate commodities and the crowd will be right again. Tough business, contrarianism.

[jk]

Re: the crowd is right most of the time

it is only at turning points that the crowd is wrong.

it's interesting to conceptualize the process by which trends are made. "the trend is your friend" indeed, but only if you discern it relatively early in its life. for the trend to continue in its profit-friendly direction more and more people must come to discern it and endorse it with their investment funds.

it is only when there is virtually universal agreement about the trend that the trend will end -- everyone is already on board and there is no one left to convert. too many people worry that more people on board, more endorsements, mean that they need to get off the train to maintain their "contrarian" credentials.

commodities, for example, are in the early days of their new bull trend.

many people see the commodities run up in the last few years as the new "bubble," saying that recent pull-backs spell the end of price gains for commodities. furthermore, because there have been price gains, they say that this position makes them "contrarian."

but in the context of commodities 20 year bear market up to 2000, recent gains are relatively small in both size and duration. there is far from universal endorsement of commodities. the nyc news station, wcbs, announced the price of gold every half hour in the late 1970's, as part of their business report. i have heard them mention the price of gold one or two times in the last year. people were at one time lined up at coin shops, the way they more recently lined up to sign contracts for unbuilt condos. this trend has a way to go.

look at the particular errors to which bill miller ascribes his recent performance problems: buying homebuilders on the way down ["catching a falling knife"], and not buying energy on the way up. these were significant trend changes that he misinterpreted as minor corrections of what he thought were unchanged fundamental trends.

miller beat the s&p for 15 years. maybe he'll pull it out this year too. but the last 15 years are of a piece, fundamentally there was little in the way of trend changes. the shake out of 2000-2002 was "corrected" by the 2002-2005 move that beasically re-established the prior trends, and especially reinforced the prominance of finance in the s&p, although it did see tech slipping from the role it had in the 1990's markets. but there are still a lot of tech bulls waiting for a replay of 1999.

so far miller's missed the more fundamental shift now in process, to commodities and away from paper. he is quoted as still waiting patiently for a resurgance of home builders. this is to say that he's waiting for the reemergence, and re-confirmation, of the 2000-2005 housing bubble. i think most people on this board would take the other side of that bet.

also "In hindsight, 'only scattered Stone Age tribes in the Amazon, the comatose, or newly arrived aliens from Alpha Centauri' don't know that energy stocks are a ticket to profits, Miller and Gay wrote." this appears to be a knock on the energy move. after all, if only the comatose "don't know that energy stocks are a ticket to profits," it means everyone is on board - it was a bubble that has peaked. i think there will be pull-backs, but i'll take the other side of that bet, too.

[Chris Coles]

Re: the crowd is right most of the time

[quote=jk]the shake out of 2000-2002 was "corrected" by the 2002-2005 move that beasically re-established the prior trends, and especially reinforced the prominance of finance in the s&p, although it did see tech slipping from the role it had in the 1990's markets. but there are still a lot of tech bulls waiting for a replay of 1999.quote]

If you go to Robert Beckman's book The Downwave you will see that he describes exactly this; a long upgrade followed by a short drop that rebounds again and takes everyone ALMOST back to the top again but just before the crash takes the lot to the bottom, right back where the trend started, 20 or 30 years before. Food for thought?

[jk]

Miller wrong again: kodak.

Kodak's shares plunged 13.71% Tuesday in reaction to the persistent losses, job cuts and punk projections, to 19.20, its lowest close since July 24, 1991, when they ended at 19.17, the Associated Press reports.
More than half of Kodak's shares are in the hands of institutional holders, AP also notes. Prominent among these is Legg Mason, which held 21% of Kodak stock as of March 31, according to Yahoo Finance. Legg Mason Value Trust (LMVTX), run by another American icon, Bill Miller, owned 23 million Kodak shares, or 8% of the total outstanding as of that date.



miller seems to be having trouble with paradigm shifts: commodities, end of housing bubble. and in this case he's invested with a company, kodak, that is having trouble with the paradigm shift in photography.

[Chris Coles]

Re: Miller wrong again: kodak.

Kodak has missed perhaps the greatest opportunity ever presented any company and yet, at the same time demonstrates that large companies cannot evolve into new areas of technology. While Epsom were presenting detailed evidence of where the electronic camera marketplace was going way back in the very early 1990's; Kodak sat and did essentially nothing.

There are still huge opportunities in electronic cameras and associated markets that have not been addressed. There is no sign whatsoever that Kodak has any interest in trying to penetrate into the new paradigm. Sad, yes, but that is progress.

The new Kodak in the new paradigm is?

[jk]

Re: Miller says Legg fund 'clearly wrong' on energy, homebuilding stocks

the problem with successful companies faced with a paradigm shift is that they're afraid of cannibalizing their own business. so they retreat into denial.

[Chris Coles]

Re: Miller says Legg fund 'clearly wrong' on energy, homebuilding stocks

No, the problem is that there is no efficient financial mechanism set into place that quickly and adequately capitalises the new companies coming into the new paradigm. Ask yourself why it is often a Japanese company leading the way with these new technologies into new markets? The answer is simple; they have a well oiled mechanism that permits them to address these new opportunities while on the run. It is their home financial institutions that have not so much as a shimmer of reluctance to capitalise the paradigm change.

That is the problem. Fear of failure deeply embedded into our sources of capital who in turn place that fear into the hearts of the management of our companies.

So I ask again; the new Kodak in the new paradigm is? and the answer is, here in the US/UK...... there never will be as long as we assume that how we are investing is the greatest thing since sliced bread.... and that takes us around in a complete circle.

There's a hole in my bucket, dear Lisa, dear Lisa, there's a hole in my bucket dear Lisa, a hole!

The lesson is that we must break the circle and start anew with a new way forward that regects the past investment paradigm that has been taking us around in ever decreasing circles for decades.