Bill Miller Wealthtrack Interview

Bill Miller recently appeared on Consuelo Mack's WealthTrack for an interview.  He's beat the S&P 500 for 15 consecutive years when he worked at Legg Mason.  Then he had a few years of underperformance and has come back with Miller Value Partners, an independent investment advisory firm. 

Here are some of the key takeaways:

-  Looks for stocks trading at a discount to intrinsic business value (present value of future free cashflow): looks for business that are naturally cash generative and buys them when free cashflow yield is 50% or more higher than the market.

-  Noted that typical value investors look for accounting value versus economic value.  Cites them missing Amazon (AMZN) as an example over the past 20 years.

-  Miller looks for "companies that can earn above their cost of capital through an economic cycle."

-  "Where you can really make significant amounts of money is when an industry changes from being one that doesn't generate economic value to one that does."  One example of this he cites is the airlines now.  Now they've had positive cashflow ever since 2009.  He owns Delta (DAL), United (UAL), American Airlines (AAL).  Consolidation has played a huge role.  As we've noted before, Warren Buffett is also now a large shareholder of airlines.

- Also owns Valeant Pharmaceuticals (VRX) equity in one fund and the bonds in another fund.  Notes that Bill Ackman has sold his VRX position.  Miller was buying around $30.  Thinks "perceived risk is way underpriced to real risk."  Thinks it could be a $50-60 stock in 3 or 4 years.

-  Miller thinks Apollo Group (APO) and Carlyle Group (CG) are cheap.  We've highlighted how Tiger Global has been buying APO as well.

-  Miller doesn't think the market is overvalued on a relative or absolute basis.  Especially compared to other asset classes it's cheap.

-  Likes Intrexon (XON), leading company in synthetic biology (think re-writing DNA). 

-  If he had to pick one stock to own for the long-term he'd pick Amazon (AMZN).  Compared it to Alphabet (GOOGL) and Facebook (FB) and their core business is the $500-600 billion ad market which is growing 5% a year.  Whereas AMZN's core business is retail.  US retail alone is $5 trillion so the total addressable market is huge.  Not to mention Amazon Web Services, etc.

Embedded below is the video of Bill Miller's Wealthtrack interview:



For more recent Wealthtrack interviews, we've also posted Consuelo Mack's interview with Joel Greenblatt.

Bill Miller on What Stocks He Likes Now: CIMA Conference

Continuing the series of notes from the CIMA Conference (Columbia Investment Management Association), we move on to the presentation and Q&A from Legg Mason's Bill Miller.

Bill Miller on What Stocks He Likes Now

He started out discussing how he is different from traditional value investors. Low P/E, low cash flow not enough. Focus on long-term creation of business value, the future, not just the past. Allowed them to avoid the terrible returns of value investors. How does he invest in tech? There are a few platforms that are locked in long-term. They did do 10-year projections on Amazon. If you think through it carefully, you CAN make long-term projections on tech. (They are doing it with Facebook now).


AMZN example: high growth, high valuation companies, in aggregate, have small chance of maintaining that rate. But some can. What is the probability that this is an exception to the base rate? Once companies get a certain level of market share, it is very difficult for that share to be eroded. (Network effect). True even with low barriers to entry. You want a business with low switching costs that nobody switches from. GOOG/MSFT search example- GOOG has 66%; MSFT has 14%, even with spending. Once you have stable market shares, and large market. It’s judgment, understanding the industry, not just looking at P/E ratios. They are looking at Facebook now.

AMZN: low 20s GMs, and high cost structure. Bezos exploited technology and customer-focus, to achieve critical mass, costs all up front, market would finance it. When stock was down, Bezos said he was focusing on new markets and customer service. They had a dominating presence by then. Issue now is what is the level of OM long term? Bezos says it will still be a double-digit OM business long-term. Bezos said, “I’m not going to make the Steve Jobs mistake of pricing the iPhone to subsidize the rest of the world R&D by pricing it so high.” IPad is priced much more competitively, so they have total share.

Bruce Greenwald says cloud isn’t that profitable because they have to provide capacity when everyone needs it, so it’s not really just using their excess capacity. The device business is bad, too. Miller says the device business is defensive. All of retail is realizing that AMZN is a threat to EVERY segment. AMZN has all the data about what you buy, like, etc. Ease of use. End market is so large. GOOG: internal discipline issue on capital spending.


How he does valuation? Build probabilistic models. No predictions: what does the market believe, what is embedded in the price, what is the trajectory of the business? INTC, CSCO, AAPL, MSFT, good business with reasonable valuations today.

Macro is fading as an important thing for investors. People have adequately discounted the macro risks.


Biggest Lesson He's Learned: if building an investment business, you need to be different, and right. That will attract assets. He went from zero to 75B in assets. Those assets will also fly out when you are different and wrong. To build a business, be different and right, to retain the business, you have to be a closet indexer.

Things change. Understanding and recognizing them is the key. They were late in the game in recognizing how far valuations would be squeezed by the financial crisis. “Don’t rule anything out.” When in a crisis, wait for the global coordinated action.


Stocks Miller Likes Now:

2008 was a lot of permanent loss, 2011 was temporary losses.

1. Bullish on housing already, all data-driven. KBH up 80% for the year! Still lower than it was a year ago. Housing cycle in process of bottoming, orders are up, better business models. Massive cyclical turn, with profound implications for the US economy.

2. Genworth: Mortgage business down, 50-100% gain in 12 months.

3. Financials: C, BAC below tangible book.

4. Insurance companies: below book value.

5. Airlines: Worst industry in the history of the world. Here’s the difference now. Was commodity business, unionization, high regulation, and fuel costs volatile, fragmented. Highest share was 12% in the US. United now 26%, DAL 25%, so story is consolidated business with better pricing. Positive FCF for 3 years straight now. UAL 40% ROIC. $5 FCF, will be investment grade in a year, trades at 3.5x earnings. Small, risky position.

6. Techs: AAPL, largest position. What kind of company is it? Debate is if Apple is just a really good tech company, what’s it worth? Not much, these things change rapidly. If Apple is a recurring revenue company, consumer products company, then it’s radically mispriced. Bill makes the case that it is a consumer products company; the repurchase rate on the iPhone is 95%. Very few SKUs in line-up. Only 375 stores, only in a third of the carriers worldwide. Share in iPhone doubled from a year ago. Stock is 10x eps and low earnings estimates. 90B in cash, dividend possible. In short term, very low risk. Value it at the least, like a cable company. Compare to KO, or NKE.

7. Facebook: actually, the higher it goes, the more the probability of winning. You can’t look at it like paying $85B for $1B in operating profit. That’s what they DID; they’ll do $2B this year, more than AMZN ever had in history, higher margins, less competition.


Q&A Session:

Why banks? How can you trust the B/S? Have to compare categories to overall market prices. Consolidation means top 6 banks are 63% of GDP. It’s impossible for the US GDP to grow without the assets of the banks growing. Banks as a whole are mispriced, but not compared to each other. BAC has 70B market capital; they were earning 40B a year ago pre-tax, pre-provision. Biggest beneficiary of housing recovery. Can’t get comfortable at the micro level on all their assets, but you can get comfortable about the direction of those assets.

AMZN: can it wipe out other business? Way too early to say. No threat to WMT, COST, JCP.

Market: Best thing for the stock market would be for the bond market to sell off; indicates fear about tail events is dissolving. Biggest risk to the market is Israel attacking Iran. Policy errors. Like in 2008, they wiped out capital as they told people to raise capital.


For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- David Einhorn Question & Answer Session

- Bruce Berkowitz's Basic Checklist for Investing & What He's Learned

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Long/Short Equity Investing Panel (Whitney Tilson)

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

Think Twice: Harnessing the Power of Countertuition by Michael J. Mauboussin (Book Review)

Our book review series continues and today we'll be reviewing Think Twice: Harnessing the Power of Countertuition by Michael J. Mauboussin. You may be familiar with Mauboussin as he is the Chief Investment Strategist at Legg Mason Capital Management and he has also been an adjunct professor of finance at Columbia Business School. Needless to say, he's had a storied career in finance and is a credible author on the subject. However, this book is not specifically about financial markets, but rather the process of decision making. We enjoyed his work because it offers a refreshing look at a topic applicable to all of life. Don't get us wrong though, the content still definitely applies to financial markets as well.

Think Twice takes a focused look at how you can recognize and in-turn help to avoid common mental mistakes. Mauboussin outlines topics such as the misunderstanding of cause and effect linkages, how people don't consider enough alternative possibilities in making a decision, and how often people rely too much on experts. We found the over-reliance on experts bit intriguing seeing as that's what we do on an everyday basis here on the site. After all, Market Folly serves to track the 'smart money' a.k.a. hedge fund experts. Needless to say, this section definitely gave us reason to reflect. If you think about it though, it's true. People do tend to seek out experts because they perceive that expert to have more knowledge than them on a given subject and then often blindly trust their expertise. We just found that whole notion fascinating because it's true.

Mauboussin's book flows nicely and is a shorter read at just over 140 pages. Due to its brevity compared to most books, we actually cruised through it twice. Some of the main takeaways from the book are to examine as much data as possible as well as to use common sense and logic. (Insert 'well, duh!' here). Another main focus of the book is on pattern recognition. While it does not specifically cite this, we figured one can easily apply this to technical analysis and analyzing financial markets in general. People seek to identify patterns even when sometimes there are none.

In the end, Think Twice helps refine your decision making in all walks of life. However, there are definitely strong tie-ins to how investors think and make decisions regarding their investments. We read through it with the topic of finance in our head, seeking as many tie-ins as possible. After all, it only seemed natural. (One interesting focus was on that of crowdsourcing and the 'herd mentality,' two traits certainly found in financial markets). This book is a little bit different than the typical work we review and it was a welcome change. The topic of behavioral finance and decision making on a broader level is definitely one worth looking into seeing how it plays a prominent role in everyday life, and in particular, investing. While the book does flow nicely, be warned that it does use some complex language and you'll probably end up looking up one or two terms like we did. (So much for our college degree). Think Twice is ripe with examples of the decision making process and truly opens your eyes to something that occurs everyday seemingly effortlessly and subconsciously. One thing's for certain after reading: we're conscious about it now and hopefully can use countertuition for the better.

Definitely check out Think Twice: Harnessing the Power of Countertuition by Michael Mauboussin if you're intrigued with the topic of decision making as it applies to financial markets and life in general.


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Make sure to also check out some of our other recent book reviews as we're starting to build a series of them.

- Riches Among The Ruins by Robert P. Smith
- The Greatest Trade Ever by Gregory Zuckerman
- The Murder of Lehman Brothers by Joseph Tibman
- Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly
- The Ivy Portfolio: How To Invest Like the Top Endowments by Mebane Faber

Don't forget you can find other insightful books on our recommended reading lists as well.