Thursday, December 11, 2008

Bill Miller and the Existential Crisis of Value Investing

(or what did you in the crash of '08 Daddy?)

The Wall Street Journal Article on Bill Miller highlights a existential problem for value investors. Reading what he said, Miller basically bought stocks into the panic, as he had done before, only this time, by his own admission "The thing I didn't do, from Day One, was properly assess the severity of this liquidity crisis," He had a well worn playbook and it just did not work in this market. Now, if he goes out and beats the market for 8 of the next 10 years then his methods will presumably have proven to be valid. Or are they?

Now, obviously Miller has the institutional imperative that he had to buy and stay in the market. Even as individual and not institutional investors, how can one develop the intellectual and intestinal fortitude to avoid this sort of debacle? Biglari's playbook also looked great before this debacle. (Buy real estate heavy restaurants that can be franchised.)

Now perhaps Mauboussin's article on reproductive strategies in nature points to an answer, but I just don't know. (Some animals have lots of babies--diversification? Some have just a few--focus investing? And some store for the really lean times--Berkshire, Fairfax?)

Is it just temperament, either cultivated or genetically inherited that makes better investors? And those qualities to anticipate the next weird turn are presumably what Buffett is looking for (or found) in his CIO successor.

Anyway, the point remains how the hell do you get to the point that you can at least carry Watsa's shoes(CEO of Fairfax, which made a bundle on the crash)--not to mention Buffett's?

1 comment:

Ken Roberts said...

Good question. I've always been amazed by Bill Miller's moves - eg Amazon - not sure I would call him a traditional value investor, except that he looks at value - in Munger's sense of saying that all investing is value investing. But where Miller's style is not value investing, is that he sometimes seems to ignore margin of safety considerations, instead relying on market return to "normal". And this is what has bitten him this time.

Ben Graham taught us two primary ideas (among others): "margin of safety" (the most important three words) and distinction between value of a business/security to a non-market purchaser, vs price in market. Miller seems to have drifted away from each of those.