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3 Important Lessons from the Downfall of Legendary Stockpicker Bill Miller

By:
Paul J. Lim
7 min read
Bill Miller of Legg Mason Capital Management, left, and Jerry Yang, formerly of Yahoo, leave the morning session at the annual Allen & Co. Media summit in Sun Valley, Idaho, July 9, 2010. - Nati Harnik—AP
Bill Miller of Legg Mason Capital Management, left, and Jerry Yang, formerly of Yahoo, leave the morning session at the annual Allen & Co. Media summit in Sun Valley, Idaho, July 9, 2010. Nati Harnik—AP

If you were an investor in the 1990s, you know Bill Miller as a rock star fund manager who did something even the legendary Peter Lynch never could: He beat the stock market every year from 1991 to 2005. To put that in perspective, only about one quarter of stock funds manage to beat the market in any given year; the odds of doing it 15 years in a row are astronomically low.

But even if you aren't old enough to remember Wall Street in the '90s, you might recall Miller from the movie The Big Short, in which a fund manager based on him (but re-named Bruce Miller) debated Steve Carell's character on stage at an investment conference. Portrayed as a comically overconfident by character actor Tony Bentley, the movie'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.

Accounts of the actual event suggest the movie's depiction isn't far from the truth—and the funds Miller ran did in fact take catastrophic losses because of the downfall of Bear Stearns.

Bill Miller, in other words, has at various times in his career been the living embodiment of the best and worst of Wall Street and the mutual fund industry.

So when Legg Mason, the asset management firm that Miller put on the map over the past 35 years, announced late last week that it was parting ways with Miller, a long-time industry watcher like me could not help but see the dripping symbolism of the occasion.

But you don't have to be a connoisseur of Wall Street carnage to draw some lessons from Millers rise and fall. Here are three takeaways for ordinary investors.

#1) Even the best stockpickers fail to consistently beat the market.

While Miller is best known for his 15-year winning streak while managing the giant Legg Mason Value Trust fund, he is also the same stock fund manager who led the smaller Legg Mason Opportunity Trust to huge losses from 2007 through 2011. A $10,000 investment in Miller's Opportunity Trust fund at the end of 2006 shrank to just $4,815 by the end of 2011, thanks in part to big bets on hobbled financial stocks, according to Morningstar.com.

To be sure, Miller did bounce back, trouncing the S&P 500 in 2012 and 2013. But he went back to trailing the market again in 2014, 2015, and so far this year—at which point Legg Mason apparently decided to cut losses.

#2) The era of the star fund manager is over.

There's a reason why Miller is the last fund manager that you may have heard of. That's because the era of traditional actively managed funds has long since passed.

As my colleague Penny Wang has pointed out, passive investing—in which you buy and hold all the stocks that make up the broad market through a low-cost index funds—is winning out.

As she notes, from January 2014 through March 2016, fund investors pulled $111 billion out of "actively managed" funds run by stockpickers like Miller. Meanwhile, they plowed more than $434 billion into index funds, according to Cerulli Associates.

It's easy to see why indexing has become so attractive recently. Miller's Legg Mason Opportunity, for instance, charges 1.19% of assets a year on its "A" class shares in addition to levying a 5.75% sales commission. Yet over the past decade, the fund has returned just 3.1% annually. That means the fund has been outpaced by 96% of its "mid-cap blend" category (funds that invest largely in shares of medium-sized companies).

By contrast, iShares Core S&P Mid-Cap, an index fund that's also in the mid-cap blend category, charges just 0.12% of assets annually. Yet by buying and holding virtually all mid-cap stocks, the fund has earned 9.3% annually over the past decade, beating 85% of its peers. The ETF is in the Money 50, our recommended list of mutual and exchange-traded funds.

#3) If you invest with a value fund, you have to give it at least 10 to 20 years to succeed.

Value investing—where you seek out underappreciated or beaten-down stocks and wait for the market to recognize their virtues—has been shown to outperform the broad market over the long run. Yet to take advantage of those long-term benefits, you have to be willing to bet on these stocks for years, if not decades.

Research Affiliates studied the performance of value funds over time. It found that between 1991 and 2013, value-stock funds returned 9.4% a year, beating the 9% returns for the S&P 500. Yet during this same stretch, value-fund investors earned just 8.1% on average. Why? Because fund investors mistimed the market.

The only way to capture the full value advantage is to be patient even during those painfully long stretches where market euphoria favors the high flyers, not the good bargains. "If you want to invest in value, you've got to stick to value through thick and thin, and your time frame should be at a minimum 10 years," said Ben Johnson, director of global ETF research at Morningstar.

Yet we may be in an especially tough period for value-minded investors. Miller's fund isn't the only popular (and historically successful) value portfolio that has run into a rough patch. Oakmark International, a foreign value fund, has lost 0.7% a year for the past three years. The Fairholme Fund has gained just 1.2% a year for the past three years. And the Yacktman Fund has been beaten by at least 85% of its peers over the past three and five years.

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