Bill Miller, an American investor, fund manager, and philanthropist, remains relatively overlooked in the realm of investing, despite his remarkable achievement of outperforming the S&P 500 index for an unprecedented 15 consecutive years while at the helm of Legg Mason Capital Management Value Trust. Naturally, this significantly surpassed any benchmark by orders of magnitude. However, his choice to invest in Bitcoin led to a decline of over 70 per cent in his fund over 18 months.
While Miller endorses the concept of value investing, which entails concentrating on undervalued stocks with robust fundamentals, he refrains from labelling himself as a value investor. This deviation from the label may be linked to his achievements in the stock market. However, a closer examination of the principles guiding successful fund managers reveals that his emphasis lies more on concepts such as margin of safety and intrinsic business value.
The trio of principles that underpins Bill Miller’s success as an investor includes:
Laser focus on free cash flow
Rather than depending solely on conventional metrics such as earnings per share (EPS), Miller underscores the significance of free cash flow (FCF) as a superior indicator of a company’s genuine profitability and sustainability. FCF denotes the actual cash a company generates after factoring in operating expenses and capital expenditures. Miller’s emphasis on FCF is driven by the goal of identifying companies capable of generating consistent cash flow, enabling them to reinvest in the business for sustained growth and, ultimately, creating value for shareholders.
Bill Miller’s method of computing expected return through the use of free cash flow yield and growth is undeniably intuitive and perceptive. Miller asserts that one can estimate a stock’s expected return by combining the FCF yield and the anticipated growth rate. An analysis of this perspective highlights how FCF yield signifies the immediate cash return on investment, while growth signifies the potential for future increases in cash flow, potentially translating into capital appreciation. This validates his argument that monitoring a company’s free cash flows before making an investment decision is crucial.
Ultimately, Miller sought companies with a free cash flow yield surpassing the market’s hurdle of 6-8%, maintaining his investment in them as long as they aligned with his overarching investing strategies.
Disregard for investing labels
Miller steers clear of rigidly adhering to specific investing styles, such as “value” or “growth.” He contends that any stock can qualify as a value investment if it trades at a substantial discount to its intrinsic value, irrespective of its categorization. This adaptable approach empowers him to seize opportunities across diverse sectors and prevailing market conditions.
Diverging from his peers and predecessors, Miller never adhered to the traditional definition of value investing. He didn’t base his assessment on whether a company traded at 10x P/E or 100x P/E. His famous quote “Metrics like P/E and P/FCF should be guideposts for further research, not the end-all-be-all of investment decision-making” still makes value investors cringe.
This also clarifies why Miller favoured investing in software/technology companies. While traditional value investors concentrated on net income, Miller directed his attention to cash flow. As the world persisted in emphasizing value investing, Miller adhered to his distinctive approach for 15 years, consistently generating profits.
Buying at low expectation inflection points and holding on
Renowned for his contrarian investment approach, Miller frequently takes positions when sentiment is pessimistic and expectations are minimal. He aims to pinpoint companies undergoing a turnaround or harbouring substantial hidden potential not yet acknowledged by the market. After investing, he displays remarkable patience, retaining his positions for years or even decades, enabling the underlying value of the company to manifest and yield substantial returns.
This astute investor skilfully avoids succumbing to market emotions, which accounts for his remarkable knack for acquiring companies when expectations are low. Relying on “low expectations” serves as Miller’s entry point. Through patience, he seizes opportunities during these phases of diminished expectations. Not only does he make purchases at these low-expectation prices, but he also typically maintains positions for over five years. With a portfolio turnover averaging around 20 per cent, significantly lower than the 100 per cent turnover average for most managers, this underscores his patience and inclination to retain his investments.
There is inherent value in retaining investments rather than merely engaging in buying and selling them. Gaining an advantage involves extending your perspective beyond that of other investors. Some refer to this as “time arbitrage”, signifying the act of looking further into the future than others. Ultimately, investors need to be well-versed in their companies’ operations, any formidable competitive advantages they may have (if any), and potential challenges before incorporating them into their investment portfolios.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
Published: 13 Dec 2023, 01:38 PM IST