Bill Miller Interview

The interview of Bill Miller....

Miller Comment on Dell

"We’ve made 30 to 40 times on our money in both Dell and AOL. Most investors rarely hold companies long enough to make 30 to 40 times their money. They’re lucky if they make 50, 100 or 200 percent. We’ve got not only 10-baggers, but 20-, 30- and 40-baggers. (10-bagger is a term popularized by Peter Lynch for a stock that increases 10 fold from your purchase price.) You get those only if you actually invest in companies as opposed to trading them and trying to guess when the stock is going to pull back. We don’t spend time trying to guess stock price action. We spend our time trying to value businesses. "

"When we analyzed Dell, for example, in February 1996, that was a period when you had rumbles of Fed tightening and everybody thought we were going to have a recession. Investors had sold tech stocks down to levels that looked to us to offer an opportunity. Most value people at the time were buying paper, steel, and aluminum, which also were down in the dumps. When we did all the valuation work on those companies, we concluded thay were not terribly attractive or mispriced by the market. Their business fundamentals were poor and were likely to remain so. On the other hand, when we looked at Dell, trading at the time around $1-2 on a split-adjusted basis, we saw a company that had a superior business model, excellent competitive advantages, growing at 25 to 30 percent a year, earning 30 percent on invested capital, and trading at five times earnings. Why would we ever buy a paper company at five times what they hope to earn if paper prices go up if we can buy a terrific company at five times today’s earnings? When we got further into the detail of the business, it looked to us that the market had systematically misunderstood the potential of the company. Historically, PC companies traded between 6 to 12 times earnings. Even when value investors were buying PC companies, they would buy at 5 to 6 times earnings, and sell when they got to 12 times earnings because that was the peak multiple these companies historically had attained. When we analyzed Dell, we concluded it was worth at least 25 times earnings as a business. If you were to buy the whole company, you would pay up to 25 times earnings, whereas the market had peaked valuation out historically at around 12 times. We thought it was worth about five times what the market thought it was worth. It’s highly unusual to find things that appear to be that mispriced, so we loaded up on it. As it turned out, we were right. We actually underestimated the ability of management to execute what turned out to be a very superior business model. Fortunately, because what we do is dynamic valuation, our models are updated every quarter or more often as we get more fundamental data. We’re always trying to figure out the underlying business value and the intrinsic value of the company. Earlier in 1999, Dell reached a level where we thought it was moderately overpriced, so we sold a fairly significant portion of it."

Bill Miller -- Letter to shareholders of Legg Mason Value Trust Q406

“Active managers are paid to add value over what can be earned at low cost from passive investing, and failure to do that is failure.”

“As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future.”

“What we try to do is to take advantage of errors others make, usually because they are too short-term oriented, or they react to dramatic events, or they overestimate the impact of events, and so on. Usually that involves buying things other people hate, like Kodak, or that they think will never conquer their problems, like Sprint. Sometimes it involves owning things people don't understand properly, such as Amazon, where investors wrongly believe today's low operating margins are going to be the norm for years. It is trying to invest long-term in a short-term world, and being contrarian when conformity is more comfortable, and being willing to court controversy and be wrong, that has helped us outperform. "Don't you read the papers?" one exasperated client asked us after we bought a stock that was embroiled in scandal. As I also like to remind our analysts, if it's in the papers, it's in the price. The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it is bad, and too optimistic when it is good. So grounding our security analysis on valuation, and trying to abstract away from the sorts of emotionally driven decisions that may motivate others, are what leads to the stocks that we own, and it is the performance of those stocks that has led to our performance.”