WEBVTT - Barry Ritholtz's Masters in Business: Bill Miller Interview 0:00:00.120 --> 0:00:03.239 Brought to you by Bank of America Merrill Lynch, committed 0:00:03.279 --> 0:00:06.280 to bringing higher finance to lower carbon named the most 0:00:06.320 --> 0:00:10.280 innovative investment bank for climate change and sustainability by the banker. 0:00:10.640 --> 0:00:13.960 That's the power of Global Connections. Bank of America North 0:00:14.000 --> 0:00:22.720 America Member f d C. This is Masters in Business 0:00:22.840 --> 0:00:27.440 with Barry Ridholes on Bloomberg Radio. This week on the podcast, 0:00:27.680 --> 0:00:33.600 I have an extra special guest. He is Bill miller Um, 0:00:33.640 --> 0:00:38.840 the legendary mutual fund manager at leg Mason. He most 0:00:38.920 --> 0:00:46.080 famously beat the SMP five for fifteen consecutive years. The 0:00:46.120 --> 0:00:51.320 math behind that is just mind boggling. It It's something 0:00:51.360 --> 0:00:54.880 that couldn't possibly have been a random act. Michael Mobison 0:00:55.000 --> 0:00:59.360 discusses this in great detail and talks about the skill level. 0:00:59.720 --> 0:01:04.480 He very famously blew up in the financial crisis, meaning 0:01:05.040 --> 0:01:08.880 the fun crash and burned along with everything else, and 0:01:09.000 --> 0:01:12.240 people kind of wrote him off as having Alright, that 0:01:12.280 --> 0:01:16.240 guy's done, we'll never hear from him again. Um. And 0:01:16.319 --> 0:01:21.800 over the past five years he's again crushing the market, 0:01:21.920 --> 0:01:25.160 beating UH the SMP five hundred by four hundred base 0:01:25.319 --> 0:01:29.920 points a year, UH, consistently being in the top handful 0:01:30.000 --> 0:01:34.240 of funds every year. He is really a fascinating guy, 0:01:34.560 --> 0:01:40.320 super intelligent, very thoughtful about things like valuation. He's incredibly 0:01:40.400 --> 0:01:45.640 circumspect about his experiences during the financial crisis and talks 0:01:46.240 --> 0:01:48.920 quite with great humility and quite bluntly about what he 0:01:49.000 --> 0:01:52.480 got wrong during the crisis. I always find that refreshing 0:01:52.560 --> 0:01:57.320 when someone um has a bad run and instead of saying, oh, 0:01:57.400 --> 0:01:59.720 it was the FEDS faulter, this person's fault or what 0:01:59.760 --> 0:02:04.000 have you, basically owns it and says, yeah, I failed 0:02:04.040 --> 0:02:07.040 to understand the difference between this recession and that recession. 0:02:07.080 --> 0:02:09.280 Here's what I learned, Here's what I wish I would 0:02:09.280 --> 0:02:13.640 have learned known during the crisis. It was just an 0:02:13.680 --> 0:02:19.600 absolutely fascinating conversation if you're at all interested in asset management, 0:02:19.680 --> 0:02:23.000 running a mutual fund, running a portfolio, how to be 0:02:23.080 --> 0:02:25.560 a value investor, how to come up with a unique 0:02:25.639 --> 0:02:30.760 value add that allows you to beat the market, And 0:02:30.880 --> 0:02:35.560 perhaps more interestingly, Bill Miller's criticism on the failure of 0:02:35.600 --> 0:02:42.440 active management being that so many managers are are suffering 0:02:42.480 --> 0:02:46.400 from career risk and so they become closet index ers. 0:02:47.080 --> 0:02:52.760 He has in great detail described why the move towards 0:02:52.800 --> 0:02:58.480 passive investing is actually a rational response from the investing community, 0:02:58.480 --> 0:03:00.960 from the public, Hey, why are you paying a lot 0:03:01.000 --> 0:03:04.880 of money for an active manager who is essentially a 0:03:04.919 --> 0:03:09.480 closet index er. He's essentially not only similar to the index, 0:03:10.000 --> 0:03:12.520 but his portfolio is going to be wholly unable to 0:03:12.760 --> 0:03:18.000 beat the market because it's essentially a closet index plus 0:03:18.040 --> 0:03:21.080 a high fee. Get out of that and either go 0:03:21.200 --> 0:03:23.920 to an active manager who has a chance to beat 0:03:24.000 --> 0:03:27.519 the market, or just index. And he's pretty blunt. Hey, 0:03:27.600 --> 0:03:30.600 most people are better off indexing. So I I've just 0:03:30.639 --> 0:03:34.080 found this to be an absolutely fascinating conversation and I 0:03:34.120 --> 0:03:36.640 think you will as well. So, with no further ado, 0:03:36.800 --> 0:03:45.080 my conversation with Bill Miller. This is Masters in Business 0:03:45.160 --> 0:03:49.960 with Barry Ridholts on Bloomberg Radio. My special guest today 0:03:50.240 --> 0:03:53.440 is a legend. His name is Bill Miller. He is 0:03:53.560 --> 0:03:57.520 the former chairman and chief investment officer at leg Mason, 0:03:57.720 --> 0:04:03.080 where he ran the leg Mason Capital Management Value Trust 0:04:04.000 --> 0:04:07.720 for many years. He was named by morning Star in 0:04:09.320 --> 0:04:13.120 the Fund Manager of the Decade. Uh Bill Miller beat 0:04:13.160 --> 0:04:21.800 the SMP five hundred from through fifteen consecutive years. It's 0:04:21.800 --> 0:04:27.080 a feat essentially unprecedented in mutual fund management. Since then, 0:04:27.200 --> 0:04:31.440 he's been running the leg Mason Opportunity Trust and just 0:04:32.520 --> 0:04:34.880 launched or that's really not the right word for it. 0:04:35.320 --> 0:04:38.000 LMM is the new fund that a new firm that 0:04:38.040 --> 0:04:41.679 he's in charge of. The leg Mason Opportunity Trust Fund 0:04:41.800 --> 0:04:46.040 has beaten of its peers over the last five years 0:04:46.400 --> 0:04:50.880 and has outpaced the SMP five dred by two percent annually. 0:04:51.360 --> 0:04:54.160 Bill Miller, Welcome to Bloomberg. Thanks, very nice to be here. 0:04:54.279 --> 0:04:59.080 So so that's quite an introduction. What you did with 0:04:59.200 --> 0:05:02.320 the fund is real, the legendary. We're gonna get into 0:05:02.880 --> 0:05:05.200 the streak in a little bit, But let's talk about 0:05:05.800 --> 0:05:08.599 your approach. Is it fair to call you both a 0:05:08.680 --> 0:05:13.000 value investor and a contrarian? I would say yeah, I'd 0:05:13.040 --> 0:05:15.160 say that that what I am as as a long 0:05:15.279 --> 0:05:19.640 term oriented value investor with the contrarian overlay. That that's 0:05:19.720 --> 0:05:23.840 that's a pretty fair description. So let's talk about your process. 0:05:24.480 --> 0:05:28.000 How do you begin the process? How do you approach 0:05:28.640 --> 0:05:31.480 selecting stocks? Well, what I'm trying to do, what we're 0:05:31.480 --> 0:05:32.680 trying to do, the team is trying to do, is 0:05:32.720 --> 0:05:34.880 find companies that trade a large discounts to what we 0:05:34.920 --> 0:05:38.400 call intrinsic business value, and intrinsic business value is the 0:05:38.440 --> 0:05:41.960 present value of the future free cash flows of the business. 0:05:42.440 --> 0:05:44.600 And then we're also looking for companies where you're starting 0:05:44.600 --> 0:05:46.920 out with low expectations, where people don't where people don't 0:05:46.960 --> 0:05:49.320 believe that the future looks very bright, or that there's 0:05:49.320 --> 0:05:52.120 a lot of controversy. And then with that, the key 0:05:52.480 --> 0:05:55.320 we use every valuation technique known demand, but the key, 0:05:55.480 --> 0:05:57.560 the key one that we're always starting with this free 0:05:57.560 --> 0:06:00.640 cash flow yield. So just under a checkbook, a ounting approach, 0:06:00.680 --> 0:06:02.920 like you have your own checkbook, we want we want 0:06:02.920 --> 0:06:05.080 companies that ideally will start out with a ten percent 0:06:05.120 --> 0:06:08.440 free cash flow yield and that that that's just that's 0:06:08.520 --> 0:06:10.520 there's there's nothing magic about that. That's just that's just 0:06:10.600 --> 0:06:13.400 a heuristic that we've developed over the years. It tends 0:06:13.440 --> 0:06:15.480 to work. But higher is always better as long as 0:06:15.560 --> 0:06:18.159 if those free cash flows are sustainable. How how does 0:06:18.160 --> 0:06:22.039 this differ from classic Graham and value investment, Well, the 0:06:22.040 --> 0:06:25.680 great the classic Graham and Dodd approach was was a 0:06:24.960 --> 0:06:28.480 um an approach that focused mainly on accounting metrics and 0:06:28.560 --> 0:06:30.840 so pe price to book, price to cash flow, those 0:06:30.960 --> 0:06:33.960 kinds of those kinds of things, and towards the end 0:06:33.960 --> 0:06:35.520 of his life, Ben Graham made a point that those 0:06:35.560 --> 0:06:38.480 things no longer work because they became replicable and they 0:06:38.480 --> 0:06:40.960 were they then they then did not They didn't identify 0:06:41.000 --> 0:06:43.960 companies that were mispriced. They tended to identify companies if 0:06:43.960 --> 0:06:48.400 the valuation statistics were were superficially attractive. Those are typically 0:06:48.400 --> 0:06:51.960 companies that had lower returns on capital. And then unless 0:06:51.960 --> 0:06:55.000 those returns on capital change, those those low accounting metrics 0:06:55.000 --> 0:06:58.039 didn't give you out performance. How important are are the 0:06:58.080 --> 0:07:01.840 growth metrics? For a while, GARP was quite the thing 0:07:01.880 --> 0:07:05.520 in the nineties. Is growth at a reasonable price significant? 0:07:05.520 --> 0:07:08.279 Do you do you bring growth into your metrics? Yeah? Absolutely, 0:07:08.279 --> 0:07:10.040 Well it's not so much growth at at a you know, 0:07:10.080 --> 0:07:12.080 at a reasonable price, so much as it is that 0:07:12.240 --> 0:07:15.120 growth is an input to the calculation of value. And 0:07:15.160 --> 0:07:17.560 so companies that grow faster, other things equal, assuming the 0:07:17.600 --> 0:07:19.720 learning above the cost of capital or more valuable. In 0:07:19.760 --> 0:07:22.000 companies that grow more slowly, the cash lows will catch 0:07:22.040 --> 0:07:26.080 loads will compound more quickly. How do you balance the 0:07:26.120 --> 0:07:30.360 current fundamental picture of a company with what you hope 0:07:30.440 --> 0:07:32.560 the future prospects are going to be? How how can 0:07:32.600 --> 0:07:37.120 you judge how the business will will grow and develop? Well, 0:07:37.160 --> 0:07:40.239 there's a there are many many ways to attack that 0:07:40.240 --> 0:07:41.600 that issue. One of the things that we try and 0:07:41.640 --> 0:07:44.640 do if if the economy is is in recession, for example, 0:07:44.720 --> 0:07:46.520 or the economy is in a boom, we will tend 0:07:46.520 --> 0:07:48.880 to normalize that. So if if if the economy is 0:07:48.920 --> 0:07:51.480 growing more rapid than normal when we're looking at a company, 0:07:51.520 --> 0:07:53.040 we will bring it back to a normal growth rate 0:07:53.080 --> 0:07:56.000 if the company, we're also looking at the company economics, 0:07:56.040 --> 0:07:58.720 and those are typically function of the industry economics. So 0:07:58.760 --> 0:08:01.920 you start out with industry almage, you a company economic quality, assets, 0:08:02.000 --> 0:08:04.240 quality of the management. All of those kinds of things 0:08:04.320 --> 0:08:06.040 go into go into trying to figure out what the 0:08:06.040 --> 0:08:08.120 company is going to going to do. And you know 0:08:08.160 --> 0:08:10.840 that a company like General Motors, for example, is going 0:08:10.920 --> 0:08:13.160 to be a company that's a very mature, slow growth 0:08:13.200 --> 0:08:16.800 company operating an industry that's has global overcapacity and it's 0:08:16.880 --> 0:08:18.960 under it's under a lot of technological threats, so that 0:08:18.960 --> 0:08:21.000 that all goes into thinking about a company like that. 0:08:21.600 --> 0:08:24.880 Amazon is our largest position. That's completely different, completely different 0:08:25.160 --> 0:08:28.520 exercise because Amazon is a completely dominant company and with 0:08:28.840 --> 0:08:32.360 an enormous total addressable market and incredible competitive advantages, so 0:08:32.400 --> 0:08:34.160 it's it's going to have a growth has a growth 0:08:34.240 --> 0:08:36.880 rate of you know, right now, fuffy thirty percent a year, 0:08:36.880 --> 0:08:38.640 which is unheard of a company of a hundred billion 0:08:38.640 --> 0:08:41.240 dollars of revenues. How do you deal with something? And 0:08:41.320 --> 0:08:44.320 let's stay with Amazon, where there really isn't a whole 0:08:44.360 --> 0:08:47.200 lot in the way of profits, but they're certainly taking 0:08:47.240 --> 0:08:50.559 market share and they're certainly growing revenue like wildfire. It 0:08:50.840 --> 0:08:53.040 comes down to again the issue of of of accounting 0:08:53.040 --> 0:08:57.679 based metrics versus economic metrics. So with with Amazon, then 0:08:57.800 --> 0:09:00.520 their natural business is one that has a original return 0:09:00.559 --> 0:09:03.319 on capital of triple digits. And when people say Amazon 0:09:03.400 --> 0:09:05.840 doesn't make any money, it doesn't make much money, what 0:09:05.880 --> 0:09:07.680 were they're really looking, I think at the wrong wrong 0:09:07.720 --> 0:09:10.520 sort of metrics because everything below the gross profit line 0:09:10.520 --> 0:09:13.280 at Amazon they consider an investment. So some of those 0:09:13.280 --> 0:09:17.240 investments to capitalize, some of those investments are expensed. But Amazon, 0:09:17.280 --> 0:09:18.640 if you if you begin to if you do some 0:09:19.120 --> 0:09:21.559 a little bit of math on a little bit of statistics, 0:09:21.880 --> 0:09:25.000 what you'll see is that Amazon share price historically it 0:09:25.040 --> 0:09:27.480 isn't correlated with profit growth, That isn't correlated with cash 0:09:27.480 --> 0:09:30.360 flow growth, it's correlated with with the growth of gross 0:09:30.400 --> 0:09:33.640 profit dollars. And so the faster the growth rate of 0:09:33.640 --> 0:09:36.800 gross profit dollars, namely what they have to invest, the 0:09:37.160 --> 0:09:39.600 higher the evaluation that the company has been able to attain. 0:09:39.960 --> 0:09:42.480 That makes some sense. So let's talk a little bit 0:09:42.480 --> 0:09:45.760 about size. Your fund started at seven hundred and fifty 0:09:45.840 --> 0:09:50.200 million dollars back in and it didn't take very long. 0:09:50.360 --> 0:09:54.000 Fifteen years later it was over twenty billion dollars. How 0:09:54.040 --> 0:09:58.000 does that change in size affect your ability to to 0:09:58.200 --> 0:10:02.000 be nimble? It really didn't. And and what's interesting about 0:10:02.040 --> 0:10:04.920 that is that while the fund got to five billion, 0:10:04.960 --> 0:10:06.679 I think at the peak we had another fifty billion 0:10:06.720 --> 0:10:08.880 of institutional assets to go along with it. So the 0:10:09.000 --> 0:10:11.679 the overall money under management in that one strategy at 0:10:11.679 --> 0:10:14.880 the peak was around seventy five billion. And what what 0:10:14.960 --> 0:10:18.360 we what we observed anyway, is so ironically is that 0:10:18.600 --> 0:10:21.800 as the assets got larger, the performance got better. And 0:10:22.040 --> 0:10:24.880 that's amazing and uh. And then of course what happens 0:10:24.920 --> 0:10:27.080 is that that that the assets always peak with the 0:10:27.080 --> 0:10:29.680 peaking of performance, because if the performance kept up, the 0:10:29.679 --> 0:10:32.520 assets we keep going up. I'm Barry Ridholts. You're listening 0:10:32.600 --> 0:10:36.160 to Masters in Business on Bloomberg Radio. My special guest 0:10:36.200 --> 0:10:40.200 today is Bill Miller. He was with leg Mason for 0:10:40.400 --> 0:10:44.480 the longest time before Uh he took himself private. Is 0:10:44.480 --> 0:10:46.360 that a fair way to say it? L l MM 0:10:46.480 --> 0:10:50.000 is now owned by yourself? It will be yet. It's 0:10:50.040 --> 0:10:52.720 currently fifty owned by leg Mason and fifty by me. 0:10:52.800 --> 0:10:54.240 But I have a deal to buy them out, which 0:10:54.240 --> 0:10:56.880 should close, uh in the spring of two thousand seventeen. 0:10:56.960 --> 0:10:59.760 So let's talk about your streak. You ran the leg 0:10:59.840 --> 0:11:04.120 may Sin Value Trust for since from one through two 0:11:04.120 --> 0:11:07.480 thousand and fifteen. Um, you actually ran it longer than that. 0:11:07.520 --> 0:11:09.800 But in the middle of that was a fifteen year 0:11:09.960 --> 0:11:16.439 streak of beating the market every year consecutively. There's never 0:11:16.520 --> 0:11:20.360 been anything like that before and there probably never will 0:11:20.400 --> 0:11:26.120 be since. So, um, what's the secret? Uh? Luck, There's 0:11:26.120 --> 0:11:28.240 a lot of luck into it. Um, hold on, let 0:11:28.240 --> 0:11:32.320 me write that down. Luck. But in all seriousness, it 0:11:32.480 --> 0:11:35.640 can't just be luck. It's got to be some combination 0:11:35.920 --> 0:11:39.880 of some skills, some luck, some right guy, right place 0:11:39.960 --> 0:11:42.960 sort of thing. I mean. Steve and j Gold wrote 0:11:43.240 --> 0:11:46.319 wrote a piece on on streaks the late late paleontologist, 0:11:46.760 --> 0:11:49.000 and he noted that that every street went to all 0:11:49.320 --> 0:11:51.520 sports streaks and stuff like I was gonna say, paleontologists 0:11:51.520 --> 0:11:53.840 slash baseball thing, right, yeah, And and he noted that 0:11:53.840 --> 0:11:56.160 that every streak is a some combination of skill and luck, 0:11:56.520 --> 0:11:58.680 depending on the length of it and how it's achieved 0:11:58.679 --> 0:12:00.480 and stuff like that. I'd say that the thing that 0:12:00.559 --> 0:12:03.840 contributed to it probably the most was a pivot that 0:12:03.880 --> 0:12:07.960 we made in so five or six years into it 0:12:08.200 --> 0:12:11.640 um when when technology stocks got very cheap because people 0:12:11.640 --> 0:12:13.920 were worried about a recession. And you may or may 0:12:13.920 --> 0:12:16.080 not remember the Jeff Vinnick ran the Magellan Fund at 0:12:16.160 --> 0:12:18.240 that time, and it raised a lot of cash because 0:12:18.240 --> 0:12:21.160 the feed had been tightening, there were some issues in 0:12:21.160 --> 0:12:24.720 the economy. People gott nervous exactly. So what happened then 0:12:24.840 --> 0:12:27.040 was that you could buy companies like Dell, which is 0:12:27.080 --> 0:12:29.880 a relatively new company at the time at five times earnings. 0:12:30.240 --> 0:12:32.360 You could buy Nocchi at six times earnings. And because 0:12:32.360 --> 0:12:35.160 people were worried and they also mistaken, they didn't they 0:12:35.200 --> 0:12:38.280 didn't properly analyze those businesses. Dell's growing year trade of 0:12:38.320 --> 0:12:41.200 five times earnings, so we bought Dell. Then we bought Nokia. 0:12:41.240 --> 0:12:43.800 We bought America Online, another one that went up fifty 0:12:43.800 --> 0:12:46.560 times after we bought it. So when what we did 0:12:46.640 --> 0:12:49.920 was unusual for value investors is we we got into 0:12:49.960 --> 0:12:52.560 technology at that time, and most value investors following Warren 0:12:52.600 --> 0:12:55.280 Buffett's kind of dictum that he didn't own technology, he 0:12:55.320 --> 0:12:58.959 didn't understand it. Um. We threw some work that we've 0:12:59.000 --> 0:13:01.160 done with the Santa fe and who uh came to 0:13:01.200 --> 0:13:03.880 understand the economics of technology were different from what people 0:13:04.160 --> 0:13:06.960 traditionally believed, and it was much more predictable than people believed. 0:13:07.120 --> 0:13:09.400 So let's let's talk about a O L for a moment, 0:13:09.440 --> 0:13:13.800 since since you mentioned them, that was a fifty bagger 0:13:13.880 --> 0:13:17.839 that went up fifty x In the real world, how 0:13:17.840 --> 0:13:20.840 do you hold onto something that goes up five x 0:13:20.920 --> 0:13:25.600 ten x? Investors are notorious for for quote unquote ringing 0:13:25.640 --> 0:13:28.360 the bell too soon. How do you withstand the ups 0:13:28.360 --> 0:13:30.840 and downs of a stock like that, that that was 0:13:30.920 --> 0:13:35.439 somewhat volatile and write it till it's a fifty bagger? Yeah, 0:13:35.520 --> 0:13:38.120 it's interesting. Part of the part of the thing is 0:13:38.160 --> 0:13:41.199 you have to try and understand the potential of the company. 0:13:41.640 --> 0:13:43.440 General Motor is not going to be a fifty bagger, right, 0:13:43.440 --> 0:13:45.640 General Motors a mature company. A O. L was a 0:13:45.720 --> 0:13:48.280 very new company, a small company in a very a 0:13:48.400 --> 0:13:50.520 very big new area. So it had it had a 0:13:50.520 --> 0:13:51.760 lot of potential. We didn't know it was going to 0:13:51.840 --> 0:13:54.120 go up at all, but but it certainly had the 0:13:54.120 --> 0:13:56.800 potential to do so. And uh, and so that's really 0:13:56.800 --> 0:13:59.719 trying to understand what the company's possibilities are with the 0:13:59.760 --> 0:14:02.520 total addressable market for the businesses and the other The 0:14:02.559 --> 0:14:04.840 other part of it is that that when you get it, 0:14:04.880 --> 0:14:07.840 when it becomes a big winner like that, and it 0:14:07.840 --> 0:14:09.760 it becomes a bigger and bigger part of the portfolio. 0:14:10.280 --> 0:14:12.600 Part of what happens is that just from a portfolio 0:14:12.679 --> 0:14:15.920 management technique, it becomes riskier in the sense of it 0:14:15.960 --> 0:14:18.000 has a greater and greater impact on the portfolio. And 0:14:18.000 --> 0:14:20.080 that becomes a question how you size the position? Well 0:14:20.080 --> 0:14:23.680 that that leads to another question, do you ever have 0:14:23.760 --> 0:14:27.080 an upper capacity? Nothing can be more than ten percent 0:14:27.160 --> 0:14:30.000 of the portfolio or or some line in the sand, 0:14:30.120 --> 0:14:31.880 or what do you do with there? There was there 0:14:31.920 --> 0:14:34.120 was no line in the sand. We we actually part 0:14:34.120 --> 0:14:35.920 of the reason that that streak went on and because 0:14:36.000 --> 0:14:37.280 then part of the reason I was manager of the 0:14:37.320 --> 0:14:40.160 decade was that with A O. L. And with Dell, 0:14:40.240 --> 0:14:43.560 for example, both were fifty baggers for us. But they 0:14:43.880 --> 0:14:47.200 got to be as much as of the portfolio, which 0:14:47.240 --> 0:14:50.320 was which each which had never happened before. Fanny May 0:14:50.400 --> 0:14:52.600 was fourteen I think at the peak, and then we've 0:14:52.640 --> 0:14:54.600 were fortunately able to cut them, cut them back and 0:14:54.600 --> 0:14:57.520 get them actually out of the portfolio. Of that was 0:14:57.600 --> 0:14:59.880 very unusual. Probably the biggest the biggest we would go 0:15:00.240 --> 0:15:03.040 we've been since then is I think Amazon got to 0:15:03.120 --> 0:15:07.280 twelve or so earlier, ear late last year. So you 0:15:07.360 --> 0:15:11.760 start accumulating A O. L. And Dell mid nineties, it's 0:15:11.760 --> 0:15:16.400 an incredible five year run for technology. What other than 0:15:16.440 --> 0:15:19.440 the sheer size in the portfolio, what are you doing 0:15:19.480 --> 0:15:23.960 in to call those back? Is it just those two 0:15:24.000 --> 0:15:27.800 because of their outsize um position in the portfolio. Were 0:15:27.800 --> 0:15:30.440 you looking at the macro environment and you're looking at 0:15:30.480 --> 0:15:33.760 technology no longer is cheap? What's the thought process like 0:15:33.800 --> 0:15:38.800 in two thousand when you're when you're selling two giant winners, 0:15:39.400 --> 0:15:42.920 capital gains and all. We went from thirty eight percent 0:15:42.960 --> 0:15:46.560 of the portfolio. I think in the in the beginning 0:15:46.560 --> 0:15:50.000 of two thousand in tech to no percent by the 0:15:50.080 --> 0:15:52.320 end of the first quarter. And the reason for that 0:15:52.480 --> 0:15:55.480 was that the market had been going up a year 0:15:56.080 --> 0:15:59.120 and corporate earnings have been growing very rapidly, and valuations 0:15:59.160 --> 0:16:01.040 got way out of whack. So back back at that time, 0:16:01.080 --> 0:16:04.360 as you may recall, you had Microsoft was sixty or 0:16:04.400 --> 0:16:07.680 seventy times, Cisco was that GE was fifty times, Home 0:16:07.720 --> 0:16:10.440 Depot was sixty times. So the valuations were just way 0:16:10.480 --> 0:16:13.000 way way out of whack for mega mega cap and 0:16:13.080 --> 0:16:16.480 for technology. And part of our thought as we looked 0:16:16.480 --> 0:16:19.240 at companies like Dell and A. O. L. It wasn't 0:16:19.280 --> 0:16:22.000 so much that the total market value of those businesses 0:16:22.080 --> 0:16:25.120 was way out of whack with the potential there. But 0:16:25.240 --> 0:16:27.080 what we did know was it wasn't going to be linear. 0:16:27.160 --> 0:16:30.400 There would be some interruption there, and when that interruption came, 0:16:30.480 --> 0:16:33.360 the companies would get killed. So what and then the 0:16:33.360 --> 0:16:35.760 FED was tightening at that time, and I think that 0:16:35.720 --> 0:16:39.240 the real, the real trigger uh for me and that 0:16:39.360 --> 0:16:41.600 environment that really kind of put paid to the whole 0:16:41.640 --> 0:16:44.840 thing was there's a two It was two fold. Number 0:16:44.880 --> 0:16:46.320 one was there was a headline in the New York 0:16:46.360 --> 0:16:50.600 Times in March of of two thousand about Jillian Robertson. 0:16:50.800 --> 0:16:52.640 It's called the it's called the end of the game 0:16:52.720 --> 0:16:54.320 or the end of the end of an era, and 0:16:54.320 --> 0:16:57.040 it talked about how value investing was dead and about 0:16:57.120 --> 0:16:59.720 Jillian Robertson had had to close up shop and at 0:16:59.720 --> 0:17:02.960 buff of course I hadn't had done poorly for several yeah, 0:17:03.160 --> 0:17:05.199 done done poorly. And then so that was kind of 0:17:05.240 --> 0:17:07.560 one trigger that everybody had thought that that that that 0:17:07.720 --> 0:17:10.040 was dead. And the second one made more more important 0:17:10.280 --> 0:17:13.880 one was it from from the spring of the spring 0:17:13.920 --> 0:17:15.920 of two thousand, the first quarter of nine, the first 0:17:16.000 --> 0:17:19.240 quarter two thousand, the Nasdaq was up a hundred percent 0:17:19.880 --> 0:17:23.040 and the Dow was down. And again that bifurcation was 0:17:23.200 --> 0:17:26.240 that bifurcation was so large, and the valuation discrepancy was 0:17:26.280 --> 0:17:29.119 so large. And I'd say that the final part of 0:17:29.160 --> 0:17:31.679 that whole thing was at the end of the first 0:17:31.760 --> 0:17:37.000 quarter in in two thousand, uh something like seven or 0:17:37.000 --> 0:17:40.200 seventy percent of active managers beat the market in that quarter, 0:17:41.000 --> 0:17:44.640 and which is an extraordinarily high percentage. And and at 0:17:44.640 --> 0:17:47.520 the same time there were only two sectors of the 0:17:47.520 --> 0:17:49.640 ten or eleven s and p sectors that beat the market, 0:17:49.720 --> 0:17:53.480 Utilities and tech. So what that told when nobody was 0:17:53.480 --> 0:17:56.280 owning utilities right, So what that told me was everybody 0:17:56.320 --> 0:17:58.959 was crowded in attack that that's they were. Everybody's overweight tech. 0:17:59.000 --> 0:18:01.280 There's nothing more going that. And then that couple of 0:18:01.400 --> 0:18:04.120 valuation said it's time to go the other way. That's 0:18:04.160 --> 0:18:08.160 quite fascinating. I'm Barry rid Hults. You're listening to Masters 0:18:08.160 --> 0:18:11.480 in Business on Bloomberg Radio. My special guest today is 0:18:11.560 --> 0:18:14.920 Bill Miller. He is the former chairman and chief investment 0:18:14.960 --> 0:18:19.520 officer of leg Mason, perhaps best known for really an 0:18:19.600 --> 0:18:25.960 unproducible streak beating the SMP five fifteen consecutive years. When 0:18:26.000 --> 0:18:29.920 he was running the leg Mason Value Trust Funds, morning 0:18:29.960 --> 0:18:34.480 Star named him the Manager of the decade. In let's 0:18:34.480 --> 0:18:37.119 talk about the new um. For lack of a bit 0:18:37.160 --> 0:18:40.800 of word, the new shop, LMM, tell us a little 0:18:40.800 --> 0:18:44.280 bit about the firm and its history. LMM was created 0:18:44.320 --> 0:18:48.520 in when we started in nine night, we started the 0:18:48.600 --> 0:18:51.080 leg Mason Opportunity Trust and it was created as a 0:18:51.160 --> 0:18:55.000 joint venture between myself and Like Mason. It was the 0:18:55.000 --> 0:18:58.520 only Like Mason subsidiary that wasn't owned by leg Mason 0:18:58.600 --> 0:19:01.199 at the time, and the idea was that that leg 0:19:01.280 --> 0:19:04.560 Mason I would be partners in that in that particular fund, uh, 0:19:05.119 --> 0:19:07.520 whether it whether it did well or not. And so 0:19:07.720 --> 0:19:10.720 that was run co extensively. Lelaman was run co extensively 0:19:10.760 --> 0:19:13.280 with leg Mason Capital Management, which I was the chairman of. 0:19:13.920 --> 0:19:16.000 And then in two thousand and I want to say 0:19:16.000 --> 0:19:20.080 two thousand and twelve or so, um, leg Mason decided 0:19:20.119 --> 0:19:23.919 to combine my subsidiary, like Mason Capital Management, with Clearbridge, 0:19:24.160 --> 0:19:27.040 which is a New York based equity shop. I did 0:19:27.040 --> 0:19:29.800 not think that was a particularly good idea, and so 0:19:29.880 --> 0:19:31.600 what I was able to do, but guys, because had 0:19:31.680 --> 0:19:35.399 operational control of LMM, was to extract that from that 0:19:35.480 --> 0:19:37.960 transaction and set it up as a separate as a 0:19:37.960 --> 0:19:39.840 separate entity and a separate business. But I had to 0:19:39.840 --> 0:19:44.280 go restaff it from the standpoint of trading and reporting 0:19:44.280 --> 0:19:46.359 and production and compliance and all that, all that kind 0:19:46.359 --> 0:19:49.639 of stuff that was BA. That was in two thousand twelve. 0:19:50.160 --> 0:19:51.800 So it's run of the joint venution. Yeah, run as 0:19:51.800 --> 0:19:54.280 a joint venture for for most of that period. And 0:19:54.280 --> 0:19:58.080 then in two thousand and I guess, uh, fourteen, we 0:19:58.119 --> 0:19:59.919 moved out of the moved out of the leg Mace 0:20:00.000 --> 0:20:04.000 and building into our own into our own space. And 0:20:04.000 --> 0:20:06.880 and then just just this year, just last I guess, yeah, 0:20:07.000 --> 0:20:09.119 just this year, we reached a deal like Mason and 0:20:09.160 --> 0:20:10.920 either where I would buy them out and buy the 0:20:11.119 --> 0:20:13.959 now two funds that that are advised by LMM, by 0:20:14.040 --> 0:20:17.040 that advisory firm out. So the two funds are the 0:20:17.119 --> 0:20:21.640 leg Mason Opportunity Trusts, which you've been running since inceptions, 0:20:21.640 --> 0:20:25.640 since since getting two. And it had a so so 0:20:25.760 --> 0:20:30.120 two thousands, however, it's been on fire lately. Fair fair 0:20:30.119 --> 0:20:32.320 way to describe it. Yeah, yeah, I would say I 0:20:32.320 --> 0:20:34.560 wouldn't say so so two thousands had a very bad 0:20:34.600 --> 0:20:38.520 two thousand and uh seven and eight. Um it was. 0:20:38.720 --> 0:20:40.199 It was one of the best performing funds in two 0:20:40.240 --> 0:20:42.200 thousand nine. It was the single best performing fund of 0:20:42.200 --> 0:20:44.639 all funds in two thousand and thirteen, I mean a 0:20:44.720 --> 0:20:47.880 two thousand and twelve, and then the best performing fund 0:20:47.920 --> 0:20:50.639 of all funds above fifty million two thousand thirteen. And 0:20:50.680 --> 0:20:54.480 there's about a billion, billion, billion three in that domestic 0:20:54.640 --> 0:20:57.119 version of it. And probably probably the most unusual thing 0:20:57.160 --> 0:21:00.439 about it, which will never happen again, is if you 0:21:00.520 --> 0:21:03.480 opened the New York Times special section on mutual funds 0:21:03.520 --> 0:21:06.160 of two weeks ago. You'll see that the Opportunity Trust 0:21:06.200 --> 0:21:08.439 was the single best performing fund of all domestic funds 0:21:08.440 --> 0:21:11.280 in the third quarter, and then the single best performing 0:21:11.320 --> 0:21:13.720 fund of all domestic funds for the last five years, 0:21:13.840 --> 0:21:16.320 and that will probably never happen again. So here's what. 0:21:16.480 --> 0:21:18.800 Here the numbers, I'm showing it beat the S and 0:21:18.880 --> 0:21:21.960 P five hundred by two hundred basis points on average 0:21:22.480 --> 0:21:27.480 every year for the past five years. Yeah, it's probably right. Yeah, 0:21:27.480 --> 0:21:30.520 and at least yeah and over I want to say 0:21:30.560 --> 0:21:34.120 seven years, it beat nine of its piers. And what 0:21:34.160 --> 0:21:36.359 you're now telling me is for the trailing five years 0:21:36.800 --> 0:21:38.920 it was the top. It beat all of its pers 0:21:39.400 --> 0:21:42.000