Hero to toad

Investing is a brutally competitive business. Unlike being a doctor or plumber, where you fix things in reality, investing is all about how you perform relative to your peers. No one gets an appendectomy, or has their pipes unclogged, and then asks how that fix compares to all other fixes done by all other professionals. If the problem gets fixed, the customer is happy.  

Investing is more like sports in this way. Hardly anyone asks about a football, baseball or basketball players’ career stats. Instead, people want to know how athletes stack up to the competition, and more specifically, how many championships have been won.

I was reminded of this recently with the announcement that Bill Miller is retiring from managing Legg Mason’s Value mutual fund. You may not have heard of Miller, but he became famous in the early 2000’s for beating the S&P 500 year after year. Amazingly, he managed to beat the S&P 500 every calendar year for the 15 years ending in 2005. This made him a deity among many individual and professional investors.  

If Miller had retired in 2005, he would still be touted as the hero he seemed to be. He’d be able to write best-selling books, make a fortune with speaking engagements, and perhaps even milk that hero status for the rest of his life.

Instead, Miller stayed on the job and has gone from hero to toad. Not only did he fail to continue out-performing the S&P 500 every year after 2005, he managed to lose a huge amount of his clients’ money (after making a ton for them prior to that). Investors have abandoned him en masse as his fund went from over $20 billion in assets to around $2 billion, now.  

A good question to ask is whether Miller “lost his touch,” or if he ever had a touch to begin with. I don’t think Miller lost his touch, I think the odds simply caught up with him.  

Looking at Miller’s record, you’d see that he didn’t out-perform every period, he just happened to out-perform calendar years over 15 years. Change the date to October 31st instead of December 31st, and you would have seen that he didn’t out-perform every year. Added to that, he really didn’t out-perform the market by that much over those 15 years. His edge was small and has been completely erased.

Look deeper into his process, and you’ll see an almost blind contrary approach–buy what others hate and wait. Because the market always recovered nicely between 1990 and 2005, Miller looked like a genius (even though he wasn’t). In fact, I believe Miller was one of the most over-rated money managers of the last 20 years.

Does that make Miller the toad he is being treated as now? Not at all. Miller out-performed most (probably 80%) professional and individual investors. He’s neither a hero nor a toad, but clearly an above average money manager.

And yet, people’s perception of him is based on his retirement date, not his career stats. One feels for Bill Miller like one feels for sports greats that never win the championship. They are always seen as “could-have-beens” instead of the out-performers they are. Such is life.

Many seem to forget the role that luck plays in life, and particularly in sports and investing. Many that seem great, are both good and lucky; and many that seem mediocre are actually much better than perceived.  

Think for a second, about Steve Jobs. Looking at his career in 1985, 1990 or 1995, he seemed like a loser to most. Even in 2000, when he was clearly (in hindsight) on the come-back trail, most (including me) had written him off as a has-been. Then he went on to change the computer, mobile phone, music and movie-making industries and become what many consider the greatest CEO ever. It’s sad to say it, but perhaps cancer saved Jobs’ reputation from the fate of Bill Miller.

Look, too, at Robert Rodriguez, one of the best mutual fund managers alive. He under-performed the S&P 500 over 15 of 18 5-year periods from 1973-1991. But, if you invested with him in 1968, you’d have three times the money you would have had investing in the S&P 500. It pays to back the right horse, not the one who just looks pretty. Looking at Rodriguez’s process, I could see he was great. Not so much with Miller.

Investors with the right process win in the long run, even if they don’t rack up amazing, headline-grabbing statistics. Look at how they do what they do, not just the results. Look for the Jobs or Rodriguez that hasn’t broken out instead of the famous show-boat who might be short-term lucky instead of long-term good. Look for single-minded focus, an ability to learn from mistakes, and an inherent love of the game and you’ll likely find a winner. If you over-simplify the process and look for the bandwagon everyone else is jumping on, you’re likely to find the odds will catch up with you, too.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Hero to toad