07.27.07
Bill Miller interview
I found this recent interview with Bill Miller to be interesting. Now I’m not a “great investor” by any stretch of the definition, but several of his comments reflect my own philosophy.
Question: Why shouldn’t investors just put their money in index funds instead of trying to find the next Bill Miller?
A. The odds of getting a manager who can outperform over 10, 15 or 20 years are about one in four. So there’s a very significant case to be made for having most of your money in index funds. The fact is, however, that index funds do not give you the results of the index. They give you the results of the index less your costs, which are small but real. To have a prayer of outperforming, you’ve got to have some money in active management.
Both halves of his statement are unfortunately true. The allure of stock index funds is that they will consistently be only a little worse than a monkey throwing darts. They are particularly well suited for taxable investment accounts, since their very low portfolio turnover allows you to defer recognizing capital gains until you sell the fund shares. Nonetheless, a level-headed fund manager with a long-term approach should be able to beat the index over the long term simply by opting out of bubble markets.
Question: I have a theory that great investors are not unemotional but inversely emotional: worried when the market is making people happy and feeling good when everyone else is worried. Do you see that in yourself?
A. Definitely. I’m always much happier when stocks are trading at their 52-week lows. It’s simple: Stock prices change more rapidly than business value. And rising stock prices mean lower future rates of return, while falling prices mean higher returns.
The Dow Jones has fallen almost 5% in the last week. Does that make you happy or worried? Personally, I was getting very nervous in early July. The global economy has been healthy, with the falling dollar further boosting results for the multi-nationals, but the extended march of the bulls seemed to be abandoning all reason. A rising tide lifts all ships — including some riddled by termites. Only during a market correction do investors begin to differentiate between “healthy” and “speculative” investments.
Like everybody else, my investments are losing money in this slide. Nonetheless, a modest dip today may head off a more devastating collapse down the road; I would be greatly encouraged by a return to 12,000. (Disclaimer: I reduced my allocation to US stocks from 50% to 40% in early July, part of a long-term shift in my investment plan. While I was not attempting to time the market, or predict a bear run, I freely admit that this decision is contributing to my current emotions.)