Bill Miller's amazing track record?

Truly one of the greatest investors of all time.

  • Miller's Legg Mason Vakue Trust fund has beaten the S&P 500 every year since 1991
  • Over 15 years, it achieved an average annual rate of return of 15.8% compared with 11.9% for the S&P 500 benchmark
  • Miller's fund grew from $750 million of assets in 1990 to over $21 billion in 2006
  • Manu Daftary, who has the second-longest streak of beating the S&P 500 at eight years, is also struggling - up only 5.6%

How does the Visible Investor see this performance?

  • Beating the market is not easy or probable - only 2 professional managers out of thousands have done it consistently for 8 years or more
  • Year to date, Bill Miller's Legg Mason Value Trust had a total return of 5.9%, trailing the 15.8% gain of the S&P 500
  • Most people didn't recognize Bill Miller's outstanding performance unitl the most recent 5 years, a period in which he under-performed the market
  • If you took away his 3 best years of market beating performance, his results would be only slightly better than the S&P 500
  • Shares of Legg Mason (the public investment company that Bill Miller works for) have declined 20 percent this year

Seeing the future...

  • As indicated by the facts above, their are very few professionals that consistently beat the market, and there is no reason to think that will improve in the future.
  • If the professionals with all their resouces can't beat the market, there is little chance that the individual investor can either beat the market or pick a fund that can.
  • The individual investors best investment is to buy the market in a low cost index fund, where he would have beaten Bill Miller (and 94% of professional and individual investors) over the last 5, 3 and 1 year periods.

If you'd like some Visibility into your portfolio, find out more about Visible Investing.

Wolf in sheeps clothing

Many so-called active fund managers and stock pickers are really "closet indexers."

Let's take a look at some mutual fund shenanigans...

Many of the top performing mutual funds are small as measured by assets under management. In their small stage, funds take large positions in just a few stocks, seeking exaggerated performance from the volatility that results from lack of diversification.

If the volatility brings exaggerated downside performance, the mutual fund company will close the fund (merge it into a larger fund). If the volatility brings exaggerated upside performance, the mutual fund company will publicize it heavily, attracting new funds.

As the successful fund's assets under management reach critical mass, the fund begins to diversify to mimic the performance of their benchmark index. Their goals change from attracting new assets to retaining existing assets (as long as they have close to benchmark performance, withdrawals will be limited)-closet indexing.

What's the problem with closet indexing? It costs you money!

Since actively managed funds, on average, charge almost 5 times what an comparable index fund charges in fees (1.15% versus 0.25%), on a $400,000 portfolio, the difference is $3,600 each year. Over 10 years (assuming you could have gotten 10% on that money) closet indexing can cost you $57,375 in added fees.

Visible Investing enables you to see the outcome of your investment decisions BEFORE you make them. We conduct seminars that help employees manage their 401(k)'s, develop independent investing solutions, and manage client assets. Contact us to discuss your personal situation.

Used Stock Salesman

In the recent USA TODAY/Gallup Poll

  • measuring honesty and ethics among 23 occupations,
  • only 17% rated stockbrokers "High" or "Very High"
  • just behind lawyers (at 18%) and above U.S. Senators (at 15%).

    What investors need to know is that stockbrokers are:

  • salespeople - selling you on activity;
  • make their money on fees from the actions their clients' take;
  • must put their employer's interests ahead of their clients' interests;
  • only need to insure their clients are buying and selling "suitable" investments, not the investments that are in their best interests;
  • are under no obligation to disclose conflicts of interest (i.e. making a commission on a mutual fund or how much commission they make on a bond transaction - although if you ask, they will give you the information).

Used Stock Salesman make money on your transactons whether you buy or sell, or make or lose money.

See the breaking news about a Long Island used stock salesman.

The market's overvalued bias

Let's take a look at why most publicly traded securities are either fairly valued or overvalued by the market, and why there are so few undervalued opportunities.

The price of a security changes often, some being repriced several thousand times each day. Investors continually monitor price fluctuations with the most sophisticated technology, immediately identifying price momentum and valuation trends. As security prices move, momentum investors act to take advantage of the price direction continuing - extending and exaggerating the trend, while value investors act to take advantage of the valuation anomaly -returning the security's price to its norm.

The efficiency of this system of checks and balances works differently for rising and falling prices. Because of the inherent risks of shorting, most momentum investors are monitoring rising price trends while most value investors are searching for undervalued securities. The combination of these two situations provides an overvaluation bias in the market.

Let's examine the example of good news that comes out on a stock, raising its price. Momentum investors and technicians react by buying the stock, sending the price higher. Even as prices reach levels which value investors can clearly identify as overvalued, they are generally reluctant to sell the stock short, for the risks generally outweigh the benefits. If, on the other hand, a stock's price is driven down by bad news to a point of undervaluation, value investors are quick to buy in, reversing the price trend.

How can an individual investor use this to his or her advantage?

  1. Be cautious about buying securities in a rising market. You will probably be buying into an overvalued situation. While that can continue for quite a while, it always ends badly.
  2. Due to a more efficient correcting mechanism, finding undervalued securities happens very infrequently. If you try to make it happen too often, you'll find yourself with more risk and lower returns than you expect.

In our next article, I'll discuss how you can find those rarest of rare undervalued securities.

Visible Investing enables you to see the outcome of your investment decisions BEFORE you make them. We conduct seminars that help employees manage their 401(k)'s, develop independent investing solutions, and manage client assets. Contact us to discuss your personal situation.