Bill Miller’s Outperformance “Deferred”

Bill Miller's shareholder letter for the first-quarter is out, and while he does not apologize for having the worst quarter in his history, relative to the S&P 500 and his peers, his attempts at humor might provide a template for money managers to use lest they trail their benchmarks:

My friend Jeremy Hosking, who has delivered around 400 basis points per year of excess return over two decades at Marathon (in London), corrected me recently when I spoke about our underperformance. "You mean, your deferred outperformance," he said. I thought it a clever line, but it contains an important point. For investors who are trend followers, or theme driven, or who primarily build portfolios around forecasts, or who employ momentum strategies, price is dispositive. When they do badly, it is because prices moved in a direction different from what they thought. For value investors, price is one thing, and value is another. When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.

This is especially the case in momentum-driven markets, such as we have been in for the past two years. In such markets, price trends persist, and wide gaps open up between price and value. That is why fertilizer stocks such as Potash can go from the $20s to the $200s in two years, and why Microsoft can bid over 60% more than where Yahoo! was trading and still be getting a great deal.

Bill has no clue when his numbers will turn, but is praying that hurricanes stay out of the Gulf of Mexico this summer. And he would appreciate if you don't drive either, since he does not own energy stocks, although his overweight in GE hurt him last week, and Amazon.com is killing him today.

But I will grudgingly admit he is a genius. Deferred Outpeformance is the greatest line in the history of the BuySide.

It should buy him at least another six months. No wonder he is smiling.

Legg Mason Value Trust Letter to Shareholders: First Quarter 2008
PRN Newswire
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