Everything Wrong With Investor Behavior in One Article

A new profile of Bill Miller hit the Wall Street Journal yesterday and boy is it a doozy. If I were teaching a course on behavioral investing, and had lost access to all of the curriculum’s text books for a week, I could probably get by just on pull-quotes from this piece. Something happens to investors when they get around a stock picking manager who’s managed to string  together a few years of market outperformance – they become giddier than a drunken bachelorette party hanging on the neck of a Vegas magician who happens by their table at the bar (I’ve seen this in real life, long story).

For the uninitiated – Bill Miller’s Legg Mason Value Trust shattered every record on the books by trouncing the S&P 500 for fifteen straight years between 1991 and 2005. And then the fund demolished all the benefit of that fifteen years of outperformance within a two-year period, between 2007 and 2009. It hardly needs to be said that the vast majority of the Value Trust’s assets came in toward the top of this record streak – meaning the average dollar invested became a loser even despite all the glory of the track record on its surface.

The entire article is hilarious – through no fault of the reporter, Kirsten Grind, or the subject, Miller himself – whom I regard as a brilliant, if flawed icon of the investment management business. The story here just inadvertently exemplifies every single flaw and fallacy of the investor mentality.

I mean, the headline alone:

Screen Shot 2014-06-30 at 9.36.53 AM

And now, a running list of our flaws as investors – which find a way to manifest themselves even when we think we’re aware enough to get them under control:

1. We’re confusing brains with a bull market, ascribing some sort of meaning to Bill Miller’s “comeback”:

Over the last three years, though, Mr. Miller’s Legg Mason Opportunity Trust has outperformed 97% of the mutual funds in its category, according to research firm Morningstar Inc. It was No. 1 in 2012 and second-best in 2013. Its total return of 67% last year trounced the S&P 500 stock index’s 32% jump.

As though anyone making big bets on a concentrated portfolio in one of the greatest stock rallies of all time couldn’t have done this.

2. We’re acting as though Miller’s behavior during the crisis wasn’t true of almost all long-only value managers:

Lots of mutual-fund managers took a beating during the crisis, but none so publicly as Mr. Miller. As his Legg Mason Capital Management Value Trust fund sank to the bottom of the rankings, fleeing investors shrank its assets to $2.8 billion from $21 billion. He refused to cut his losses on shaken financial firms like Bear Stearns Cos. and American International Group Inc., which were then nearly wiped out.

With all due respect, value investors don’t cut losses when they’re running money in the public eye – they double down and “ignore price”, focusing on value and why “the market is wrong.” Third Avenue’s Marty Whitman blew up in the crisis, as did Fairholme’s Bruce Berkowitz, as did almost all of the other “legendary” value mutual fund managers.

3. We’re lauding Miller for his guts and having balls – with other people’s money:

His resurgence largely reflects more of the same: steadfastness in his beliefs, a stock-picking strategy dominated by big bets on beaten-down companies, and comfort taking risks that frighten away other investors.

4. Investors, who fled the fund en masse, are back to throwing money at Bill Miller, now that he’s gotten his groove back.

Opportunity Trust brought in a net $189 million last year, the fund’s first increase since 2007, and money has kept coming in so far this year, boosting total assets to $2.2 billion.

Classic performance chasing behavior. He’ll be back up at another peak in AUM just as his performance is about to mean-revert back down to the category average or just as the global economy is once again set to explode into a million pieces again. Dollar-weighted mutual fund returns are always hilarious.

5. This time is different:

Since the horrible losing streak, Mr. Miller has read a pile of books and research papers about crises in hopes of getting a better grip on what happened.

That should do the trick.

6. No comment:

Before the crisis hit, he attracted $1 billion to $1.5 billion a year in new investor money. Legg Mason didn’t publicly disclose his pay, but Mr. Miller’s annual salary likely topped $10 million. In 2006, he bought a 235-foot yacht called “Utopia.”

Bridget Hughes, a mutual-fund analyst at Morningstar, says Mr. Miller was “so famous” among investors, “and then everything just fell apart.”

The Morningstar analyst quoted neglects to mention that her firm’s backward-looking rating on the Value Trust at the time was undoubtedly “Five Stars”.

7. Industry professionals aren’t immune either – Legg Mason got out of “the Bill Miller business” at the bottom and left him with a smaller role at the firm and a less important fund to manage:

Value Trust rebounded sharply, but it was too little, too late. In 2011, Legg Mason named a successor to Mr. Miller, saying the move was part of a long-term succession plan hatched before the crisis.

8. Bill Miller is betting big once again:

He says he is trying to take advantage of “blindingly obvious” trends. One-third of the Opportunity Trust fund’s portfolio is invested in financial firms, with another 14% tied to the housing market.

If it works out, he will be a genius again and double his assets under management. If it doesn’t, well, brokers will “manage the manager” by firing the fund and just start recommending a new one. There’s very little downside for everyone involved. Except the investors.

Same as it ever was.

Source:

Mutual-Fund King Bill Miller Makes Comeback (Wall Street Journal)

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. wholesale privacy screen protector commented on Oct 20

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]

  2. Matt Erausquin CLA Legal commented on Nov 26

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]

  3. DevOps commented on Dec 10

    … [Trackback]

    […] There you will find 50569 more Information on that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]

  4. 토토사이트 commented on Dec 18

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]

  5. scotia online banking commented on Dec 20

    … [Trackback]

    […] Here you can find 8471 additional Info on that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]

  6. 토토사이트 commented on Dec 22

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]

  7. rbc royal bank sign in commented on Jan 09

    … [Trackback]

    […] There you can find 55263 more Info on that Topic: thereformedbroker.com/2014/06/30/everything-wrong-with-investor-behavior-in-one-article/ […]