Bill Miller: "Large-cap Stocks Represent a Once in a Lifetime Opportunity"

Legg Mason Value Trust manager Bill Miller caused a bit of a stir with his most recent commentary, in which he wrote that "U.S. large-cap stocks represent a once in a lifetime opportunity ... to buy the best quality companies in the world at bargain prices." What should fund investors do with this information?

On one hand, it's not hard to argue that Miller's opinions are worth considering. Since 1982, he's guided his fund to an 11.6 percent annual return, outpacing the total stock market's 11 percent return over that same period. Included in that performance is an unprecedented run in which his fund outperformed the S&P 500 for 15 calendar years in a row.

That record propelled Miller from an unknown to an industry legend.

But on the other hand, recent history has tarnished Miller's legacy. Since his winning streak ended in 2005, Miller's fund has faltered badly. He's trailed the S&P 500 by more than 9 percent annually over the past five years, and 2.6 percent annually over the past decade, which places his fund in the 99th and 94th percentile of all of its peers for the respective periods.

What happened? Simply, the credit crisis. For most of his career, Miller has been rewarded for placing big bets opposite conventional wisdom. So as the market drove down the prices of financial stocks during the credit crisis of 2007 - 2008, Miller made placed a significant bet that the market was wrong.

At a Wall Street conference in May 2008, for instance, Miller identified Freddie Mac as one of his favorite stocks. By the end of June, his funds owned approximately 8 percent of all Freddie's stock. But by the beginning of September -- just three months later -- the stock was essentially worthless.

In The Big Short, author Michael Lewis recounts a similar episode. On a Friday morning in March 2008, Miller was invited to present the bullish case for investment bank Bear Stearns, which had traded at $53 the previous day. During a Q&A session after his presentation, an audience member asked Miller a question: "Mr. Miller, from the time you started talking, Bear Stearns stock has fallen more than 20 points. Would you buy more now?" Miller's answer: "Yeah, sure, I'd buy more."

By the following Monday, Bear Stearns had been sold to J.P. Morgan for $2 a share.

Clearly, this proves nothing more than that Bill Miller is mortal. His probability-defying run of success was undone by a spectacular implosion; his apparent ability to see value where the market could not failed him in the midst of the global credit crunch.

But that mortality is worth considering as we listen to experts make their case for what the future holds in store. Their arguments (and Miller's is no exception) are well thought out and rationalized, and it's easy to find one nodding one's head in agreement.

But before you succumb to the urge to act upon Miller's -- or any expert's -- prediction, remember that over the long-term, the markets almost inevitably end up humbling even the most successful investors. And ask yourself how you'll react if the expert you're following turns out to be wrong.