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Is Legg Mason's Bill Miller Back in the Game?

I turned on CNBC last week just in time to catch an interview with Legg Mason's legendary manager, Bill Miller. The caption at the bottom of the screen read "Beating the S&P 15 years in a row." Here's why he says he's back in the game and why I'm not playing that game.

A little background
Bill Miller's Legg Mason Cap Mgmt Value I LMNVX had a stellar history. If you compare this fund to the Vanguard S&P 500 fund (VFINX) between 1990 and 2005, you will see quite an impressive record by Miller.

In 2006, Bill Miller started another, less stellar, streak by underperforming the S&P 500 three years in a row. In fact, between 2006 and 2008, the fund lost about 54 percent of its value - far more than the 23 percent lost by the S&P 500 during the same period. This performance earned the LMNVX fund a one star rating by Morningstar.

But in 2009, Bill Miller kicked off a new winning streak. The LMNVX fund earned 42 percent, besting the S&P 500 total return by 15.5 percent.

Miller's shocking explanation
It seemed to me that his explanation was that he will constantly do well as long as the "this time it's different" paradigm ends up not being true. He explained that what happened over the past few years could be chalked up to a "once in a lifetime," improbable event. In the interview, Miller compared his performance to a different natural disaster, an earthquake. During this metaphorical earthquake, where things really were different, he performed poorly. But much like after an actual earthquake, the pressures are now released, and he seemed to imply that his style will work again since this once in a lifetime event is over.

My view of Miller's game
Sorry, I'm not buying this once in a lifetime explanation. With thousands of managers, it's not exactly surprising that some would outperform the S&P 500 by a hefty margin. Even if the managers had no skill whatsoever, random probabilities alone would allow a few stellar performers. Of couse, those performers would do no better going forward.

And while I was impressed with Mr. Miller's track record back in 2005, I was far from convinced. Another ten years of stellar performance might have been more persuasive but obviously this didn't happen.

Don't get me wrong, besting the S&P 500 last year by 15.5 percent is good, it just isn't good enough in my book. After losing 54 percent, the unfortunate math works out that he needs to earn 117 percent to merely get back to even. Between 2006 and 2009, Miller ended up being down 35 percent versus only 3 percent for the S&P 500 total return.

My take is that that Legg Mason LMNVX fund may be better than most mutual funds with a 0.72% annual expense ratio and a low 21.5 percent annual turnover. I also suspect that Miller is a better manager than most. But if the fund wasn't good enough for me to recommend back in 2005, it certainly isn't there now.

What troubled me the most about this interview was that Miller seemed to imply it was very unlikely he would underperform the market again. This just doesn't ring true, as I have seen the biggest plunges from managers who also thought they were bullet proof.

So "yes," it seems Miller is back in the game and, with a great 2009, I suspect he will gather more assets. But "no," that's a game I have no interest in playing. Nor do I think it's a game that rational investors should play either.

Yes, I watch CNBC. It's the source for many Irrational Investor columns.


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