BALTIMORE — For more than 30 years, giving your money to Bill Miller at Legg Mason was one of the most reliable ways to turn a profit. He beat the returns on the benchmark Standard & Poor's 500-stock index for 15 years running, a feat unmatched among the legends of Wall Street.
And his fall from grace was nearly as spectacular.
During the global financial crisis of 2007-08, the famed stock picker’s bets turned bad, and once-loyal clients took their billions and left. And soon enough, he left the Baltimore investment house that had flourished on his good fortune.
“I regret I didn’t retire in 2006,” Miller joked. “Then I would have had this extraordinary record nobody else ever had. They would have thought I was a genius. By 2009, I was like an idiot.”
By 2019 or 2029? Well, Miller’s working on a record. From a mostly sparse office in Baltimore, he’s staging one of Wall Street’s most closely watched comebacks. And he has returned to the game with an unusual playbook.
He’s running two mutual funds — just as stock pickers are losing favor and investors are flocking to index funds.
And he has launched a hedge fund — just as the industry is retracting.
The biggest hurdle, of course, is what is seen as the future of investing: a dramatic turn toward complex computer algorithms and artificial intelligence — and away from the human touch, the instincts and the judgment honed over decades that once put Miller at the top of the heap.
With fewer than 20 employees, Miller Value Partners is a small fraction of what Miller once ruled at Legg Mason, but he beams with pride as he shows a visitor the view of Baltimore’s skyline from one window.
After spending decades trading under the flag — and restrictions — of Legg Mason, he is on his own. His two mutual funds, the Miller Opportunity Trust and Miller Income Fund, have about $1.7 billion in assets — modest, compared with the more than $70 billion he managed in his heyday at Legg Mason.
“I’m taking a lot of risk here by doing these things that could go over a cliff,” he said, noting that critics could soon declare that he had “lost it” and was “too old.”
Stock pickers are losing their grip on the trillions of dollars Americans invest every year. Over the past year, investors pulled $341 billion from funds that rely on stock pickers, according to Morningstar, a research firm. Meanwhile, index funds gained $505 billion in assets.
And a recent JPMorgan Chase report estimated that 10 percent of daily trading is done by humans.
“In the ’80s and ’90s in order to make an investment, you would have to go see a broker. Now you can just take your phone out,” said Tom Lin, a law professor at Temple University who has studied the effect of technology on financial markets. “There are more convenient and faster ways to invest.”
Rise and fall
Miller says his interest in the stock market was sparked by watching his father, who worked as a terminal manager at a trucking company, scan the business pages everyday. “We didn’t have any money,” he said. “My dad looking at stock pages was a measure of hopeful thinking.”
After graduating from Washington and Lee University and serving in the Army, Miller married an accountant at Legg Mason. While waiting for his wife to finish work, he spent hours standing around the offices reading financial documents. Eventually, Legg Mason hired him as a research director, and he later helped launch the Legg Mason Value Trust fund.
Miller joined the legions of “value investors” looking for undervalued companies with solid fundamentals. But when the fund struggled after the 1987 market crash, Miller said he tweaked the strategy. The fund would not just buy “stuff that was cheap statistically but companies that could actually earn decent returns but happened to be cheap temporarily for a variety of reasons,” he said.
Some rivals cried foul. They argued that a traditional value investor wouldn’t be wagering on pricey stocks such America Online and Dell Computer that had bolstered the Value fund. Miller’s strategy distorted the definition of value investing, they said.
“One thing that was different about him is he had a more flexible definition of value,” said Bridget Hughes, director of research at Morningstar. His commitment to tech stocks in the 1990s and early 2000s defied conventional wisdom, she said. “Those were not considered value stocks back then.”
Still, it was a winning strategy. Someone who invested $1,000 in the Value fund with Miller in 1993 earned more than $6,000 over the next decade, twice what they would have seen by investing in the S&P index.
“At one point, I had more clients’ assets invested with him than any other adviser. It’s impossible to be jealous of someone who is making your clients money,” said Marvin McIntyre, a managing partner at Morgan Stanley Private Wealth Management. “Bill is iconic. He is not swayed by conventional wisdom or a plethora of pundits.”
His savvy earned him the ear of billionaires such as Bill Gates and Jeffrey P. Bezos, the founder of Amazon. (Bezos owns The Washington Post.)
Miller’s streak began to crack during the financial crisis. The Value fund had reached more than $20 billion in assets by 2006. It lost 6.6 percent of its value in 2007, the first time it had trailed the benchmark Standard & Poor’s 500-stock index in back-to-back years since 1990. In 2008, it lost more than 50 percent of its value as Miller held onto losing bets on Bear Sterns and American International Group long after many investors had bailed.
“In the 2008 correction, he tried to pull out that old playbook,” Hughes said. “But it didn’t work.”
“Maybe because there was so much attention on him, he kept trying to make up for losses,” Hughes said. “Everybody else was focused on [mitigating] risks.”
Miller also attracted a different sort of attention. His attachment to bank stocks was mocked in "The Big Short." A character playing Miller is seen arguing with another investor about the strength of Bear Stearns as the audience watches the bank's stock price plummet on their BlackBerrys.
“I didn’t find the character representative of me,” Miller says, saying that he appeared “smug” in the film.
He swivels in his chair and looks down at a conference room table as he explains his missteps. Miller appears pained by the experience but turns cerebral when describing the improbability of such losses. That kind of crisis was unprecedented dating to the Roman Emperor Tacitus, he says, and academic literature would not have anticipated what came to pass.
“Our strategies were good,” he said, but not adequate to deal with the crisis the country faced.
It took a physical toll on him. He gained more than 40 pounds during the crisis and woke in the night to check stock prices. “It was a terrible time, hugely stressful,” he said. “I had hundreds of people working for me, and we were getting killed. ... I still get up in the middle of the night, every three hours.”
As the losses piled up, Miller handed over leadership of the Value fund in 2012. After more than 30 years at Legg Mason, his role began to shrink.
‘The next stage’
Miller could have retired. He is wealthy and commutes between Baltimore and Vero Beach, Fla., a few miles from President Trump’s Mar-a-Lago resort.
Instead, he is doubling down. This year, he bought two mutual funds he had started at Legg Mason: the Miller Opportunity Trust, which has $1.6 billion in assets and focuses on buying stocks, and the Miller Income Fund, which has $120 million in assets and buys stocks, bonds or other financial products that produce income, such as dividends.
“I would just call it the next stage as opposed to a second act,” Miller said.
He has surrounded himself with familiar faces, including his personal assistant, Darlene Orange, with whom he has worked for 30 years. His longtime collaborator, Samantha McLemore, helps run the Opportunity Trust, and his son, Bill Miller IV, helps run the Income Fund.
Everything else has changed. But, Miller says, he relishes the independence. At Legg Mason, he said, “I spent a lot of time doing stuff that I really didn’t want to do, like traveling all over the world and pitching for business and meeting with clients.”
“If the sovereign wealth fund in the Middle East says ‘be over here,’ I have to go over for it,” he said. “Whereas now I’m much more in control of my own time.”
So far, the largest fund, the Opportunity Trust, is outperforming the S&P, though Miller says he is not trying to re-create the streak. To beat the markets for 15 years, he said, “it was like 1 in 20 million. My point being I don’t think there’s much to prove except I’m not senile, maybe.”
And that will include adapting to the challenges posed by Silicon Valley upstarts. Companies like California-based Stock Circles, which recently registered with the Securities and Exchange Commission, are a growing threat to traditional stock pickers. The company’s founder, Jean Boisvert, calls traditional investing models, including careful examination of cash flow statements, “prehistoric.”
Those fundamentals are already baked into a company’s share prices, he said. To beat the markets, investors need to do more, including tapping into the chatter about companies on social media such as Twitter. As he put it: “Artificial intelligence is the future of investing.”
Miller is at once dismissive and in awe of the challenges posed by technology. “Anybody can search Twitter feeds and do things with software. Everybody is trying something like this,” Miller said. Firms such as Renaissance Technologies, a massive hedge fund that relies on computing power to make bets, are using technology profitably, he says. Even Miller is testing technology used to predict earthquakes to determine whether it can be applied to the financial markets.
The hedge fund is perhaps the riskiest part of Miller’s ambition. The $120 million fund is dominated by family money and a few outside investors, but Miller is working on marketing materials and predicts it could reach a few billion dollars soon.
It is something he has long wanted to do, Miller said, but couldn’t while at Legg Mason. The firm thought it could create a conflict of interest between its mutual fund and hedge fund clients, he said, and “they wanted me focused 100 percent on the funds that they wanted to do.”
There are two types of hedge funds, he says: those for people who want to stay rich and others who want to get rich. He wants to run the latter.
But Miller is jumping in just as many hedge funds have lost their edge. Many of the advantages the industry relied on for decades are disappearing, industry experts say. More hedge funds are placing the same type of bets. And finding a unique idea, an undervalued company or one with flaws that no one else has spotted is harder, particularly at a time when so many stocks are rising, they say.
“The hedge fund industry is probably in the first inning of a long slow decline or fast decline,” Miller said, “whereas the active mutual fund industry is probably in the sixth inning of a decline.”
Miller is targeting one of the industry’s chief weakness — its high fees. Most hedge fund managers charge a 2 percent management fee and 20 percent of the profit earned, known as “2 and 20.” Miller allows clients to choose from several payment models, including paying him nothing if he doesn’t beat the S&P index.
That strategy may “enhance the marketability of the fund,” said Don Steinbrugge, managing partner at Agecroft Partners, a hedge fund marketing firm, but it won’t win over everyone. Miller “has a huge advantage over most start-up managers, but most people are not going to allocate just on fees.”
Already, Miller has found himself cast as the contrarian. His hedge fund is making a big bet on bitcoin, the digital currency.
Jamie Dimon, chief executive of JPMorgan Chase, the biggest bank in the country, has said bitcoin has "no actual value" and predicted "governments are going to crush it." "I could care less what bitcoin trades for, how it trades, why it trades, who trades it. If you're stupid enough to buy it, you will pay the price for it one day," Dimon said in one recent rant. Laurence Fink, chief executive of BlackRock, the massive asset management company, called bitcoin an "index of money laundering."
Miller appears unfazed by the high-powered naysayers, comparing his investment in bitcoin to his once widely criticized investment in Amazon.
“People thought up until recently, less than three or four years ago, that Amazon was kind of a fake thing, too,” he said. “Now that’s flipped over, and people now think Amazon is going to kill every company in the country.
“That is what’s going to happen with bitcoin,” he said with a grin.