Transcript: Bill Miller
The transcript from this week’s, MiB: Bill Miller of Miller Value Partners, is below.
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MALE VOICEOVER: This is my Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, what can I say. You are in for a treat. Bill Miller’s spends an hour waxing eloquent on everything from why value investing has underperformed and what you should do about it, the impact of the Federal Reserve, why bitcoin is a fascinating technology as well as a potential currency substitute, maybe for the dollar, maybe for something else.
This was really an unbelievable conversation. I don’t want to gush too much but Bill Miller is just one of these people who understands the way markets work, who understands how to express what’s going on in an investment posture. Their funds run a 100 percent active share meeting there is zero closet indexing going on and they have been one of the top performers since the market bottoms ’08-’09 after the financial crisis.
What can I say? This is just a tour de force exposition on investing theory and practice in the real world. Just unbelievable. So, with no further ado, my conversation with Bill Miller.
MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Bill Miller. He formed the Miller Value Partners in 1999 as both an RIA and an investment manager for the Miller value family of funds running about $2 billion in assets under management.
Previously, he ran the Legg Mason’s Capital Management Value Trust. After fees, the funds beat the S&P 500 for 15 consecutive years from 1991 through 2005. That is a feat that I don’t think has ever been matched.
Bill Miller, welcome to Masters in Business.
BILL MILLER, FOUNDER, MILLER VALUE PARTNERS: Thanks, Barry, and it’s great to be here.
RITHOLTZ: I should say welcome back. Our last conversation was in 2016. Let’s talk a little bit about what’s going on in the world today.
Early March, you went on TV and said you were looking at one of the best buying opportunities of your lifetime. That turned out to be quite a prescient call. Tell us what you were looking at that led to that conclusion. What was behind the thought process?
MILLER: So, one of the things that I’m quite confident of having done this for about 40 years is that nobody can predict the market with any — maybe Jim Simons at Renaissance, but certainly not me and certainly not basically (ph) anybody else who I’ve come in contact with on a consistent basis.
So, given that, I think — I think one of the things that I want to look at is just how the market has behaved relative to its history. And in this case, what we say was the fastest decline from all-time highs to a bear market in history.
And when things happened that have never happened before, that always gets my attention. I tend to be in the Howard Marks (ph) camp but you can probably, if you’re lucky, recognize extreme points. But other than that, you probably have no better than a coin toss trying to — trying to predict or guess regular cyclical turning points.
So, in this case, it just seem to me that the prices had gotten so out of whack with anything other then very, very short term fundamentals that the probabilities were great, that if you had a time arising longer than a few weeks or a few months, that you would do very, very well.
And I think that it reminds of in 2008 when Warren Buffet wrote that oped and he’d said buy American stocks, that’s what I’m doing. And I was at a meeting before and a couple years later and somebody said, Warren, how did you know that was the right time to buy stocks? And he said I don’t know time. I know price.
He said that those prices were completely dislocated from any type of long-term — the long-term reality unless you believe that the U.S. economy isn’t (ph) going to be in a permanent depression.
And so, I think that’s the same thing that my view was those prices were very, very disconnected. And if you look today, the market’s in a big rally. And look at those prices back on March 23rd or in a few days after. I mean, most things are up 40 percent, 50 percent from the lows even if they’re not back close to their highs. So, that was an extreme — that was an extreme point.
RITHOLTZ: So, let’s talk about both that moved down and that moved up. Not only fastest bear market, fastest 30 percent drop in history, but since those lows, markets were up about 44 percent and one of the fastest recoveries we’ve ever seen. The common pushback, I hear, from people is the market has gotten ahead of itself. We’ve gone too far too fast, what do you say to those folks?
MILLER: I’d say — I’d make one comment and then one observation. So, the comment is that if you go back and look at bear markets and look at history, there tends to be a rough symmetry between how long it took to get to the lows and how long the recovery took.
So, when you had a very — again, this is the sharpest in history, when you had a very, very dramatic drop, you can go back to 1987, for example, when the market crashed. So, the market, after churning around the bottom for a while, began a strong recovery in 1988 and made it back to those highs and I do — and then I do this in the future.
So, this is not — this is not unusual compared to what we’ve seen before, just so we don’t see these kinds of declines very often and they tend to be far enough apart that most people don’t go back and look at history. They just — they just look at their own reaction.
So, with that said, I would say that the comment that which you mentioned about people think the market is ahead of itself, the market disconnected from reality, is one of those things that I always puzzle at because this is something that’s actually pretty easy to analyze.
And the first part of it — the first part of it is that if you — before you can say the market is disconnected from reality, that there’s (ph) some belief or evidence about what the connection is between the market and economic reality. And the answer there is very clear. There is no connection whatsoever.
If you go back and look at all the — going back from 1930 to like 2019 and you look at the annual correlation between the markets return and the economic growth, the answer there is I think that the — that the correlation coefficient is 0.09 meaning that it’s random. There’s — zero is exact random. It is 0.09.
So, there’s basically no correlation whatsoever. If you look at rolling 10-year periods, so not just that annual period but rolling — every rolling 10-year period from that same thing, the correlation is minus 0.4, meaning there’s a negative correlation between the economy and economic growth.
So, the idea that this market is somehow disconnected from reality because it’s actually gone up and economic growth is was going down at the same time, it is very consistent with history.
The second thing, and maybe easier to understand is that the market is — as a forward-looking indicator, it reflects people’s expectations about what’s going to happen. It doesn’t reflect what has happened in the past.
And so, as a I’d like to say, the market predicts the economy, the economy does not predict the market. So, the market bottomed way before the economy — the economy is bottoming and this second quarter will be the — the economies bottom and the market bottom was in the first quarter.
And so, I don’t there’s anything out of whack with what’s going on. The market — if the market did in fact bottom in the second quarter as it appears it did and that means that it would — it’s getting better.
And so, if it’s getting better, then the market should be reflecting that it’s getting better. And if you look at the current consensus, what you’d see is that if the market, on an annualized basis and the second quarter was down, maybe let’s call it 2five percent to 30 percent and we don’t know what it is, some of those numbers, like the housing numbers yesterday, the consumer spending numbers were just way, way better than people expected.
But even if were down 30 percent, then what you would get would be normally speaking — and I’m going at (inaudible) data here which is you have it up 20 percent third quarter and up 20 percent fourth quarter. Then if you just got back to five percent nominal growth in the first quarter of next year, you’d be back at all-time highs in GDP.
So, I don’t think that the market is ahead of itself. The only way the market is ahead of itself is if we have a very huge reversal in what’s going on. Namely, we have a — we have a so-called second wave where they shut down the economy again. But even though the cases — the caseloads aren’t looking that great, the death rate is still falling and I think that we’re not going to see a shutdown of the economy.
We may see moderate changes and things, but the shutdown the economy again that way we did in March and April, I don’t think it’s going to happen. So, I would be shocked if the market retest those old lows.
Let’s talk a little bit about what’s going on today in the world of investing and you and I were both around in the ’90s, I have to ask you about the rise of these Robinhood day traders. What — is this — just the distraction or is this a potential speculative frenzy?
MILLER: It’s both. I mean, I think that there’s — it’s a distraction in the sense of these — the number of people that are actually trading on Robinhood is trivial in terms of numbers of people of the volume that they can do relative to the overall market. Maybe they can have an impact on something like Hertz (inaudible) or some of these smaller names.
But I think the focus on that is misplaced unless it’s just a — it’s just (inaudible) something entertaining to — entertaining to look at. As you remember, Barry, back in the — back in the late 1990s with the — with the dotcom tech telecom bubble, the day traders were everywhere and they weren’t Robinhoods and that was brokerage firms were raising their — raising their margin requirements.
And so, there was a lot more impact, I think, on the overall market’s behavior during that time than there is right now. The volumes were lower relative to the, I think, the number of people that were trading and the way in which trading was done and now the volumes are huge compared to what people in Robinhood or day traders are doing.
RITHOLTZ: I remember it as sort of the national pastime. You couldn’t walk in to a restaurant or a bar without seeing the stock market on the TV. It’s nothing remotely like that today.
MILLER: Right. Yes.
RITHOLTZ: Last we spoke, you had a very interesting quote that I have to ask your thoughts on. In 2016, you said, “we are only halfway through the shift from active to passive.” Give us an update. Where are we in that process? Do you still think lots of fund managers are clause and indexers and that this transition is going to continue or how is your thinking on this changed?
MILLER: I think that active management is in secular decline. So, just like newspapers have been in secular decline for a long time, once the Internet got going, active management has been in a secular decline. I know that’s going to continue because most active managers don’t add value and most people, specially as the demographics get older, people become more risk-averse.
And so, they’re happy to have tracking error if your active manager’s way above the market. But if the managers — if the market is a standard and you’re below the market for a couple of years and people take their money out. In fact, there was a statistic which you probably saw that I was surprised at which was that Fidelity, that basically 30 percent of Fidelity’s clients who are 65 and older took 100 percent out of their money out of equities in the first quarter of this year.
So, that gives you a sense of both the risk aversion and how fear spreads in the market. And also, the fact that passive money still gets — still is getting the flows. Equity ETFs are getting flows but the average active manager is getting consistent outflows. And of course, we’ve seen this year that equity managers broadly defined equity mutual funds, so that big outflows and bond funds have continued to in flow.
So, I think we still got a ways to go on that and so it’s going to be an uphill climb or a — assuming against the tide or whatever, if you’re an active manager. I would say it’s also that the hedge funds have also dropped into that category there much earlier in the thing (ph), but in a low nominal rate of return where the (inaudible) interest rate is 60 basis points.
Somebody’s going to charge you one or one and half or two and 20 to manage your money and take 20 percent or 1five percent of the profits no matter how meager those profits are. That’s a losing proposition. So, I think that also is — the hedge fund world is probably in that — in that liquidation as well.
RITHOLTZ: So, you mentioned 60 basis points on the 10-year, what do you make of the bond market where it is? Is it telling us anything about inflation? And what sort of support does that provide for equities if yield on treasuries is practically nothing?
MILLER: Yes. It’s really interesting that the current yield on the S&P 500 is about three times the yield on the 10-year treasury. And so, one of those so-called no-brainer trades to me would be if you’ve got a 10-year horizon in the market or even a five-year horizon for that matter, go long the — an equity index fund and go short to five-year or 10-year treasury.
It would seem to me that the things — it’d be very difficult to lose any substantial amount of money and, again, if the — if the people were worried about inflation, right, and inflation isn’t a problem for the next couple of years for sure. But if it becomes a problem in year three, four, five, and the yield curve start shifting up significantly, then that would be a — that would be kind of a home run trade.
So, I think right now, I mean, interest rates as my center runs or income funds, the data shows that interest rates have been falling in real terms for 800 years. And so, you don’t want to bet that interest rates are going to rise and my turn (ph) to that as well, if you lived a thousand years that would be relevant. But what we see on the bond market is that it goes to these long cycles, so we had a 35-year bear market in bonds, almost a full working career from 1946 to 1981 and I’ve got a 38-year bull market in bonds.
And rates can’t go much lower than where they are right now. Maybe they’re not going to go up a lot but they’re negative in real terms and certainly real terms after tax. So, I think bonds are as unattractive now as stocks were in September of 1987 when then 30-year yielded 9 percent and the stock market yielded about 2.8 percent and the stock market traded at the highest PE since 1929.
And so, there was no reason to own stocks then because the dividend yield and the dividend growth rate and stocks is about nine percent. So, if everything went well, you’d get close to nine percent in stocks if valuations didn’t drop and they stayed at the all-time high.
But otherwise, why is it buy 30-year bonds and go home? And that was the right thing to do then and I think the right thing to do now is to forget about bonds except in a very rare instance that you might think we have a deflationary bust. In which case, OK, Ben Graham talked about having no less than 2five percent a year money in bond. So, put two five percent in quality corporates or something like that. But I don’t find bonds at all attractive now.
RITHOLTZ: Quite interesting. You mentioned earlier some of the technology tech stocks of the ’90s, what do you make of the big five — big cap tech stocks, Amazon, Apple, Facebook, Microsoft, Google? Have they gotten too big? And if so, is there risk of government deregulation or even antitrust enforcement?
MILLER: Yes. I thought you’re going to ask me a slightly different question which is not have they gotten too big but are they too expensive and what kind of — what kind of opportunities are there. So, let me ask …
RITHOLTZ: Well, they’re certainly — they’re certainly cheaper than they were in the 1990s. Radically cheaper. Radically cheaper. So, I’m not even — I’m not worried about — we own all of them except for Netflix right now.
So, at which we’ve owned — we’re the largest shareholder in Netflix a couple of different times and that’s the only one that I think it is expensive. Although I think if you got a longer-term time horizon, that will do — that will do fine as well. But like in the late 1990s, I mean, GE traded 50 times earnings and home depot traded at 50 times earnings.
So, these stocks at this level don’t look to me particularly extended at all. Even though they’ve done very, very well. They should have done well.
Now, the different question, though, where’s the risk in them? Well, there’s always risk in everything and I think you hit that that the risk is antitrust or a reinterpretation of antitrust. I don’t think — unless there’s a democrat sweep that you’ll get any significant change in the antitrust laws like the Clayton Act or the Sherman Act.
But nonetheless, there’s not (ph) going to be a change in the law before courts can interpret things differently. Regulators can come after the companies. And so, I do think the regulator risk and the government is high in these companies but that’s what you’d expect for company that are so dominant and so large and five of them or 20 percent or 25 percent of the S&P 500.
So, yes, I — now, I don’t think the risk is so great they’ll significantly inhibit what you can earn from them. But maybe they traded a multiple point or two lower and there’d be headline risk more, I think, than real risk.
RITHOLTZ: Bill, let’s talk a little bit about some of the changes we’ve seen in the industry including what some people are calling the death of value investing which I have to imagine you’re going to snicker at. What — why has value been having such a difficult time and what does this mean for people’s portfolios?
MILLER: Yes. It’s a fascinating question and there’s a lot of — there’s a lot of, I’d say, different views on this. We’ve got a guy named Dan Lysik who runs a — I’ll call it a pure value or a classical value portfolio which is basically a low-priced tangible book, low PE, low priced cash flow.
And as you might expect, he’s been having a very difficult time of it and sends out a never-ending stream of emails about how extreme this is and how it’s never happened before and there’s got to be a snapback and all.
And then you might have seen (inaudible) has worked on the same …
MILLER: … thing about how extreme this is and he believes that you’re going to get a snapback. So, where I come out on this is I think that the odds are overwhelming that, I’d say value as, traditionally understood, will do very well from roughly now until maybe a year or two years from now.
It could be long.
MILLER: But why I say that is that value has led out of every recession as far back as the data goes. And the reason for that is that when companies — when the economy peaks and go down, value names just tend to be more cyclical, their return on capital drops.
And so, their theoretical valuation, (inaudible) drops and the stocks underperform. And then we come out of recession. Their return on capital rises because they’re more cyclical than Coca-Cola or on Amazon.
And so, therefore, they outperform. And we’ve seen that right now. If you look at the over — repeated that right now. If you look at what happened going to March 23rd, the tech names, the stay-at-home names, the secular winners, ServiceNow and Shopify, those kinds of things, they kill the market.
And some of the guys that are really good at this, like, Dennis Lynch at Morgan Stanley or James Anderson at Baillie Gifford, the high-growth guys, I mean, they’re up in the — they’re up 40 percent for the year. And traditional value guys were — at the bottom of the page.
But since March 23rd, the value people have beaten the growth people pretty handily. And I think that that’s because the economy has been bottoming and then the economy is going to start up. And so, what you — what you see, I mean, day like yesterday, the market’s up one and a half percent and most of those growth — all those growth names underperformed dramatically.
So, I think in the relatively short run, meaning now until the next year or two, the odds are strong that value will outperform growth. But a little more — a little more nuance here, the reason that value has done so badly for 10 years is that value thrives in a — in an environment of reversion to the mean. So, the economies speeds up and the it peaks then it goes down the bottom.
So, you have this kind of cyclicality. And if you look since the financial crisis, since March of ’09, the economy for 10 years grew basically between one and a half and two and a half percent. It’s going to average about two percent with low inflation, with low interest rates and not a lot of cyclicality.
And therefore, that’s an environment where growth is going to thrive because low nominal growth such as or low real growth, one and a half to two percent, basically, then if you grow fast, like on Amazon or Google, Alphabet, your theoretical valuation is much, much greater than it is otherwise.
I saw a thing in the Journal (ph), you might have seen it last week where somebody was looking at the economic literature and said that if you — if you run Nestle through a model of what the market kind of looks like now with interest rates at 60 or 70 basis points and low nominal growth from here, then Nestle’s worth 50 times earnings.
And so, I think that’s the thing that would put value back behind the eight ball which is if growth in the future is like growth in the last 10 years, so call it one and a half to two percent after we — after we go to this high-growth period rebounding and interest rates stay low and by that I mean, the 10 years, I don’t know, one and a half or two and a half or — then value’s going to have trouble again.
So, I think that’s the — it’s maybe a long-winded answer. So, it depends on a lot. It’s context dependent. So, if the world looks somewhat different, the curve shifts upward, if inflation starts to come back, then value will kill growth. And if it doesn’t, then growth will probably beat value again.
RITHOLTZ: So, you mentioned the stay-at-home stocks are doing well. What industries and companies have been permanently impaired by the virus and where are the opportunities arising from this whole lockdown experience. Is this going to change us or is this just a temporary experience?
MILLER: So, permanent is a long time. And I would say that — I’d say to that that nobody has any idea because nobody knows what the future is going to bring. I mean, people have talked about Bill Gates. Others have talked about going back years that we’re going to have another pandemic at some point.
The problem is you can’t predict what that point is. And so, at the beginning of this year, no one was predicting a pandemic this year which is now radically upended all kinds of things from the economy to growth rates to excess death rates, the changing norms and all of that kind of stuff.
So, if you look forward and you say what’s permanently different, well, there’s going to be nothing permanently different if we have a vaccine in the relatively short term. By that, I mean, over the next six months to a year that’s effective. Because if that happens then all of a sudden, you can fly safely, you can travel in cruise ships safely, you can gather, you can get sports, you can go to sports and you can go in movie theaters.
And so, the kind of environment that we saw in January and February would be right back on the table. If, on the other hand, there is no vaccine and I’ll also say it’s not just the vaccine, no vaccine and no effective treatment, so maybe there won’t be a vaccine. But if the death rate for the COVID-19 drops down or turns out to be about the same as flu, then I think there’ll be a longer term, return to normalcy but we’ll get back to that same normal thing.
So, that’s sort of point one and point two which is — which I’ll summarize shortly is that the effect of this is going to — has been to and I think will be permanent to accelerate trends that are already in place which means trends towards online shopping, for example.
And also, it uncovered some things that we didn’t know. Namely, that a large number of people don’t have to be in an office building and when in certain industries, to be very productive. And so, I think James Gorman at Morgan Stanley and others have been fairly vocal about the fact that the real estate footprint for financial service companies is going to be significantly different going forward so that I think that commercial real estate is potentially exposed, not in the near term but over the — over the longer term.
And again, a lot of stuff is just in the middle. We just don’t know what the answer is yet.
RITHOLTZ: I was on a Zoom call when one of the participants were marveling over the new technologies and I had to point out, hey, we’ve had Facetime and Screen Share and Google Hangouts for years and years and years, people just didn’t have to use them. So, your point about the preexisting trends is very well made.
MILLER: Yes, I mean, I think it’s — I think that’s the about all I can say in confidence is that any trends that were in effect were probably accelerated because of this.
RITHOLTZ: I couldn’t agree more. Let’s talk a little bit about some of the things that you’ve seen change over the course of your career and I want to start with something that is a little surprising, let’s talk about cryptocurrency. How actively involved in the crypto world are you and where do you see this going as either a speculation or a potential asset class?
MILLER: That’s interesting the way you framed that, Barry, because if you ask how actively I am and — or actively involved, I’m not active at all. I have a very large position, personally, in bitcoin. I think “Financial Times” had a — did an analysis and that’s at least a couple of years ago if I got the data right, they weren’t naming names. So, I think it was a top 100 holder of bitcoin in the world.
And I have — but I haven’t bought or sold a bitcoin in years. So, but I am — I am holding it. I haven’t — I’m not trying to trade it. I’m not trading like that.
My view on cryptocurrencies was and is that they are — and I’m talking mainly about bitcoin here, the other — the other cryptocurrencies, I think are mostly — mostly uninteresting. There are some that are interesting, but mostly uninteresting.
But I think it’s a very interesting technological experiment. We haven’t seen any kind of thing like this as kind of an innovation in finance and in money, really, in history. And so, I think to bash it as many of the very prominent people whose names I won’t mention, but I think we all know who they are, well, to bash is to, I think, without — also I think analyzing it in any kind of — with any kind of care is probably premature.
And I do believe — I’ve changed my mind on one thing which is that when I first gotten involved in bitcoin and I think my average cost on my bitcoins is around — my initial coast is around 200, my average cost is around 300 to — $300 of bitcoin.
And my view then was that it was — it was very, very risky. It had a nontrivial chance of going to zero and by nontrivial, I mean that it’s probably at least 25 percent.
Well, so unlike many investments, with bitcoin, the higher it goes, the less risky it is longer term. With other investments or the stock, the higher it goes, unless that’s being driven totally by fundamentals, the riskier it gets, the more expensive it gets, the riskier it gets.
Where here, what’s leading to the bitcoins price around $9,000 right now is greater and greater adoptions. So, we’re seeing more and more institutions get involved. What you’re seeing is exchanges getting more, I’d say professionalized and not being quite the wild west, that’s pretty much the wild west but we’re still early in that game and the thing that encourages me probably the most is that venture capital firms, the people who are — who make their living trying to sort out which technologies are worthy of investing and which aren’t.
Not every venture capital firm is big in bitcoin. But many of the most prominent ones are. And I think that’s probably the thing that gives me the greatest confidence is they’re still putting new money into this and raising new funds for this and that increases the probability that it works.
And then secondarily, the point is — I think it’s right now, just a speculative vehicle. I think it could become asset class. I think it’s most likely to be one of the books, it’s entitled “Digital Gold.” I think that’s probably the most likely venue for it to succeed (ph) that.
And I think also, that one of the things that’s gotten some attention as you probably know is that Paul Tudor Jones has put close to — I think now it’s close to 2 percent of his funds in bitcoin. And other people like Stan Druckenmiller, who I don’t believe owns bitcoin or Ray Dalio, I don’t believe owns bitcoin. I’m not sure.
But they are — those bullish on gold because of the mass stimulus, the massive money printing and not that they’re bullish because they think we’re going run away in inflation, they just believe the probabilities of gold doing well and gold is — has done well or increasing.
And my view is that if gold does well in the next five to 10 years, bitcoin will do a lot better because it hasn’t many advantages that a gold doesn’t have. So, I would — I would say that if I were to advise people which I don’t do, those kind of thing. But what I did was that I put about one percent of my liquid net worth in bitcoin and I would say for people who are interested in it, that’s an interesting way to go because anybody can afford to lose one percent of their liquid net worth.
And if you can’t, then you ought to be in cash or in short term government bonds. Many of the — anybody that own stocks can afford to lose one percent. So, but that right-hand tail of the distribution, if it works, it is — many, many times the current price.
RITHOLTZ: Quite fascinating. So, you mentioned it’s a technology, digital gold as well. Is this a potential currency and a potential alternative to the dollar and regardless of bitcoin is the almighty dollar going to continue to be the almighty dollar into the foreseeable future? What potentially could dethrone the dollar as the world’s reserve currency?
MILLER: Yes. That’s a really interesting and important question because I wrote a book on the dollar called “Exorbitant Privilege” some years ago. And the dollar has been a huge, huge benefit as the reserve currency for the U.S. It’s why we don’t suffer the problems of countries that have to use dollars and so we’ll be vulnerable to runs on their own currency and in favor of dollar.
You might remember back in 19 — in 2007, 2007 and ’08, that Warren Buffet and Paul Krugman, when asked what their — what the risk was to the overall market, they both mentioned the current account deficit. And so, they were concerned about a dollar collapse. And people had lose confidence in the dollar because of our massive current account growing — current account deficits.
And so, it turned out the current account deficit wasn’t a problem at all and the housing market was the problem. But and — when the global financial crisis came, people didn’t sell dollars, they bought dollars. So, I think that — that gives you a sense of how powerful the dollar is right now.
The issue, though is that that we’re in competition with the Chinese globally and the Chinese economy will be bigger than ours at some point. And the Chinese are experimenting and I think going to come up with a — with a cryptocurrency that will be -that the Chinese government will back.
And part of the reason they want to do that is to try and undermine the dollar. So, I would guess also that the U.S. will also, at some point, have a — have a Fed-backed cryptocurrency and maybe some other — the other reserve currencies as well.
So, I think that’s a potential significant change that as it evolves, that would also put a lot more attention on bitcoin. And of course, the big advantage of bitcoin is that it’s permission less, it’s decentralized, it can’t be hacked, and it can’t be debased.
And so, I think that difference between a government-backed currency, even if it’s a cryptocurrency and one that is basically independent, it’s whole way of operation is independent of any government would be beneficial to bitcoin.
So, it doesn’t have to be …
RITHOLTZ: So, it’s …
MILLER: … collapse, it’s just bitcoin would benefit from the differentiated aspect of it to whatever other sorts of cryptocurrencies or payment systems come around.
RITHOLTZ: You called bitcoin digital gold. I’ve been calling it libertarian gold and I can’t see that crowd getting behind — certainly not behind the Federal Reserve-backed crypto and essentially planned regime like China. I can imagine the libertarians buying into that. Do you really think a Chinese cryptocurrency has a chance to capture the imagination of at least the early adopters in that space?
MILLER: Let me resort this out. If you look back at bitcoin when it got started and who it’s initial enthusiasts were, it was basically libertarians, people who hate the Fed, inflationists, hard money people, all that kind of stuff. They provided the early impetus and the emotion to get behind it because it checked a lot of their boxes.
So, if you think of bitcoin as a favorite of the libertarians as a politicized thing, which I think it is, to a minor extent, much minor than it used to be before. The libertarians are never going to get behind the — a government sponsored cryptocurrency much less a Chinese sponsored cryptocurrency.
But they’re a relatively small part of what — what drives the global economic system. And I think the rest of it is going to be just based on practicality and it doesn’t work. And does it solve some kid of financial need? And we’ll just have to see that. Again, it’s early days and as Friedrich Hayek wrote a monogram called “Denationalization of Money” where he argued that there should be basically monies, money as plural, should compete with each other.
And any bank should be able to issue its own money, any company should issue its own money. And then the market will sort out which ones are valuable and which ones aren’t. And we had that in the United States for about 30 years. Didn’t work out too well in the 19th century. But it doesn’t mean that it can’t work some version of it in the future and I think that’s part of what — part of the direction that this is going right now.
RITHOLTZ: So, let me shift gears on you a little bit. I have to bring up something I’m fascinated by, 2018, you made a $75 million donation to Johns Hopkins University, your alma mater to the philosophy department. Turned out to be the largest ever gift to a philosophy department. Explain what motivated that. Tell us about your thinking behind that gift?
MILLER: Sure. So, I went to grad school at Hopkins, got to the Ph.D. program there in the mid-1970s and after I get out the of the Army. And I was — had my mind set on becoming a college professor. And that was a very bad time, just like it is right now. It’s been time for like four years to get a Ph.D. in the humanities, sort of the English or philosophy or French or whatever the case may be.
And so, when it finally became clear to me that that was not going to be something that made a lot of sense, I would probably a vagabond bouncing from college to college. I then shifted gears. I’ve always been interested in markets and so, I was fortunate to get a job initially at a private company and then moved in to their treasure function and managed some money for them and then went to Legg Mason in 1981.
And the thing as I’d look back on — was the thing that probably was the most useful, practically useful thing to me, much more useful than being an economics major undergrad and learn money and banking and all that kind of stuff. And the equation of exchange and mv=pq. Where the analytical habits of thought and the critical analytical skills that you learn in philosophy which is very rigorous, and in some cases, highly quantitative, although I wasn’t attracted to that part.
But I — my view is that I would not have had anything like the success that I’ve had in capital markets and I not have that philosophical training because part of it is that you’re trying to figure what’s wrong with your view and not trying to press your view about what’s right.
A lot of people in markets, as you’re undoubtedly aware have very strong views about lots of things. I mean, lots of very smart people were short on Tesla and thought it was a fraud. Lots of very smart people thought that Amazon was going to go bust. (Inaudible) Amazon dot bomb.
But when you get — when you get — kind of bitten your teeth and have a strong view on that, you tended to ignore kind of revealing (ph) information and looked for confirmation and all kinds of psychological things come to play and one of the things of going through the drill in grad school philosophy, at least at Hopkins, was imparted to me that you’ve got to hold all that stuff back because your — what you’re really trying to do is get at the — what’s called the argument to the best explanation.
So, what’s going on here, not — what do I want to go on or what do my beliefs tell me? But you got to consider all evidence from every angle. So, it’s like a Rubik’s cube look at things.
And that was enormously helpful to me and I would say that it was part of why we bought Google on — we’re the second buyer — biggest buyer of Google on the IPO, the big buyer of Amazon on the IPO. And so, a lot of those names that had been among our biggest winners have been due to, I think, the analytical skills that I developed in grad school and I thought it was a useful way to pay that back because I think the more people that are exposed to philosophies, the department will more than double as a result of the size of this and they’ve already hired in the last few years several distinguished philosophers.
So, I think it — I think it will be good as more students at Hopkins take philosophy. And also, I just — I thought it was good to shine a light on the value of philosophy and especially when people are thinking about STEMS so much and using your education to get a job, I think that’s fine. But I think that, actually, that the humanities have a practical value as well as an intellectual value to people as well.
RITHOLTZ: So, one of the things that’s kind of intriguing, watching people who are not epidemiologists track all the data is that we’re testing so many more people today that we’re finding lots of asymptomatic people who are infected or asymptomatic, people who are currently infected. So, that’s driving the death rate down.
And then, the number of people under 50 and under 40 who seem to be getting it, who have a much better prognosis for surviving, those really making a — the mortality rates look better than the did in the beginning when we really only factored (ph) out about who had it based on whether they went to the hospital or died.
MILLER: Right. Right. Yes, I mean, it’s interesting. I’m on the board of Johns Hopkins which is kind of ground zero for all the data on this — on this kind of staff. And we have a call on COVID every — used to be every week, now it’s every other week. But, yes, that was one of the things that came up in the call this morning.
Which is if you look at like, Florida, for example, you’re getting a huge increase in cases. Before Florida reopened, the average age of somebody with COVID was 62. And since it’s reopened, with all that jump in cases, the average age of cases since then is 35.
MILLER: And if you look at, then the data on mortality of people who are 35, then their mortality — their chance of dying is 0.0005. So, basically, it’s basically almost nothing.
So, I think that’s what — that’s what your seeing and the depressed doesn’t do a very good job of sorting out the various ways in which you can carve up these — carve up the statistics. So, it’s — and as you said, the mortality — the number of people that apparently are asymptomatic and that’s, I think, the CDC said the other day that it’s probably 10 times the number of people that actually had the — have tested positive.
So, that would be instead of 2 million people that have had it, it’s 27 million people and they — CDC said it could be as many as 50 times that which means the mortality is very, very low and the aggregate and if you look at it and then carving it by age, I think it’s only six percent of the people who have died from COVID were actually in the labor force.
So, of people that are in the labor force, very little — very little problem which, again, makes that — makes the cost of shutting down the economy to try and protect people who are in their 70s or 80s instead of isolating those people and trying to have them make sure that they don’t — there not mixing like people my age and over 70 years old. That makes perfect sense but keeping every out of the labor force has very little risk, doesn’t make much sense at all.
RITHOLTZ: So, I won’t spoil the surprise for Johns Hopkins but I suspect there’s a big pile of bitcoin coming their way sometime over the few decades. But let’s just keep that between us.
So, you mentioned how philosophy has impacted the way you approach investing. How has your philosophy about investing changed over the past few decades? It’s hard to imagine the Bill Miller of Legg Mason as a buyer of bitcoin. I suspect your thinking seems to have evolved over that time period?
MILLER: Yes, I’d say — actually, I was still an employee of Legg Mason when I made the — when I made the bitcoin — the first bitcoin purchase. But, yes, I guess, my thinking changed mostly around 1990 and it — and then it’s, I’d say, it hasn’t changed much since that point in time.
So, what happened was that we started value trust in 1982 and by 1986, it was the single best performing fund in the country of the last five years. So, we were number one in Fidelity, Magellan Fund were number two. And then when the economy peaked, we — so, we got — we have hit in the crash, not terribly but — because we had a lot of cash going into the crash.
RITHOLTZ: The 2000 crash? Is that what you …
MILLER: No, the 1987.
RITHOLTZ: OK, ’87. Way back.
RITHOLTZ: Yes, yes.
MILLER: So, but when we had that recession, we then had a terrible year in 1989 and 1990. And we lost half our assets in the fund. And so, I went back to look at the history of value investing as traditionally conceived and concluded at — what people thought about it and the way it was portrayed in the press and (inaudible) was wrong. And that the academic research did not — did not support that view.
And namely, the value investing was, in some way, superior to growth investing on some fundamental basis which is probably psychological. And it was the case that just because (inaudible) low price to book and low price to cash flow, that just — that typically meant that they had a low return on capital or highly capital intensive or they had a lot of debt. And unless one of those things or many things change, they didn’t outperform, they just (inaudible) statistically cheap.
So, we began to put a lot more effort on integrating with the academic research showed about investing which would the practicalities of investing were. And the key thing was the focus on return on capital through a cycle. So, what we went from doing was getting away from generally accepted account principles, gap measures and looked at measures of economic value.
And so, we focused on free cash flow yield, return on invested capital, and companies that could earn that through a cycle. That was — that was the big change and that hasn’t really change very much since then. I’d say the only thing which is change since then is an understanding which I’ve talked about earlier in the interview about when value does well and when growth does well.
So, that the so-called value could underperform for long periods of time if the economy has very low volatility and low nominal growth rates. So, I think that’s the — that’s the other change which had caused us — which has caused us to tilt differently so in the opportunity fund that I run with my colleagues, Samantha McLemore.
Since the March ’09 bottom through 2019, when the top one percent of all funds and that’s partly due to the stuff that I just I covered and then some psychological things that we believed about people’s risk aversion and misperception of risk which I think will repeat again in this current post pandemic environment.
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RITHOLTZ: So, it’s funny because when we had our last interview in 2016, I think a large segment of the fund following world had figured, well, Bill Miller’s washed up and left for dead and I saw some data that had you as the top performing fund for one, three, five years. This is all post ’09.
So, clearly, whatever you learned in ’90 and applied after the financial crisis seems to be working. It raises a couple interesting questions.
Let me ask about ’08-’09, why did value underperform heading into the financial crisis and what was it that so many people missed in the spreadsheet that was evidenced if you look at books like the Big Short or the movie or just how crazy the home flipping epidemic had become, why was it so challenging to see that if you were looking at balance sheets as opposed to the real estate listings?
MILLER: Yes. I’d say this. There’s a line that Charlie Munger, Warren Buffett’s partner said in 2009 because he had just hired Todd and Ted to come start managing money for Berkshire maybe a year or two earlier. And they were asked at the annual meeting, did the guys that you hire, did they outperform in this — in this bear market.
And Buffett said no, they underperformed and somebody said, well, what — what do you think they did wrong or the implication of where they messed things up and Charlie Munger said — he said, well, he says the way that I looked at this, he says, I think market estimated (ph) was down 38 percent or something we got in 2008.
Charlie said, in my view, he said if you weren’t down at least 45 percent then you didn’t know what you were doing. It was a clever line. And I think that the issue that — in retrospect that I looked at was that here were structural things that I missed. The stock market never got really expensive in the sense of 20 or 25 times earnings and expensive relative to rates.
And part of the reason was that the market had kind of picked up that there was a risk there. And it was an asset-based risk. And most — almost all recessions are due to liquidity implosion. So, Fed tightens, the discount rate goes up, the economy goes into recession, that kind of thing. But it’s basically, the raising interest rates.
And they typically weren’t debt financed assets that were such a large part of the economy that it could — it could be a risk to the financial system. And I think that’s what — that’s what I missed then. So, there were — the academic research didn’t even distinguish between balance sheet-based recessions and income statement recessions. And it does now and I think that’s — so, that’s one of the things you got to be careful looking at and if the overall economy is what kind of problem are we seeing in the financial system.
And there, the financial system was in — was at risk of complete collapse if the Fed hadn’t put TARP in there, the banking system could easily have collapsed. And that’s just not the case now. The Fed has acted much faster and it’s a very different sort of problem that we’re facing from what we — what we faced before. That problem was a banking system-based problem and the banking system is actually probably one of the strongest parts of the economy right now. So, very, very different now from — from that.
RITHOLTZ: So, since you brought up the Fed, I have to ask — I’ve heard people complain about Fed interventions, that support of the stock market, not only is the Fed buying ETFs, they’re buying specific bonds, what do you make of the Fed action, how does it influence your views of the market, and do you do anything to position your portfolio to either withstand or take advantage of whatever the Fed is doing?
MILLER: Yes. So, I think that — puzzled a little bit at people’s views who have a — again, a strong view about the Fed ought to do this, the Fed ought to do that. And this is the right thing, doing the wrong thing to do. I mean, my main issue is I’m — I don’t really care what my personal view is about what the — what the Fed ought to do or what not or will do.
My view is — I need to figure out what it is they are doing and what the impact of that’s likely to be quite a part of what I think that they’ve ought to do.
And I think that, also, people kind of forget about why we have a Fed in the first place and why we have a Fed in the first place was we had recurrent banking prices and collapses and severe recessions or short depressions back throughout the 19th century and we needed it — we needed — instead of a central clearinghouse which is the way banking system worked is how they actually have — a lender of last resort similar to what the — what the Bank of England was.
And that worked out OK, I’d say. I think it’s working so much better now because we know a lot more now about how stuff works. And I still think that people fundamentally misunderstand what — the power of the Fed. There’s a famous line, don’t fight the Fed, but underestimate the power of it and how it fits into the overall economy since one — ones brief thing.
We — you remember this very well and I’m surprised that people still don’t pay attention to this but when the Fed finally got it’s self in gear in 2008 and really began acting as a lender of last resort and backstopping facilities and swap lines with the overseas banks and central banks, I mean, that was — that was what ended along with the TARP, that’s what ended the financial crisis and save the banking, save the banking system.
But people, lots and lots of people said that we were going to have inflation. And look at all these money printing. And that was completely wrong and but I think that same basic group, that was 100 percent wrong says the same thing again without having any idea about why they were wrong then.
So, again, I don’t have a — I don’t have a view, certainly, not a dogmatic view, but I don’t have a view about what — whether we’re going to have an inflation or not. All I know is we don’t have inflation now and we’re not going to have inflation probably the next year or two. After that, who knows?
But I do think that the Fed did exactly the thing which is why the — why the stock market bottomed as quickly as it did and it moved much, much faster than this time than it did before, but it moved so fast now because it understood before what — what the consequences were of moving slowly. So, I think that the interesting thing now is that Chairman has said that they will not increase rates until they are convinced that we’re on a sustainable growth path and that they won’t increase rates until the realized inflation rate, not their forecast, but the realized inflation rate is above two percent on a symmetrical basis.
And since it’s only been above two percent two quarters in the last 10 years, we don’t know when they’re going to start symmetry, maybe as about 2018 when they changed their — what’s called their reaction function. But you’re going to — they’re going to let inflation run in my opinion based on what they said unless they changed their mind at three to four percent for a while.
So, you’re looking at a case where interest rates are going to be very, very low and no problem at all, no competition at all for equities for several years and I think that that leads you to the view that the economies then going to grow, you need to be long equities. Again, not a straight line, but I think that even now, so where are we now?
What we’re doing right now is actually interesting enough to be following the 2009 playbook. So, if you think about it, the market bottomed in 2009 in March — in early March. This market bottomed in late March. The market had a big rally in 2009 into June. That’s what this market did.
The market had a 10 percent correction then. That’s what this market did and then it continued to rally throughout the rest of the year. And again, I don’t predict the market, I can’t predict the market. But certainly, that’s the — that appears to be the direction that things are going right now.
And so, I think that it wouldn’t — so, it wouldn’t surprise me if the overall — if the overall market hit new highs sometime late this year or early next year which I think would probably be a surprise to most people but if the economy is coming back faster and there’s not going to be any inflation and the Fed’s not going to raise rates, and we can have new high in GDP by the first quarter of next year, I can’t see the reason why the market wouldn’t be at an all-time high then.
RITHOLTZ: Quite interesting. I have to circle back and ask you another valuation question because this has been an internal debate in my firm and there is no resolution of it but I’m fascinated by your perspective. If we look back over the past, I don’t know, call of century of equity valuations, there has been a gradual increase in what investors are willing to pay for a dollar of earnings.
And I don’t mean just like a cyclical move during a bull market, I mean, over the past many decades going back to the 29 crash. And some people have argued that it is a function of how much less capital-intensive companies are today. Think about railroads or auto manufacturers versus couple of guys, a laptop and a Amazon Web Services, are companies today more deserving of higher valuations than the material labor and capital-intensive companies of last century? Or is that just an excuse for higher P/E ratios?
I would think that absolutely. I mean, not every company is deserving of that. But if you look at the valuations of, I would say, the companies that dominated the top largest companies in the U.S. and the ’40s of the ’50s or even in the early 1960s, and look at their financial characteristics, their return on capital, free cash flow generation, their debt levels, and then look at companies that have those same characteristics today, they’re not any more expensive today than they were back in the ’50s or ’60s and — except that interest rates are lower. Switch (ph) make the model really more expensive.
But what’s really different is that the companies or the biggest companies in the U.S. right now, they’re radically different financial characteristics and growth rates. And also, I would say moats (ph) around them. I mean, no one’s going to catch up with Amazon or with — or with Google or with Facebook, in my opinion. No one’s going to be bigger than in global streaming than Netflix.
So, those companies’ competitive advantage period is much longer than a company like General Motors in which face foreign competition and now faces other kinds of competition from electric cars and stuff like that. So, yes, I think it’s — I don’t think it’s hard to explain at all (inaudible) what financial today (ph) would tell you.
RITHOLTZ: Quite fascinating. I’ve covered a ton of stuff before we go to our speed round questions. I have one last question for you and it’s about the cost of active management. Last, we have had a conversation about this, you had said it’s too high and doesn’t deliver enough value for what it costs.
What are your thoughts today, the prices have come down fairly dramatically, both from management and for trading which is more or less costless? What are your thoughts on the state of the industry and what it costs to be an investor if you’re working with a professional manager?
MILLER: Yes. I mean, I think I just stand by what I said before is that that the issue isn’t — though the issue is the cost relative to the value that you’re getting. And I think that that issue is not so much a question of the skills of active management as it is the risk controls or the structural impediments that they have which are partly institutional and partly legal.
So, if you — the Investment Company Act of 1940 has all kinds of restrictions about how you can construct portfolios which don’t exist in the hedge fund world for sure. And then business side of investment management is such that the reality of client behavior is that they tend to be, especially in the current environment risk and volatility phobic, and if you have tracking error on the downside, that that represents a business risk which kind of leads you then to more of a closet indexing approach.
And the only way that approach can work is with lower cost than it currently has. And an ability to kind of surf the market, just the head of the market which I think is very difficult.
So, the challenge active management has is to actually have a portfolio construction dynamic which has high active share with the purpose (ph) to go high active share meaning your portfolio can’t look exactly like your benchmark. If you’re portfolio looks like your benchmark exactly, then you’re going to underperform your benchmark if your costs are higher. You can’t do anything else.
So, that means just mathematically that your probabilities of increasing about performing grow as you diverge from your benchmark. But also, the — that tracking error can also go on the downside. And so, that’s the big challenges to try and — try and mitigate that downside tracking error relative to the upside tracking error as we’ll call it and then — and then if that’s the case, then that’s how you can add value because you’ll outperform overtime. And of course, lower costs were always helpful.
RITHOLTZ: And last we spoke, I recall your active share was amongst the highest in the industry, what are you running for an active share for your funds at Miller Value?
MILLER: The way it’s — the way it’s calculated. It’s roughly around 100 percent, 98 to 100 percent. So, among the highest in the country, still. That’s what we’ve done for a long time.
RITHOLTZ: So, and …
MILLER: So, it causes — it causes angst when we have a year where we’re behind the market fairly dramatically. But we can always come back quickly. In 2018, which is interesting, in August of — I’m sorry, yes, 2018, August 2018, I’m sorry, 2019, August of 2019, we were I think — I think 800 basis points or 900 basis points behind the market.
MILLER: And we ended up 200 or 300 ahead of the market. So, we made up like 1,100 basis points in a quarter and a month. And I think that that’s — and the reason for that is if the Fed changes reaction function, the market wasn’t worried then about a recession. And so, all of the fear that drove the 2018 fourth quarter decline dissipated.
And I think that’s the kind of thing that you’re actually starting to see right now in the market. You into the people that led, I mentioned earlier in the first quarter, and they just killed it.
But now, I think that we’re now, I think, were left behind now. We had a stronger fair market decline this year than we did back in 2019 and in the early part of the year. So, we’re less behind now than we were August of 2019. So, I feel pretty good about our chances of doing well again this year,
RITHOLTZ: So, one of the things you’ve said before that relates directly to that is volatility is the price you pay for performance. I assume you’re going to expect volatility, you’re going expect big drawdown’s like you saw in 2018, how do you manage your client base? How do you manage the institutions you deal with when all of a sudden, during a quarterly review, hey, we’re down eight or nine percent behind benchmark?
Is that a challenge to juggle and — or do people understand that you want the upside; you got to deal with a little bit of downside when things get rough?
MILLER: Well, when I bought the 50 percent ownership in what was then called LMM from Legg Mason, I brought the mutual funds along but I did not bring the institutional business along. And so, we don’t — we don’t really take — we have some separate accounts, but we don’t really take institutional business. Now that we won’t take it but that we — we’re not actively trying to grow it and we’re only interested in having clients that really understand that point that you just made that you’re going to get volatility.
And we try and monetize the volatility. So, what we want to do is if the market goes down a lot as it did in March of this year, we will — we will reorient the portfolio around to try and take advantage of when it comes back. And as it goes higher, we want to trim the stuff that has done really well and then moved out of the stuff that would tend to be more resilient on the downside.
But we don’t have that — no, we’re obviously — the papers every day, what we’re doing and we have quarterly calls and then meetings, we don’t have those quarterly institutional meetings that we used to have and those were more challenging because every institution’s got a different way of thinking about risk and reward and what they’re looking for.
I think we’ve — I think — I’ve been doing this long enough that the most of our clients understand that that’s what comes with the territory. And so, we really haven’t suffered much in the way of redemptions in the last several years. In fact, we have — don’t know if we have net inflows now or income fund definitely as net inflow so far this year and the other fund. If we — if have outflows, it’s not much which is kind of unusual for an active mutual fund.
RITHOLTZ: Quite interesting. I have a million other questions for you but I’ve kept you for an hour so far. So, rather than take up too much of your time, we’ll have you back when we’re finally done with lockdown and let’s jump to our speed round, our favorite questions we ask all of our guests.
And since you mentioned Netflix, let’s start there. Tell us what your streaming these days. What are you watching on either Netflix or Amazon Prime or what are you listening to in terms of podcast or anything like that?
MILLER: It’s a really easy question because the answer is nothing. I don’t really — I don’t listen to podcasts. Yes. I don’t stream anything. I don’t watch television especially since baseball season is on hold. That’s about the only time I had the television turned on.
So, I’m very out of touch with all of that — all of that stuff. So, I’m much more focused on reading than I am on listening or watching.
RITHOLTZ: So, let’s jump to that question. Tell us about what you’re reading these days and mention some of your favorite books.
MILLER: Sure. So, I just finished Thomas Mann’s “Magic Mountain.” Great classic that I haven’t — that I had not read before. I’m currently reading the 800-page biography of Frederick Douglass, the African American from 19th century.
I’m working my way through Ralph Waldo Emerson’s selected works. I just finished “Nature,” the first book that he — the first book that he published. And then I read a biography of Frank Ramsey, the great polymath, genius philosopher who most people haven’t heard of because he died at age 26. But that’s about a 600-page bio that I’ve — that I’ve just finished.
And in terms of — was it — the other (ph) question favorite books? Is that the other question?
RITHOLTZ: All-time favorite. Sure.
MILLER: Yes. So, in fiction, I would say “Brothers Karamazov”, “War and Peace,” “Moby Dick.” I mentioned “Magic Mountain” which was great. Conrad’s “Heart of Darkness” and then Cormac McCarthy’s “Blood Meridian.”
And then since (inaudible) on the philosophy, David Hume’s “Treatise on Human Nature,” William James’ “Varieties of Religious Experience” and pragmatism, John Dewey’s Essays in Experimental Logic,” Schopenhauer’s “The World as Will and Representation,” and then anything Wittgenstein.
And finance stuff, “Reminiscences of a Stock Operator,” something I used to read every year but since I’ve gotten it, I’ve about (ph) memorized; I can skip a year or two. And Robert Skidelsky’s three-volume biography of John Maynard Keynes is a masterpiece, I think.
RITHOLTZ: Quite fascinating. Tell us about your mentors. Who influenced your career? Who helped make you the Bill Miller you are today?
MILLER: Well, I mentioned earlier that I think that a large part of that has to do with the Hopkins philosophy department. And I actually had a chance when I gave that gift to one of the — one of their leading lights in philosophies have philosopher of science named Peter Achinstein. Peter’s in his mid-80s right now but he was president of — but he was chairman of the department when I got — when I got admitted in 1974-1975.
And I said to Peter, I said — I said what was the — I said, Peter — I was certainly not qualified to be admitted to Hopkins. I won’t even — I wasn’t even a philosophy undergraduate major and Hopkins’ one of the only schools — quality schools in the country that would take somebody that did not have a philosophy undergraduate background. What Hopkins did was they said if you didn’t have a philosophy background, send them three examples of your philosophical work.
So, without making a long story — making a long — actually making a long story short, Peter just said, well, we’re a small department, we’d only admit five or six people in the Ph.D. program every year. And he said and we always try to have one of those people be what we considered a high-risk person, like they probably couldn’t get anywhere else, but there were there was some promise there that we saw and if we got lucky, then they might — they might shed some light or do some good for the philosophy department. So, and he said and we really got lucky with you. So, I thought that was — I thought that was good one.
RITHOLTZ: You were the philosophy department’s volatility trade.
MILLER: Yes. Exactly right. Exactly right.
And then, my initial partner Legg Mason, Ernie Kiehne who died in 2010 at age 92 was a classic value investor. And so, we fit very well intellectually, but he was also open to new ways of thinking. And so, were also able, I think, I was able to work with him on some of the things we talked about earlier in terms of return on capital and stuff like that.
And I’d say the thing that he — that he thought the most was that he was a — he was like to be the most optimistic person in the world and he had a very long-time horizon. And so, what I learned from him over the — how long we work together, 25 years or something like that, actually 30 — over 30 years, what I learned from him is that generally speaking, having an optimistic take on things in a long-term time horizon, there’s a lot — there’s a lot more — first there’s a lot more fun.
And second, it gives you a lot better results than having a short term time horizon and getting all negative about all the stuff that’s going wrong in the market or in the world. So, that was — that was very helpful to me as well.
And then, of course, Chip Mason who stuck with me when I had the occasional bad year or two that’s — he also the long-term time horizon and understood the underperformance comes with the territory. So, instead of making a change after a year, after a three-year record goes by in the market, he just said this is a long-term — this is a long-term debt we’re making and we’re just going to stay with it. So, that — that was very helpful to me and it worked out OK for Legg, too.
RITHOLTZ: What sort of advice would you give a recent college graduate who is considering a career in asset management?
MILLER: Well, I would give the same advice to a — well, first of all, the slightly different answer here. So, if they’re considering a career in asset management, then I would say understand that that lot of asset management is an secular decline relative to quantitative strategies and passive strategy. So, it’s a lot harder than if you’re in an industry which is in secular advance which was when I get into it.
So, that’s a big difference. It makes it a lot — makes it a lot harder. But in general, I would say that to him or her the same thing I was say to anybody that was getting a job which is that I think the worst advice that people can get in getting a job as you read about, you need to take control of your career, you need to make sure you get what’s coming to you, you need to make sure that — no one’s going to care about you the way you do, so you need to make sure that you fight for all of the stuff and I think that’s terrible advice.
Because I think that, for me, generally speaking, what you would want and what — the way I try to manage my career is that your job, no matter what your job is, your job is to add value to your employer. It’s not to try to extract value from them and then get into your pocket. Your job is to add value to them and then you can get some of that value, part of it. If you’re doing that.,
And so, maybe contrary to what people think, being underpaid is a very powerful position to be in. Because if you’re — if you’re adding more value than your costing, then you’re a very valuable employee and you’re going to be treated well if your employer is rational. And I mean, nobody — nobody got fired for creating too much value for their employer and nobody keeps a job very long if they’re getting paid more than their worth.
So, being moderately underpaid as a really good thing. And then other things I’d say which are not terribly unusual, I think you want to, basically, have a good positive attitude all the time. You want to do what your job is with the — with the alacrity and sense of urgency, and you want to be simultaneously a good subordinate your boss, a good boss to your subordinates, and a good college your colleagues. That would be the core of my advice.
RITHOLTZ: Fascinating stuff. And our final question, what do you know investing theory and practice today that you wish you knew 40 years ago when you were first getting started?
MILLER: The thing that — the thing that I am constantly realizing and I think I’ve got it internalized not now but it’s been after 40 years is that, that the — that the markets and the world and the economy is so much more complicated than you have any idea. And it’s — and so having dogmatic views and pontificating about the world’s this way or this is going to happen or the Hong Kong peg is going to do this or the Chinese are going to do that is a complete waste of time because nobody has any idea what’s going to happen in the in the future.
There are certain things that — and then psychologically, what you find out is that if you make five predictions and then two are right and three are wrong, you’ll remember that two are right and the three that were wrong, you’ll blame on something else. So, I think that — I think that there’s a lot of psychological barriers and problems that people need to overcome and I would say just being accepting — actually being as skeptical and as humble as you can be with respect to what you think you know.
And the other thing is that — that again, I find helpful to me, I would say positively helpful, but I get asked a lot, what do you worry about in the market? What do you worry about? And my answer which might sounded succinct (ph), but it’s true, is that I don’t really worry about anything.
Because the entire world of investors and then commentators are always worried everything. Every time you turn on the television, this is going to go wrong, that’s going to go wrong, I’m worried about this, I’m worried about that, the market’s overvalued, there’s too much of this or that (ph). So, with all those people worrying about it, there’s lot of — there’s lots of — there’s no shortage of people worrying about things.
And so, what I try and do is focus on where are the opportunities in the market given whatever the market appears to be and not doing a bunch of wailing and hammering (ph) about how things are going to get worse or this is a terrible situation. So, I’d say that probably goes back to my old — late partner, Ernie, who would always say, well, let’s see if there’s anything positive and the stuff that we can figure out. We got plenty of negativism that we cannot — we can always — we can always count on being around.
RITHOLTZ: Thank you, Bill, for being so generous with your time.
Man, that was just fascinating stuff. Really, really, good stuff.
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