Money Magazine Interview with Bill Miller (Transcript)

Bill MillerJason Zweig, Money Magazine senior writer, interviews with Bill Miller, manager of Legg Mason Value Trust. It's a great interview. I highlight some insightful points below :

  • Process vs. Outcome
    • A good process will ultimately lead to good results in the long run, so you can't be distracted by what happens in the short term.
    • What is a good process ?
      1. If the person's been around a long time, is there's some evidence that this manager actually adds value [either by outperforming or by getting attractive results with lower risk]?
      2. I would look for a long-term orientation, and the evidence for that would be a relatively low portfolio turnover. In a world of 110% to 115% turnover, something in the 50% range or less - ideally in the 20% to 30% range - is what would make sense.
      3. I would look for a value orientation. Doesn't mean that they would be necessarily a so-called value manager. I would look for somebody who actually thinks about the price that they're paying in relation to what this thing is worth, even if they're growth-oriented.
      4. I would look for evidence of what Warren Buffett calls emotional stability. And I also agree with him [that managers need to understand] how markets operate, how [managing money for other people can create] external behavior modifiers, and how our own internal behavioral tendencies can [lead to] sub-optimal decisions.
      5. If you can measure or try to evaluate them, then I think intellectual curiosity, adaptability and flexibility are also traits that I would look for.
      6. Someone who is too dogmatic, too firm in their views, too sure they were right (even when they were right!) - I would be wary of that.
  • Puggy Pearson
    • Puggy Pearson : "There ain't only three things to gambling. Knowing the 60/40 end of a proposition, money management, and knowing yourself."
    • Knowing the 60/40 end of a proposition - knowing when you have some competitive advantage over somebody else. And you don't bet, you don't gamble, you don't invest, unless you have some competitive advantage.
      • There's three sources of competitive advantage in investing: informational, analytical and behavioral.
    • Money Management - knowing the proper money-management strategy, the proper amount of money to invest is the second thing.
    • Knowing Yourself - knowing how you react to stress, how you react to adverse outcomes, how you react when things go well. Do you get giddy and overconfident when things are going well? Do you get morose and difficult when things go badly? Do you make bad decisions at both extremes? Just understanding your own psychology, what your weaknesses and strengths may be, as it comes down to evaluating decisions when the markets are at extremes.
  • Kelly Criterion
    • What it enabled you to do was to maximize the growth rate of anything, if you used this formula.
    • The rough formula, in a grossly oversimplified form just for the purposes of discussion, is : 2p - 1
      • p is the probability [converted from percentage to decimal form]
    • What the Kelly criterion does is it gets you to focus on the probability that you are correct in your assessment, and then to understand that the amount of money you should commit is directly related to the probability that you are correct. It also shows that if you have less than a 50/50 proposition, you shouldn't bet at all.
    • You have to be confident that you have an edge, that you have some positive probability of an expected positive gain, before you commit any amount of money.
    • And if you can't identify that edge, you probably don't have it. And if you can't identify it, you probably shouldn't commit the capital to it.
    • A) people are overconfident, and B) that therefore whatever probability you think you have of being right, it's probably less than you think. So if you think you have a small edge, you probably don't have any edge at all.
  • The guy with the lowest average cost wins.
    • Your profit is the difference between your average purchase price and your average selling price. And so it follows that the portfolio with the lowest average cost will win.
    • If you're not buying at the bottom and selling at the top, then that stock will go down after you bought it. And it will go up after you sold it.
    • So you need to understand that your stock will go down after you buy it, and it will go up after you sell it. On average over time.
  • Inversely Emotional
    • Rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return.
    • They perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That's the psychological problem that most people have.
  • Misc.
    • Bill Ruane : "Well, if you read Ben Graham's Security Analysis and The Intelligent Investor you'll be well versed in it. And then if you read Warren Buffett's shareholder letters and understand them too, you'll know everything there is to know about investing. And you will become a successful investor."
    • The biggest problem that people have isn't selecting the right money managers. It's the way they change managers all the time in response to fluctuations of short-term performance.
    • You could earn the market rate of return by doing no work. But to earn an excess rate of return certainly does require some work!
    • Bill Miller on Buffett's successor : Tom Gayner, David Swensen and Chris Davis.
Full Transcript - Bill Miller: What's luck got to do with it?

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