THE UNREFORMED STOCK PICKER

Bill Miller beat the mar­ket for 15 straight years be­fore he was ham­mered by the fi­nan­cial cri­sis. now the leg­endary in­vestor is hap­pily run­ning money on his own terms—long on risk and big ideas.

Forbes - - CONTENTS - by ANTOINE Gara

Bill Miller beat the mar­ket for 15 years be­fore he was ham­mered by the fi­nan­cial cri­sis. Now the leg­endary in­vestor is run­ning money on his own terms.

In the liv­ing room of his seven-room Park Av­enue apart­ment, 67-year-old in­vest­ing le­gend Bill Miller wears a slightly rum­pled black golf shirt un­der­neath a blue-and-gray check­ered blazer from Dil­lard’s. On walls painted bur­gundy and colo­nial blue hang oil paint­ings de­pict­ing 20th-cen­tury life, in­clud­ing Wall Street af­ter the 1929 crash and drunks on the Bow­ery in the 1940s. Through­out the flat, heavy drapes, can­dles, plush couches and or­nate chairs cre­ate a dark, frozen-in-time at­mos­phere.

It’s all a bit sur­pris­ing con­sid­er­ing that Restora­tion Hard­ware, which ped­dles high-end mod­ern fur­ni­ture, is the largest hold­ing in Miller’s $1.5 bil­lion Op­por­tu­nity Trust—and a big rea­son the fund was up 20% for the first half of 2017, nearly twice the S&P 500’s gain.

Truth is, Miller has never cared much about la­bels or cur­rent fash­ions. Be­gin­ning in 1991, his Legg Ma­son Cap­i­tal Man­age­ment Value Trust beat the S&P 500 for 15 years in a row partly be­cause he de­fined “value” his own way. In ad­di­tion to stocks with low price-to-earn­ings and price-to-book mul­ti­ples, he bought those whose fu­ture cash flow he deemed un­der­val­ued based on his anal­y­sis of big tech­no­log­i­cal and eco­nomic trends. Af­ter Ama­zon went pub­lic in 1997, Miller’s fund even­tu­ally be­came the sec­ond­largest holder—se­cond only to founder and CEO Jeff Be­zos. When oth­ers fled tech stocks af­ter the dot­com crash, he dou­bled down, scoop­ing up a chunk of search up­start Google in its 2004 pub­lic of­fer­ing.

As in­vestors chased re­turns, Value Trust’s as­sets grew to more than $70 bil­lion, and Miller be­came the most fa­mous ac­tive fund man­ager since Peter Lynch stepped away from the Fidelity Mag­el­lan fund in 1990. Yet head­ing into the 2007–08 fi­nan­cial cri­sis, Miller owned every­thing that would soon turn toxic: sub­prime mort­gage lender Coun­try­wide, now-de­funct Lehman Brothers and Bear Stearns, bond in­sur­ers, home builders and even AIG. When con­di­tions wors­ened, he once again dou­bled down, mis­tak­enly be­liev­ing (he now says) that the Fed­eral Re­serve could end the cri­sis quickly by in­ject­ing liq­uid­ity, when the real prob­lem was as­set val­ues.

By the end of 2008, Value Trust had lost nearly two thirds of its value, wip­ing out most of Miller’s out­per­for­mance over the pre­vi­ous two decades. It came roar­ing back in 2009 and 2010. But in­vestors had al­ready aban­doned the fund, and Miller was by then the poster boy for the folly of pay­ing ac­tive man­agers high fees to beat the mar­ket when hot hands in­evitably cool and low-cost in­dex funds al­low you to cap­ture the mar­ket’s long-term gains.

Since then, the flight to in­dex funds has ac­cel­er­ated, and Miller and Bal­ti­more-based Legg

Ma­son have parted ways. In 2012, he was re­placed by un­der­study Sam Peters as man­ager of the Value Trust (now the Clear­bridge Value Trust). This past Fe­bru­ary, Miller com­pleted the buy­out of a part­ner­ship he had formed with Legg Ma­son to man­age the Op­por­tu­nity Trust and a small in­come fund. His fam­i­ly­owned Miller Value Part­ners now runs the Op­por­tu­nity Trust, a sep­a­rate $120 mil­lion hedge fund and the $116 mil­lion Miller In­come Fund, man­aged by his son, 36-year-old Bill Miller IV.

Miller is the big­gest in­vestor in all three funds and can do what he likes—think­ing big thoughts and plac­ing big and of­ten con­trar­ian bets—with­out wor­ry­ing about mar­ket­ing or bosses. “I was at Legg Ma­son for 35 years and ran the Value Trust for 30 years. This is bet­ter,” he says. “Here it is much more about just grow­ing the as­sets and not try­ing to get a con­stant in­flow of new clients and do­ing pitches.”

Still, out­siders ready to pay Miller’s fees are wel­come to come along for the pos­si­bly wild ride. Op­por­tu­nity’s most pop­u­lar C class shares have a 1% load and an­nual ex­penses of 2.13%. The fund’s 21% av­er­age re­turn over the past five years ranks it in the top 2% of mid­cap equity funds, yet Morn­ingstar gives it a neu­tral rat­ing be­cause of its ex­treme volatil­ity.

While Miller makes his le­gal res­i­dence in state-in­come-tax-free Florida, his firm op­er­ates out of Bal­ti­more with 15 em­ploy­ees. His 25th-floor of­fice there over­look­ing Bal­ti­more’s In­ner Har­bor is a sort of stock-pick­ing shrine. Against one wall is a replica

of the sound board used by CNBC’S Jim Cramer on

Mad Money, with 27 red levers that re­lease sounds rang­ing from a cry­ing baby to the “Ka-ching!” of a cash reg­is­ter. On an­other wall hangs a pho­to­graph of Silky Sul­li­van, a race­horse leg­endary for his come­from-be­hind wins—like the years dur­ing Miller’s “streak” when his fund roared back from un­der­per­for­mance to close the year ahead of the mar­ket.

Miller’s hold­ings re­flect, as al­ways, his in­tel­lec­tual breadth and ap­petite for both bar­gains and risk. Be­fore join­ing Legg Ma­son in 1981, he spent three years as an Army in­tel­li­gence of­fi­cer. For a time, he pur­sued a PH.D. in phi­los­o­phy at Johns Hop­kins. At Legg Ma­son he was the in-house pro­fes­sor, cre­at­ing read­ing lists for an­a­lysts and lead­ing week­end trips to New Mex­ico’s Santa Fe In­sti­tute for ses­sions on every­thing from ad­vances in computing to physics, biotech­nol­ogy and eco­nom­ics. Long­time col­league Robert Hagstrom, now man­ager of the Equity­compass Global Lead­ers Port­fo­lio, says Miller’s cu­rios­ity served him well at the dawn of the PC and in­ter­net age, when tra­di­tional mea­sures didn’t cap­ture the po­ten­tial of com­pa­nies like Dell, one of his best picks. “He was look­ing at the world dif­fer­ently than your tra­di­tional money man­ager.”

In­deed, Miller still has a keen eye for change. In 2014, he put 1% of his net worth into Bit­coin, judg­ing that the dig­i­tal cur­rency’s po­ten­tial for large-scale eco­nomic dis­rup­tion (see story, p. 62) out­weighed the risk of a to­tal loss. He’s up nearly ten­fold, and Bit­coin is now a top hold­ing of his hedge fund.

As for his Op­por­tu­nity fund, its se­cond-largest po­si­tion is in Ap­ple call op­tions, pur­chased be­fore the stock started ris­ing this year, and it has a large Ama­zon stake. “War­ren Buf­fett has said Jeff Be­zos is the best busi­nessper­son he ever met but he missed Ama­zon [as an in­vest­ment]. Well, he hasn’t missed it,” Miller says. He ex­pects Ama­zon’s mar­ket cap to rise five- or six­fold within a decade.

Then there’s Miller the bar­gain hunter. Last year, with Restora­tion Hard­ware’s prof­its and stock reel­ing from heavy dis­count­ing, Miller bought in at an av­er­age of $32 a share. Within months, CEO Gary Fried­man un­veiled turn­around plans and $1 bil­lion in stock buy­backs. Restora­tion now trades around $65.

Miller prides him­self on mak­ing such calls ahead of other in­vestors. “The amount of in­for­ma­tion I need to come to a con­clu­sion tends to be a lot less,’’ he says. His long-term bet on the con­sol­i­dat­ing air­line in­dus­try (he owns Delta, United Con­ti­nen­tal and Amer­i­can) re­cently got a boost when Buf­fett dis­closed an $8 bil­lion-plus in­vest­ment in air­line stocks af­ter crit­i­ciz­ing these car­ri­ers as dead money for years. (At Berk­shire Hath­away’s 2013 share­holder meet­ing, Miller quizzed Buf­fett on why he wasn’t in air­lines.) Miller con­cedes he bought Valeant Phar­ma­ceu­ti­cals “way too soon,” build­ing up a po­si­tion in the 30s; it’s now around $17. He still likes the con­cept—rolling up spe­cialty pharma prod­ucts with­out spend­ing much on R&d—but wor­ries about Valeant’s debt. Still, Miller makes no apolo­gies for bold bets. “What I’m try­ing to do with the Op­por­tu­nity fund and es­pe­cially the hedge fund is look for things that can go up many times. I am not try­ing to make 20%.” He ar­gues that in­vestors shell-shocked by the fi­nan­cial cri­sis are still “risk and volatil­ity pho­bic” and have cre­ated a “safety bub­ble.”

Miller’s pas­sion be­yond his funds? Col­lect­ing rare books. Here, too, he mixes in­tel­lec­tu­al­ism and bar­gain hunt­ing— his col­lec­tion, built over two decades, costs what one mas­ter­piece paint­ing might, he says. He owns Shake­speare’s first fo­lio and first edi­tions of every­thing from Her­man Melville’s Moby-dick to Dar­win’s On the Ori­gin of Spe

cies to Adam Smith’s The Wealth of Na­tions. A few years back, Miller shelled out more than $1 mil­lion for Bob Dy­lan’s lyrics to his 1960s clas­sic “Blowin’ in the Wind,” hand­writ­ten on sta­tionery from the Taft Ho­tel. Last Oc­to­ber, Dy­lan be­came the first song­writer to win the No­bel Prize in Lit­er­a­ture. Once again, Miller was ahead of the trend.

old and bold: Bill Miller ( right) re­mains an ag­gres­sive risk­taker. His son, Bill Miller iv, has a more cau­tious style.

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