On November 15, 2006, Andy Serwer, the managing editor of Fortune, wrote an article entitled: The greatest money manager of our time. Serwer waxed poetic about the virtues of Bill Miller, the fund manager for Legg Mason Value Trust, which had $20 billion in assets at that time. Serwer noted that Miller had outperformed the stock market for 15 years “through the tech bull market, then the crash, and now the recovery.”
Miller’s stock picking methodology added to his mystique. He ran a required book club for his underlings. He was the chairman of a think tank founded to study “complexity.” Others marveled at his ability to converse with Nobel laureates in physics. Serwer noted that Miller held a “dog’s breakfast” of stocks ranging from Amazon to Eastman Kodak.
Being an investment guru was good to Miller. He bought a yacht named Utopia, complete with a heliport, gym, and a Jacuzzi. He owned over $270 million in Legg Mason stock at the time and his annual compensation was estimated to be a good chunk of the $132 million a year in revenues generated by his fund.
Miller’s winning streak ended in 2005, but Serwer remained captivated by his expertise. He breathlessly noted that, after Joe DiMaggio’s famous 56 game hitting streak ended, he started another 16 game hitting streak. The message was clear. Miller was that rare breed: A stock picker with a remarkable skill.
If you followed Serwer’s advice, you had rough sledding. According to one observer, since 2005, his fund “gave back” all of his outperformance including a loss of a whopping 55 percent in 2008.
In December 2007, just before the big crash that hit financial and homebuilder stocks the hardest, Miller spoke to the press and suggested that many financial and homebuilder stocks were still good investments. Recently, Miller stepped down as portfolio manager of his fund.
According to Weston Wellington, vice president of Dimensional Fund Advisors, Miller’s fall from grace isn’t necessarily conclusive evidence of the failure of active management. Wellington notes that Miller’s fund expenses were a steep 1.75 percent. The blended fund expenses of a globally diversified portfolio of stock and bond index funds would be one-third of those fees or less. The difference in fees provides a “stiff headwind” for any stock picker to overcome.
Assuming Miller possesses the rare expertise of a successful stock picker, it ended up doing his investors little good. The benefits of his winning streak were transferred from the pockets of investors in his fund to him and his firm.
Miller’s demise as a stock picker is representative of what happens every day on Wall Street. Money earned by U.S. investors is handed over to brokers, advisers, and fund managers. It’s a no-lose deal for the advisers and managers, who take their cut whether they perform or not. For investors, especially those chasing returns and searching for the next investment guru, it’s often a loser’s game, causing them to underperform the market.
There is growing awareness of the inherent unfairness of this system. Maybe the next move will be to occupy Utopia.
Dan Solin is a senior vice president of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.
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