Bill Miller's Top 10 Investment Principles and Classic Practical Strategies - Crypto Circle Recommendations

Bill Miller’s Top 10 Investment Principles and Classic Practical Strategies

1. As the environment changes,

continuously adjust investment strategies,

but always adhere to value orientation.

Miller draws broadly from knowledge across various fields,

to cultivate investment insights and inspiration.

A pragmatic work style and multidisciplinary thinking,

enable him to avoid being bound by specific metrics or analysis methods,

and not arbitrarily exclude sectors like technology from his view.

2. Regarding the benchmark standard, the S&P 500 index,

extract its essence,

and discard its dross.

Like the S&P 500 (or similar),

Miller maintains a high-conviction, low-turnover, long-term investment strategy.

He lets winners run,

while selectively removing losers.

However,

he employs a more complex company selection strategy,

highly sensitive to valuation,

aiming to buy undervalued companies,

and sell overvalued ones.

3. Observe the economy and stock market,

but do not make predictions.

Many individuals and organizations engage in complex games,

to better compete with others,

but this leads to unpredictable behaviors,

including booms and busts( such as the internet bubble and the single-day crash of the 1987 stock market).

Causality cannot be simply correlated,

so prediction is futile.

However,

by observing these complex adaptive systems,

understanding how complex behaviors emerge,

and how feedback loops amplify or dampen effects,

Miller develops market insights.

4. Seek companies with superior business models,

and high capital returns.

Miller looks for such companies: those with sustainable competitive advantages,

strong management focused on shareholder interests,

and market positions capable of offense rather than just defense.

He focuses on the company’s long-term fundamentals,

not short-term financial data.

5. Use psychological biases and cognitive errors,

not become their victim.

Common cognitive errors summarized by Miller include: overconfidence,

overreaction,

loss aversion,

mental accounting,

fantasy thinking,

error patterns, and herd mentality.

6. Buy companies at prices significantly below their intrinsic value.

Miller employs various methods( such as P/E ratio,

discounted cash flow,

private market value, etc.) and multiple scenarios to value each company.

He compares estimated intrinsic value ranges with market discounts,

and if the market’s expectations for a company’s future cash flows( are reflected in its undervalued stock price) significantly below the carefully assessed intrinsic value,

he considers buying.

7. Win with the lowest average cost.

Miller is confident in his detailed analysis,

buying stocks based on his principles,

and profiting when prices decline.

Even if he buys early,

a “dollar-cost averaging” strategy allows him to outperform the market.

For example, in waste management companies,

after Miller started buying,

the stock price actually fell by 75%.

Yet,

by mid-November 2001,

the waste management stocks held by the Legg Mason Value Trust gained 18%,

while the S&P 500 index declined 9% in the same period.

8. Build an investment portfolio of 15~50 companies.

Miller concentrates his funds on his best ideas,

investing more heavily in top-tier stocks.

Most professional investors hold overly diversified portfolios,

often holding hundreds of stocks(,

making it difficult to truly understand these companies.

While short-term,

their portfolios avoid high volatility from concentration,

their net returns after fees are often below the market average.

9. Maximize expected portfolio returns,

not just stock-picking accuracy.

Most try to maximize the number of correct stock picks,

because with the same amount of capital,

the psychological pain of losses is twice that of gains (or similar).

However,

the probability of successful stock selection is less important than how much you earn when right.

Like Buffett,

Miller also heavily bets on high-probability events.

Sometimes,

he makes a series of bets on certain companies.

Despite extensive research,

the probability of being right on any single company remains low.

But,

the potential returns are enormous,

often 2~40 times the initial investment.

10. Three situations to sell:

① When the company’s stock price reaches a reasonable valuation) but valuations change over time(

② When a cheaper investment opportunity arises

③ When the fundamental logic of the investment changes

Most people sell too early,

while Miller achieved over 20x returns on Dell,

Merrill Lynch,

America Online,

Danaher, and others.

For example,

when Dell’s P/E reached 12 ) its historical peak(,

traditional value investors would sell.

They failed to see Dell’s excellent business model,

and rising capital returns,

which drove its stock price higher.

Some investors buy and hold,

but do not sell to lock in profits.

When the tech bubble peaked in early 2000,

Miller sold most of his holdings in Dell and AOL.

Miller and Value Investing:

P/E ratios are often unrelated to intrinsic value.

When Bill Miller first discovered the stock market,

he was a lively, energetic 9-year-old,

earning pocket money by mowing lawns.

His father was always reading financial news in newspapers,

which sparked Miller’s curiosity,

and he asked his father what he was reading.

His father pointed to a stock quote list,

where it clearly said “+1/4”,

and said: “If you owned this company’s stock yesterday,

today you’d earn 25 cents more than yesterday.”

Miller asked: “How is that possible?”

His father replied: “Nothing needs to be done,

it happens automatically.”

“To me,

it sounds easy compared to enduring the hardship of earning just $1,”

Miller said.

At 16,

Miller bought his first stock with $75 earned as a baseball umpire.

He invested that $75 in RCA,

and made about $600.

After his youth trimming lawns,

Miller became an undergraduate in economics at Washington and Lee University.

There,

he was introduced to value investing and Benjamin Graham’s ideas.

“Once someone explains the concept of value investing to you,

you either understand it quickly,

or never understand it,”

he said.

Miller belongs to the former.

“I think the idea of value investing suits me,

it’s very interesting.”

Later,

Miller read extensively from John Burr Williams,

which provided him with a second layer of analysis based on value analysis.

But fundamentally,

he remained attracted to the philosophy of value investing,

because it requires meticulous thinking and disciplined execution,

though ultimately he developed his own insights into Graham’s ideas.

When Miller saw Graham’s favorite indicators,

he might assign them less weight than other value fund managers.

Miller explains,

before using historical data,

investors should ask themselves,

how closely past performance correlates with future returns and profits.

“If you hold a company like U.S. Steel,

and bought it when it was founded in 1903,

you would see many prosperous years.

But it has been slowly declining.

Traders might buy in when the price drops.

But even when buying,

investors must believe it is severely undervalued,

or that its fundamentals have changed.”

“From a theoretical standpoint,”

Miller continues,

“using historical data is flawed.

Ultimately,

the value of any equity depends 100% on the future,

not the past.”

Therefore,

Miller sometimes buys stocks with high P/E ratios,

which traditionally value investors dislike.

Miller states,

a company’s high P/E ratio does not mean its market pricing is free of errors.

Besides reviewing the past,

Miller also says: “P/E ratio itself is irrelevant.

It’s just one factor capturing the stock,

but often not closely related to intrinsic value.”

“Someone asked me,

if Jabil (捷威) is more investment-worthy,

why do I hold Dell? I asked him back,

what do you mean?

He said,

Jabil’s P/E is 12,

Dell’s P/E is 35,

so Jabil clearly has higher investment value.

I replied,

there are two companies to choose from.

One can deliver a 200% return,

the other only 40%.

Which one would you choose?

He said,

the first company’s profit margin is five times that of the second,

so of course I choose the first!”

I said,

what you just said,

is exactly the difference between Dell and Jabil.

Dell’s capital return rate is as high as 200%,

Jabil’s is only 40%,

and Dell’s P/E is just three times Jabil’s.”

Dell’s relatively high P/E ratio

is due to its high capital return rate,

thanks to its position as an industry low-cost leader,

building sustainable competitive advantages.

The company can continually pressure competitors through price cuts and other means.

Jabil also has similar advantages,

but because its sales are smaller,

it lacks the same leverage effect as Dell.

Outstanding investment returns:

Surpassing Peter Lynch,

who consecutively outperformed the S&P 500 for 15 years.

By the end of 1999,

Miller was seeking investment clues from the S&P 500 itself.

The S&P 500 is compiled by Standard & Poor’s, a subsidiary of McGraw-Hill.

The Wall Street Journal reported: “Occasionally, better-performing companies are used to represent underperformers,

and winners are allowed to ride the wave.”

This is an inaccurate description of Miller’s approach.

It’s important to note that

the purpose of any index is to reflect the reality of a specific market,

not to surpass it.

However,

because the S&P 500 (the broadest index) performed so strongly,

it makes sense to focus on stocks that are pushing the S&P 500 higher.

From 1991 to 2005,

Bill Miller’s Legg Mason Value Trust achieved a total return of 980.45%,

with a compound annual return of about 16.44%,

and every year’s return exceeded the S&P 500’s performance.

During this period,

the S&P 500 rose 513.59%,

with a compound annual return of about 11.53%.

Before that,

the highest record of beating the index was set by another investing legend—Peter Lynch,

who achieved eight consecutive years of outperforming the S&P 500.

Miller’s streak was nearly twice as long as Lynch’s.

Thanks to Miller’s outstanding performance,

the assets of the Legg Mason Value Trust grew from $750 million in 1990 to $20 billion in 2006.

Forward-looking investment in Amazon:

First proposed that “Amazon’s market cap will definitely surpass Walmart.”

In 1999,

Miller invested in Amazon,

which The Wall Street Journal called his boldest move to date.

At that time, the e-commerce retailer faced a series of financial crises,

and the market overreacted.

By the end of 1999,

Amazon’s stock traded at about 22 times its expected 1999 sales.

But Miller believed,

Amazon had achieved an almost unbeatable leading position in its business domain.

Even without large-scale capital injections, debt, or stock dilution accompanying growth,

it could still achieve enormous expansion.

In the investment world,

Miller was the first to assert that “Amazon’s market cap will definitely surpass Walmart.”

Today,

Amazon’s market cap has reached $1.58 trillion,

while Walmart’s is only $419 billion,

and Miller’s prediction has been proven true.

However,

looking back to the year 2000,

Amazon’s revenue was only $2.76 billion,

while Walmart’s revenue exceeded $165 billion.

In such a stark contrast,

Miller’s ability to accurately forecast the future is truly impressive.

Similar to Munger’s “multi-disciplinary thinking model,”

Miller possesses a pragmatic and cross-disciplinary thinking framework,

which allows him to break conventional rules,

think outside the box,

and consider broader industries when selecting investments.

In Miller’s view,

there is no strict boundary between tech companies and traditional firms,

which is one of the key reasons he has the unique insight to include many internet giants.

Miller and Tech Stocks:

Analyze based on business fundamentals and estimate intrinsic value.

We firmly believe,

based on business fundamentals,

that tech stocks can be analyzed and their intrinsic value estimated.

In the tech sector,

using value analysis is a competitive advantage,

because most investors focus only on growth prospects,

while few value investors pay attention to this area.

However,

Miller points out,

if you plan to invest in tech stocks,

you must also consider some key factors.

His experience working with Ernie Keene

helped lay the foundation for his value analysis.

But,

due to his innate philosophical approach,

Miller explored futurism—concepts like collective intelligence,

complex systems research,

collective behavior, and other ideas from the Santa Fe Institute.

As a result,

Miller developed a preference for internet and tech stocks (such as emerging AOL).

He explains: “Although technological progress is rapid,

it doesn’t mean these changes are random or unpredictable.

Most of the time,

they follow established paths.

Economists like Brian Arthur and Hal Varian pioneered tech and information economics.

Anyone willing to study technology in depth

can access their research.”

But,

sometimes technology does appear in mysterious, unknown ways.

Take interactive video conferencing: companies can access cost-saving services via integrated digital networks (ISDN),

but its adoption remains limited.

Even in the 21st century,

face-to-face communication still builds trust and facilitates transactions,

and which tech products will become popular remains uncertain.

Moreover,

the structure of the high-tech economy also faces many issues.

Compared to lower-tech markets,

the high-tech sector is more volatile,

more unpredictable,

and there are significant debates on how to evaluate individual stocks from a business perspective.

Miller explains: “The companies we buy are priced far below our assessment of their intrinsic value.

So the question is,

where are the most valuable companies in the market? Growing companies,

shrinking companies,

or cyclical companies? We hold a large number of tech stocks,

because we believe the relative value in the tech sector is the highest.”

Miller realizes,

in the high-tech economy,

a “winner-takes-all” market pattern seems more likely—few excellent companies dominate the market,

so he continues: “Look at those tech giants—Microsoft with 90% market share,

Intel with 90%,

Cisco with 80%,

they are the leaders in their respective fields.

This results in a ‘winner-takes-all’ scenario in most markets.”

Miller also said: “Technology may change,

but market positions do not.”

Therefore,

investors can consider long-term investments in carefully selected high-tech companies.

Miller insists,

more importantly,

that high-tech companies are “easy to assign a reasonable valuation.

Tech stocks may be more volatile,

which makes them seem different.

But compared to U.S. Aluminum or U.S. Steel,

analyzing Dell’s business is not difficult.”

Finally,

Miller states: “The only way to judge which of two investments is better is,

by comparing what you pay and what you expect to get.”

Despite limited company history and scarce financial data,

Miller and his team built a business and project matrix based on available fundamentals.

Using ready-made software,

they provide current data and trends,

and sketch future business scenarios based on various assumptions.

Miller says: “We try to build a long-term model based on business analysis and market dynamics.

We use different probabilities to develop scenario assumptions,

where one particular outcome is certain to occur.”

Then,

based on real data that follows,

Miller continuously adjusts his assumptions,

constantly reevaluating how new information impacts the future.