Bill Miller’s Top 10 Investment Principles and Classic Practices

1. Continuously Adjust Investment Strategy with Environmental Changes, While Always Maintaining Value Orientation

Miller extensively absorbs knowledge from various fields to cultivate investment insights and inspiration. His pragmatic work style and multidisciplinary thinking approach enable him not to be confined to specific metrics or analytical methods, nor to arbitrarily exclude sectors like technology from his perspective.

2. Taking the Essence and Discarding the Dross of the S&P 500 Index Benchmark

Like the S&P 500 Index, Miller adheres to a long-term investment strategy of high positions and low turnover rates. He allows winners to keep running while selectively eliminating losers. However, he adopts a more sophisticated enterprise selection strategy that is highly sensitive to valuations, aiming to buy undervalued companies and sell overvalued ones.

3. Observe the Economy and Stock Market Without Making Predictions

So many people and organizations engage in complex interactions to better adapt to competition with others, but this leads to large amounts of unpredictable behavior, including booms and crashes ( like the internet bubble and the 1987 single-day stock market crash ). Cause and effect cannot be simply linked, so prediction is futile. However, by observing these complex adaptive systems and understanding how complex behaviors emerge and how feedback loops amplify or dampen effects, Miller cultivates market insights.

4. Seek Companies with Superior Business Models and High Capital Returns

Miller looks for enterprises with sustainable competitive advantages, strong management teams focused on shareholder interests, and market positions that can attack rather than only defend. He focuses on a company’s long-term fundamentals rather than short-term financial data.

5. Leverage Psychologically-Driven Thinking Errors Rather Than Becoming Their Victim

Common thinking errors Miller identified include: overconfidence, overreaction, loss aversion, mental accounting, whimsical ideas, pattern errors, and herd mentality.

6. Buy Companies at a Steep Discount to Their Intrinsic Value

Miller uses multiple methods ( such as P/E ratios, discounted cash flows, private market value, etc. ) and multiple scenarios to value each company. He compares estimated intrinsic value ranges with market discounted prices. If the market’s expectations for a company’s future cash flows (reflected in its undervalued stock price) are far below carefully assessed intrinsic value, he considers buying.

7. Win with the Lowest Average Cost

Miller has confidence in his detailed analysis and buys stocks based on his principles, profiting when prices decline. Even when buying early, a “dollar-cost averaging” strategy yields above-market returns. Using Waste Management as an example, after Miller began buying, the company’s stock price actually fell 75%. However, as of mid-November 2001, calculated at average purchase price, the Legg Mason Value Trust’s Waste Management holdings achieved 18% returns, while the S&P 500 Index declined 9% in the same period.

8. Build a Portfolio of 15-50 Companies

Miller concentrates portfolio funds on his best investment ideas, allocating higher percentages to stocks selected from the finest. Most professional investors are over-diversified, purchasing too many stocks ( usually hundreds ), leaving insufficient time to truly understand these companies. While this short-term approach avoids high volatility from concentrated investments, after-fee returns typically fall below market averages.

9. Maximize Portfolio Expected Returns Rather Than Stock-Picking Accuracy Rate

Most people try to maximize their correct stock picks because the psychological pain from losses is twice that of gains with equal amounts at stake. However, the probability of successful stock picks is far less important than how much money you make when right. Like Buffett, Miller places large bets on high-probability events. Sometimes Miller also makes a series of bets on certain companies. Despite extensive research, his odds of being right on any single company remain low. However, these investments’ potential returns are enormous, typically 2-40 times the initial investment.

10. Three Situations for Selling:

① Stock price reaches reasonable valuation level ( though valuations change over time )

② Found cheaper investment alternatives

③ Investment fundamental logic changes

Most people sell too early, while Miller achieved 20+ times returns on Dell, Commerce Bank, America Online, Danaher, and other companies. For example, traditional value investors would sell when Dell’s P/E ratio reached 12 ( its historical peak ). They failed to see Dell’s superior business model and continuously rising capital returns, which were driving stock price appreciation. Some investors buy and hold forever without selling to lock in profits. But when technology stock enthusiasm peaked in early 2000, Miller sold most of his Dell and AOL positions.

Miller And Value Investing: P/E Ratios Themselves Usually Have Little Relation to Intrinsic Value

When Bill Miller stumbled upon the stock market, he was a vibrant and energetic 9-year-old earning pocket money cutting lawns. Miller’s father regularly read financial news in newspapers, which curious young Miller asked about. His father pointed to a stock listing showing “+1/4” and said: “If you held this company’s stock yesterday, today you’d earn an extra 25 cents.”

Miller asked: “How do you do that?”

His father answered: “You don’t do anything; it happens automatically.”

“To me, that sounds much easier than the hard work I endure to earn 1 dollar,” Miller said.

At 16, Miller used $75 earned as a baseball umpire to buy his first stock. He invested the $75 in RCA, earning about $600. After his lawn-mowing teenage years, Miller became an economics undergraduate at Washington and Lee University, where he encountered value investing and Benjamin Graham’s ideas.

“Once someone explains value investing concepts to you, you either understand them quickly or never will,” he said. Miller belonged to the former group. “I found value investing’s philosophy very appealing and interesting.”

Later, Miller became well-read in John Burr Williams’ works, providing another analytical layer beyond value analysis foundations. Essentially, he remained attracted to value investing philosophy because it required careful thinking and rigorous execution, though ultimately he developed his own unique perspective on Graham’s ideas.

When Miller saw Graham’s favorite metrics, he weighted them lower than other value fund managers. Miller explained that before using historical data, investors should ask how much past performance correlates with future earnings and profits.

“If you held a company like U.S. Steel and bought at its 1903 founding, you’d see many prosperous years. But it’s been in slow decline. Traders might buy during price declines. But even then, investors must believe it’s severely undervalued or fundamentals changed.”

“Theoretically,” Miller continued, “using historical materials and data is flawed. Ultimately, any stock’s value depends 100% on the future, not the past.”

Therefore, Miller sometimes buys high P/E stocks, which value investors traditionally disliked. Miller states a company’s high P/E doesn’t mean markets price it without serious errors. Beyond reviewing history, Miller says: “P/E ratios themselves are irrelevant. They capture only one stock factor but usually relate little to intrinsic value.”

“Someone asked why you hold Dell when Gateway has higher investment value? I asked back, what do you mean? He said Gateway’s P/E is 12, Dell’s is 35, so Gateway clearly has higher investment value. I answered, imagine two companies. One returns 200% investment returns, the other just 40%. Which would you choose? He said the first company’s profit margin is 5 times the second’s, so obviously the first! I said, that’s exactly the difference between Dell and Gateway. Dell’s capital returns hit 200%, Gateway’s only 40%, yet Dell’s P/E is just 3 times Gateway’s.”

Dell’s relatively high P/E exists because its capital return rate is higher, benefiting from its low-cost industry leader position establishing sustainable competitive advantage. Companies can continuously pressure competitors through price reductions. Gateway had similar advantages, but with smaller sales, it lacked Dell’s leverage. Dell’s market valuation had risen far above Gateway’s for these fundamental reasons.

Outstanding Investment Returns: Surpassing Peter Lynch, Outperforming S&P Index for 15 Consecutive Years

By late 1999, Miller was seeking investment clues from the S&P 500 Index itself. The S&P 500 Index is compiled by Standard & Poor’s under McGraw-Hill. The Wall Street Journal reported: “Occasionally replace underperforming companies with better-performing ones, usually letting winners ride in most cases.” This mischaracterized Miller’s thinking. Specifically, any index aims to reflect specific market reality, not exceed it. However, because the S&P Index (the broadest index) performed so strongly, focusing on stocks pushing up the S&P Index made sense.

From 1991-2005, Bill Miller’s Legg Mason Value Trust achieved 980.45% total returns, approximately 16.44% annualized, with every year’s returns exceeding the S&P 500 Index simultaneously. During this period, the S&P 500 Index rose 513.59%, approximately 11.53% annualized. Previously, the outperformance record was held by another investment legend—Peter Lynch, achieving 8 consecutive years beating the S&P 500 Index. Bill Miller’s streak was nearly twice Peter Lynch’s duration. Due to Bill Miller’s excellent performance, Legg Mason Value Trust’s assets grew from $750 million in 1990 to $20 billion by 2006.

Forward-Looking Amazon Investment: First to Propose “Amazon’s Market Cap Will Surely Exceed Walmart”

Also in 1999, Miller invested in Amazon, which the Wall Street Journal called his boldest move yet. This internet retailer faced a series of financial crises, to which the market overreacted. By late 1999, Amazon’s stock traded at 22 times 1999 expected sales. Yet Miller believed Amazon held an almost impeccable leading position in its business domain. It could achieve massive growth even without large capital injections and accompanying debt or stock dilution.

In investment circles, Miller was first to propose: “Amazon’s market cap will surely exceed Walmart.” Today, Amazon’s market valuation reaches $15.8 trillion, while Walmart’s is only $419.046 billion, proving Miller’s proposition correct. Yet reviewing the turn-of-century 2000, Amazon had only $2.76 billion in operating revenue, while Walmart exceeded $165 billion. Under such stark contrast, Miller’s ability to make accurate future predictions demonstrates remarkable foresight.

Similar to Munger’s “multiple mental models,” Miller possesses pragmatic thinking and multidisciplinary thought models, enabling him to break conventions and cast his vision across broader industries when selecting investments. In Miller’s view, strict boundaries don’t exist between tech enterprises and traditional companies, helping explain his vision in encompassing numerous internet star enterprises.

Miller and Tech Stocks: Business-Based Analysis and Intrinsic Value Estimation

We steadfastly believe business-based analysis can evaluate tech stocks and calculate intrinsic value. In technology sectors, using value analysis is a competitive advantage because most investors focus on tech growth prospects, while few value-focused investors often overlook this field. However, Miller notes additional key considerations if investing in tech stocks.

Working with Ernie Kean laid his value analysis foundation. Yet because he maintained philosopher’s nature, Miller explored futurist concepts—swarm intelligence, complex systems research, collective behavior, and other Santa Fe Institute concepts. Thus Miller developed preferences for internet and tech stocks (like emerging AOL).

Miller explains: “Although tech advances rapidly, this doesn’t mean changes are random or unpredictable. Usually they follow established paths. Economists like Brian Arthur and Hal Varian pioneered tech and information economics. Anyone willing to study technology can obtain their research.”

However, sometimes technology emerges mysteriously. Take interactive video conferencing: enterprises could access this cost-saving service via ISDN, but usage remained low. Even in the 21st century, face-to-face interaction better builds trust and closes deals—what tech products emerge remains uncertain. Beyond this, high-tech economy structure faces many problems. Compared to lower-tech markets, high-tech markets are inherently more unstable and unpredictable, with huge controversies on evaluating individual stocks from business perspectives.

Miller explains: “We purchase enterprises where market prices far undervalue our intrinsic value assessments. So the question becomes: where are the market’s most valuable companies? Growing companies, shrinking companies, or cyclical companies? We hold many tech stocks because we believe tech’s relative value is highest.”

Miller realized high-tech economies seemingly enable “strong remain strong” market dynamics—few excellent companies dominating markets, leading him to extrapolate: “Look at those tech companies—Microsoft holds 90% market share, Intel holds 90% market share, Cisco holds 80% market share; they dominate their fields. This creates ‘winner-take-all’ dynamics in most markets.”

Miller later said: “Technology may change, but market position won’t.” Therefore, investors can make long-term investments in carefully selected high-tech companies. Miller insists, more importantly, high-tech companies “easily calculate reasonable valuations. Tech stocks may have greater volatility, making them seem different. But analyzing Dell’s business isn’t harder than American Aluminum or U.S. Steel companies.”

Finally, Miller says: “The only way judging which investment is superior is comparing what you pay against what you expect to receive.”

Despite limited company history and scarce financial data, Miller and staff built business and project matrices from available fundamental information. Utilizing ready-made software, they provided current data and trends, sketching future business scenarios based on various assumptions. Miller said: “We try establishing long-term models based on business analysis and market dynamics. We apply different probabilities developing scenario assumptions—one must occur.” Subsequently, based on resulting real data, Miller continuously adjusts his concepts, constantly reassessing new information’s future impacts ()$AUDIO