During The Month Of May

Amazon got killed after the .com bust. Investing in Amazon throughout the 2000’s shows the prototypical Bill Miller; but it is also what makes many disapprove of his strategies. Only when your own home is secured should you even consider investing in the real estate market. Unlike a bank savings account, the board of directors may choose to lower or even stop payments to shareholders all together. And it may at prices that don’t earn them good returns. Although P/E ratios can be misleading at times, they do provide a good starting point for beaten-down stocks. When Dell fell to a P/E of six, value investors moved in. When it rose to 12, value investors sold. Klarman would never look at half the stuff Miller invests in but in addition to that, Klarman’s strategy is to sell when something hits fair value. Bill Miller didn’t sell because he said that Dell was earning high returns on its capital and its business was growing. So, was Miller simply saved by Dell’s unanticipated high growth or is he right in holding companies with high returns on capital?

It’s difficult to say if Miller is simply lucky with his Dell investment or if his thinking was bold and unique. Bill Miller was overloaded on growth stocks and got clobbered in the 2000-2002 bear market but I agree with his thinking. Someone asked why he he held Dell with P/E of 35 versus Gateway with a P/E of 12 and you can see Bill Miller’s strategies in his answer (I recommend this interview to anyone interested in Bill Miller. Dell earns 200% on its capital and Gateway 40%, yet Dell trades at only three times the P/E ratio of Gateway. Well, he said, Gateway trades at 12 times earnings and Dell trades at 35 times earnings, so Gateway is obviously a better value. The introduction of the Retail Distribution Review last year will mean fewer but possibly better qualified advisers who will probably be targeting those who can more easily afford their fees.

Banks, on the other hand, don’t charge sales load as well as exit fees. The Russian debt default in 1998, along with the collapse of the Asian Tigers before that, caused all sorts of problems for investment banks, particularly someone whose main business was in bonds as Lehman was/is. I’m not saying an Ambac is a Lehman in 98, but anyone fleeing the stock because of the huge collapse in price turned out to be wrong. Martin Whitman believes that the run-off value is higher but it’s up to you to figure it out. Instead, what distinguishes value investors is their strategy–reasoning. Some investors do not consider Bill Miller to be a value investor and his investment in Dell is one of the reasons that is given. Bill Miller never sold! Bill Miller: Because we analyze businesses, not historic stock-trading patterns. Bill Miller: AOL never, but lots of value investors bought Dell when it traded at six times earnings. Bill Miller: P/E ratios by themselves are irrelevant. If the P/E ratio on these charts are accurate, Citi’s P/E went below 6 during the crisis.

If you ever look at long-term charts (most of which are just price-only charts), don’t forget to factor in the dividends of these companies. Financials, in particular, have paid fairly good dividends over the years and they seem worse on the charts than they really are. Similarly, anyone investing in Sears Holdings should have a good grasp of its break up value. Bryan Perry’s experience as a financial adviser for major Wall Street firms has given him a unique approach to high-yield investing. Similar to the clouds hanging over some financial firms right now, the survival of some were questioned back then. The discount rate used is 8%. This is depicted as the WACC at the top right. Either way, it is important to ensure you are spending your budget in the right areas to not only keep to budget but allocate the correct amount of spend in the areas which will provide the most ROI for you.

Those are stocks you never find in a value investor’s portfolio. Fred W. Frailey “The Fine Art of Value Investing – William Miller of Legg Mason Value Trust – Interview”. Maybe Bill Miller is just a one-trick pony as some suggest but, so far, I’m disinclined to believe that. Value investors have picked computer companies in the past but Bill Miller’s pick in 1996 was questioned by some. So most value investors would have bought Dell in the early 90’s and sold when they ran-up and hit fair value. Contrary to a misguided view, value investing does not preclude one from investing in growth stocks. He doesn’t mind holding if growth is strong, even if the stock looks wildly overvalued on many value investing metrics (such as P/E ratio or P/BookValue.) He is following a similar investment scheme with Amazon, which I will discuss below. It’s hard to ignore a company with a P/E of 6 if you think it won’t go bankrupt.