We Study Billionaires - The Investor’s Podcast Network - TIP247: Legendary Investor Bill Miller (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back legendary investor Bill Miller. Bill holds the record for the most consecutive beats of the S&P 500 index with 15 years straight outperformance when he was managing the Lake Mason Capital Management Value Trust Fund. Today, Bill is the founder of Miller Value Partners and manages over $2 billion. Since 2009, Miller's flagship opportunity trust has produced annualized gains of 20.4% annually after fees. So without further delay, we bring you Mr. Bill Miller. You are listening to The Investors Podcast, where we study the financial markets and read the

Starting point is 00:00:44 books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors podcast. Preston and I couldn't be more excited. We're so honored to interview legendary investor Bill Miller once again here on the show. Bill Welcome to the Ammasters podcast. Thanks, it's a great pleasure to be here. Thanks for having me back again. Well, Bill, we're very excited to have you back here on the show. So we had our audience help us out with the questions for today's show, and we're really excited

Starting point is 00:01:22 to jump right into these. So the first question, let's talk about shocks to the market. We could have a shock to the system like Brexit, trade wars, tax cuts, you name it. How do you approach the evaluation of a stock if you think that maybe the market's overreacting to this news? One specific example that we could talk about is a company called Micron Technologies, which you see right now trading what Stig and I would believe to be a pretty significant discount. But the discount's based on the market's reaction to the trade war. We don't have to talk specifically about micron technologies.

Starting point is 00:01:58 You could apply this to any case. We're more interested in the methodology that you use to think through how this news impacts investments and how you react to that. One of the things that we try and do is abstract away from, I'd say, the day-to-day noise in the market. The future is unpredictable, so nobody has privileged access into the future. So there's always going to be new stuff that happens. And the market is a real-time information processing machine. So it basically takes that information and incorporates it into prices. What I tend to tell our analyst is, you know, if it's in the newspapers, especially if it's in the newspapers every day, then it's in the price.

Starting point is 00:02:34 What isn't in the price are changes from off that base case. you know, most of the things that people worry about, and there's always, you know, whenever you say something about, you think, actually, what about this, what about this, what about this? And it's those what abouts that create the opportunity because the whatabouts are always some level of problems that you just enumerated some Brexit, trade war, that kind of thing. Those usually for us create opportunities because they're fleeting. So we try and distinguish between things that we call like cyclical, and that would include things like recessions. I would agree with Peter Lynch, the great former manager at the Fidelity Magellan Fund, who said that more money's been lost worrying about recessions or preparing for recessions than has lost. in the recessions themselves. We saw that last fall when the market went down 20% on no news whatsoever except people's worries. There was no new information at all in the marketplace. It just had a bad May. That also just part of the normal corrective process. There have been, I think, 25 or 26 corrections of more than 5% in this 10-year bull market. So two and a half a year. But whenever the market goes down, it went down, I think 6% in May, people flip out, sell everything and push prices down and that creates the opportunity. I'm curious to hear about your thought

Starting point is 00:03:34 process. Are you more just thinking, this is not relevant right now and need to see a bigger change or are you not even looking at the price changes and more thinking, what is the impact of this specific event and then look away from the price change? I think trying to assess the impact on a short and intermediate and even long-term basis is important. There are things that are likely to be, I would say, temporary and fleeting and the other things that can be more problematic and permanent. But you mentioned Micron. So we own Micron. And Micron, you know, has fallen from, I think, of a hive around 60 or so down to the low 30s. And it's fallen that way because they get a significant part of their business in China. I think, you know, maybe 12 or 13 percent is Huawei,

Starting point is 00:04:12 which is now blacklisted, DRAM prices and NAN prices and people are worried about that. But I think when you look at Micron at $32 a share or so, it trades at five times earnings, and these earnings are depressed. And it earns 20 percent on equity, which is considerably higher than the market earns on its own. And they've been buying back stock. The current problems about China are fully reflected in Micron. What isn't reflected is those problems get resolved. And I think they will be resolved over time, maybe not this month or next month. But it's in both countries' interest, I think, to have a solid long-term relationship. Bill Dudley, the former head of the New York Fed, wrote about that this morning. Tom Friedman wrote about it this morning. And so it's a process.

Starting point is 00:04:48 But it is important to distinguish between cyclical issues like that and secular issues that are things that aren't going to get solved anytime soon. They're long-term trends. So that would be, you know, just like the growth of digital over analog, that kind of thing. It's a very interesting point. And also for full disclosure, I'm long, micro-technologies for exactly the same reasons as you are. But it is kind of interesting with Huawei that you talked about, you know, being blacklisted. Almost a third of the revenue in 2018 came from China for this specific company. But it would not be a problem if this was only a problem for, say, three months, six months. Then there's definitely a way to chip.

Starting point is 00:05:21 If this is going to be, quote, unquote, an eternity, which is never the case whenever you talk about the stock market, it would be a severe problem. So are you thinking in your assessment, oh, this might last a year? this is the impact it would have on the discounted cash flows I can expect in the future? Or are we more saying, what are the chances of being two, three, four, five years? What are the probabilities and come up with your assessment based on that analysis? Well, I think it's very difficult to assign probabilities to something that is essentially a political process where you're, you only have partial information.

Starting point is 00:05:53 I think you can get a sense, and it's only a sense that it's in both countries' interests to have this issue settled because basically it can be. just to spiral down if it becomes, you know, a matter of saving face on both sides and stubbornness on both sides. But right now, it's following, I'd say, it's sort of a normal pattern in this kind of thing. And one of the things that's interesting about the trade disputes, they tend to slow growth in the short run. And that then increases the probability that the Fed will cut rates, which I think the Fed's a conservative institution. And so I think in many cases, they need a little bit of movement there. But these things are highly complex,

Starting point is 00:06:28 and I think you can't think of them as a straight linear extrapolation. So a little bit back, we were fortunate enough to have Howard Marks here on the show. And one of the things that he was talking to us about was market. And he was just talking about the stock market. He was talking about many other cycles that you had to consider before making an investment. For instance, the credit cycle, the cost cycle or the raw materials a company might use. How do you think about cycles for your stock picks? You know, it's funny you mentioned that, you know, Howard's got a relatively new book out on mastering the market cycle. But what you actually get down to it. And I know Howard. He actually believes that it's virtually impossible to time cycle with any degree of accuracy. But what you can tell and what he's done well on, and I think that we're reasonably able to do the same thing is you can tell when things reach an extreme. And so you can tell when they're extremely overpriced or when they're extremely underpriced relative to other sorts of things. And there, I think you can add value. But one of the ways that I tend to think about that is, again, no one has privileged access to the future and the ability to predict or surf the

Starting point is 00:07:29 market and try and catch the waves and cycles on a six-month or even one-year basis is virtually impossible. And if you think about it probabilistically, roughly 70% of the time since World War II, the stock market, U.S. stock market, has been higher year over year. And about 70% of the time the economy grows. Those things aren't mapped on one-to-one because the market looks forward. But roughly speaking, if you want to think about being involved in the market, you have a 70% chance of making money in any given year. That's the probability you should be thinking about, not the 30% chance that it might go down for a year or two. I mean, the worst we've ever seen before the financial crisis was, in fact, including the fact that there were three down years

Starting point is 00:08:06 in a row in 001 and 2002. That was the worst since the Great Depression. But outside of that, if you just work right through it, if you bought stocks at the peak in 2007 and just held them, you'd be fine right now. And they just passed right on through this stuff. That's an interesting fact. So we briefly talked about Howard Marks here. We really have the privilege of speaking to many great investors such as yourself. We also spoke to one Pop Rai and Guy Speer, I'm sure you're familiar with those children, too. What our audience found very insightful from the conversation we had with them was how they decided to speak or not speak to other people about their investment thesis for a given stock.

Starting point is 00:08:42 So I'm curious to hear about your process. Do you have people you trust who you run your investment decisions by? The people on our team, I discuss our potential investments with the people on our team. My colleague Samantha McLemore, who co-manages the opportunity of trust with us. My son, Bill 4, who runs our income fund, we've got a couple of young analysts that, again, we discuss all of these. You know, I don't run names before I buy them by a lot of my friends in the business. If I think they know something about a name we're looking at, I will ask them about it. We do discuss investments.

Starting point is 00:09:13 We do discuss how we see the market, where we see opportunities. I pay close attention to what other good investors are buying and selling, and just to try and see how they're thinking about things. And especially for value people like Lee Coopman is just running a family office, David Teper and other. when that we followed pretty closely in addition to some of the others I mentioned. But yeah, so I pay a close attention to a lot of people, but I don't run ideas by them before I do something. So how do you decide on the position size? It's a question of assessing the risk and reward at the individual stock level and then at the risk at the portfolio level of concentrations and correlations. So for example, we wouldn't buy probably a 5% position or 6% position going in

Starting point is 00:09:53 in a stock that we thought was going to triple because the risk management would force us to sell it because it became too big a part of the portfolio. So we might use then a 3% going in position. It has to do a lot with, as I said, correlations and how we see the opportunities in the overall portfolio. And I'll just repeat again, if we don't think that we can make something as an individual stock that isn't part of a pair of like three auto stocks, but if we don't think we could make it a 3% position, we're probably not going to buy it because it doesn't make any difference. What does make a big difference in terms of how we think about trying to add value is what the academics called active share. So the percentage of your portfolio, which looks different from your

Starting point is 00:10:29 benchmark, and there's a lot of evidence that high active share very much increases the probability of outperforming over long periods of time. Our active share is among the highest in the country at around 100%. Very, very different look in the portfolio from the weightings that the indices have. The problem with high active share and what it comes along with is high tracking error. And a lot of people are happy with high tracking error if the market's up 10 and you're up 30, but they're not happy with high tracking error if the market's down five and you're down 15. That's what comes with the territory. And as my colleague Samantha likes to say, in the post-financial crisis period, volatility is the price you pay for performance. If you can't take volatility, you're just not

Starting point is 00:11:06 going to do well in the equity market. If you don't want volatility, then just put your money in cash. You have no volatility, but you won't make any money either. I think it was childmonger said that if you can't lose 50% of your portfolio, two or three times every century you shouldn't in investing stocks in the first place. Somebody asked Charlie about, I guess both Todd and Ted were working there at the time, I'm not sure, but ask how those guys had done in their relative to the market. Did they beat the market in 2008? It was down like 35%.

Starting point is 00:11:31 And he said, no, no, they were behind the market. And then he paused and said, he said, in fact, anybody who wasn't down over 40% doesn't know what they were doing. I absolutely love that you said that. And speaking of Ted and Todd, at least one of them took a position in Amazon. You mentioned Amazon before. There was an amazing investment. You have a large percentage of your portfolio in Amazon.

Starting point is 00:11:51 I actually think it is the largest. And you also have smaller positions in Alibaba and Alphabet. Not so much talking about those specific picks, but they're all major players in cloud computing. How do you see the future of cloud computing and which impact would it have for us as stock investors? So cloud computing is part of a broad secular trend that can be, I guess, summarized in venture capitalist, Mark Andreson's comment from eight or ten years ago, that software is eating the world. That whole move towards cloud computing is one of those things that's strategic, the digitalization of, I guess, corporate processes.

Starting point is 00:12:24 The poster job for that is Amazon's AWS, which completely dominates that part of the business, you know, the outsourced computation part of the business. And that's still on its very, very early stages. I think that AWS is running probably around a $30 billion annualized run rate. And I asked Jeff Bezos a couple of years ago, what do you do? addressable market was for that. He said trillions and trillions. So it's very, very early, very early days on that. And the other companies that are involved in that space, I mean, I'll just name some of them, but we don't own them. I wish we had gotten in earlier. We don't own them. But, you know,

Starting point is 00:13:00 service now atlasian, workday, Shopify, Twilio, Annaplan, those kinds of things are all cloud computing companies. And interestingly enough, a day like today where the market's basically going nowhere but has kind of bad breadth, all of those companies are up. It's the kind of thing that if you own cloud computing companies, which by and large are very expensive, then you have to have a very long time horizon and be willing to take substantial volatility. If you're going to get out of them if they go down 20 or 30%, then you're never going to make any money in those names. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:17:43 Bill, I was speaking to one of a friend of mine here the other day. We were talking about the best value investors. We are very nerdy like that. So sometimes we meet up and we talk about who are the best value investors. Of course, I had to name drop you and I was super excited. I had a chance to speak to you. One of the other guys that said, well, Bill Middle is not really a value investor. at least not in the old-fashioned sense.

Starting point is 00:18:02 Like, he bought Bitcoin and he bought Amazon. And like, for a lot of value investors, they might be thinking, wow, that doesn't really make any sense. And you really, like, bought them at a really, really good time. Without perhaps talking necessarily about Bitcoin, it's talking about Amazon, how are you thinking about, let's call emerging modes of companies or security in general?

Starting point is 00:18:22 Those two are probably pretty decent examples. I'll give you another one of how we think about that. I would first of all dispute the notion that we're not value investors. I would say that we're not simple accounting-based factor value investors. So anything that can be put into an algorithm can be replicated and therefore any advantage of those factors can be arbitraised away, which is why the old Ben Graham stuff of low, PE, low price to book, low price to cash flow, it hasn't worked in probably 25 or 30 years because it's so easily replicated.

Starting point is 00:18:50 Buffett and Munger have both talked about. They'd much other pay up for a really good business than buy, you know, as Warren calls a cigar buck that's super cheap on the accounting factors. I'd say where we might have differed is we're always trying to buy things that traded a huge, a large discount to our assessment of intrinsic business value. An intrinsic business value in the classical value investor's definition, John Burr Williams' theory of investment value is the present value of the future free cash flows of the business. It's not a low P.E. on the current earnings of the business.

Starting point is 00:19:19 It's the present value of the future free cash flows. And Warren's talked about this over and over and over again. When we looked at the Amazon, for example, and one of the things that we figured out with Amazon early on was that the gap accounting measures, P.E. Price to Book, Price to Cash Flow, had very little relevance to Amazon. And I can perhaps just explain that by looking at something that we've already seen how it came out, like John Malone, you know, the great table investor who was a CEO of Telecommunications Inc for 25 years. And if you'd put $1 in TCI when he became the CEO and held it for the 25 years that he ran it until he sold it to AT&T, that $1 became $900.

Starting point is 00:19:55 And he never reported a profit in 25 years. There was a lot more to value creation than reporting gap accounting profits. And one of the things that I like to say is that there's a reason that they're called generally accepted accounting principles and not divinely inspired accounting principles or immaculately conceived accounting principles. They attempt to get at something more fundamental, which is the underlying economics of the business. And so that's the kind of thing that we're looking at.

Starting point is 00:20:21 And I would say I talked to Warren about the airlines when they were, in fact, asked question at the Berkshire annual meetings in 2014-15 about them. And he had famously said many times that, you know, he was a member of AA Airlines Anonymous where anytime he thought about getting an airline, he, you know, got himself out of that. But then what happened was that things changed. And the industry consolidated and the incentives were different. And now he owns, you know, big positions in Delta and the other and the other airlines. So I think you have to be, it's a great example of being flexible and adaptive in trying to understand how things will change. Now, I'll be much less long-winded, and I mentioned Bitcoin and another company Intrexon, which we own. Both of those I

Starting point is 00:21:00 considered interesting technological experiments. That is to say that the value of those businesses is purely the value of Bitcoin and the value of Intrexon. It's got products on the market such as the so-called Arctic Apple, which doesn't brown and a salmon, which grows twice the rate of other salmon and just have to feed. That company's a portfolio of real options on a transformative technology called synthetic biology. None of that may work to justify the current 700 million market value. But if it does work, if even a couple of those things worth, then that 700 million market value could be 70 billion. The probability distribution, the probability may be low, but the payoff is very high. And so the position sizing on something like that for us will be a

Starting point is 00:21:40 small position because if it doesn't work, it won't go to zero, but if it just never goes up, right, it'll cost us then the opportunity cost of having something that didn't work. With Bitcoin, it's even more different because Bitcoin is something that can very well go to zero for a wide variety of reasons. But so far it hasn't. And, you know, it's now around $7,500. I mean, it came out at about a nickel or a dime. And so it's been probably the best performing investment opportunity of the past 10 years in the overall market. It could still fail. I think there's so much venture capital money going into it. And I know that many of the great investors and business people have been very skeptical of Bitcoin. It's not that even though I own Bitcoin, a lot of Bitcoin personally, and we own it in our

Starting point is 00:22:18 in our partnership. It's not that I'm a Bitcoin bull. I'm just a Bitcoin observer. And what I've observed is that it's something which has, A, done well, B, has a lot of optionality. Its value, in my opinion, is as a potential, as a kind of digital gold, which is not a controversial opinion. But the value of Bitcoin is about 170 billion or something like that, if memory serves. And the value of gold is about $8 trillion. So it doesn't have to get much of the gold market it to be valuable. People say it's not a currency. It can be a currency. It's a very bad currency. I mean, the Venezuelan currency is a currency. The German market in the 20s was a currency. They're just terrible currencies. So Bitcoin is not a good currency right now. And it's not a good payments mechanism right now.

Starting point is 00:22:59 It may never be. And it may never work out. But again, the potential market value of it is so large that if you put money into it that you can afford to lose, it's an interesting experiment. And one of the things interesting about it is that even though all those great titans of finance have been and still are skeptical, I think Howard Marx has come around a little bit on it. But one thing that's interesting is that there's a group of people who have not dumped on it and who are bullish on it. And those are the venture capitalists. And those are the guys whose job it is to look at brand new technologies and decide if they're promising. There are many venture capitalists that don't have a position in Bitcoin. But many of the very best venture capitalists have significant positions. And it's

Starting point is 00:23:36 telling to me that that's in their wheelhouse. That's what they're. paid to do it. You know, Mr. Buffett isn't paid to look at brand new technologies and opine on which ones are going to work. So it's hard to find a venture capitalist that thinks it's rat poison or whatever, whatever Warren called it. Bill, let's talk about investor behavior. Since the financial crisis, there's been hyper focus on managing risk. At the same time, many financial historians are familiar with John Maynard Keyes and the idea of that he called irreducible uncertainty, which equals inherent financial instability. I'm curious to hear your thought. on some of these ideas and how you approach these important concepts in your own investment approach.

Starting point is 00:24:15 Sure. So I think that's a very much neglected topic because everybody kind of parrots the word risk management, risk control. And risk management is what the insurance companies do. They can calculate, roughly speaking, you know, how many people will choke to death on meat, how many people will be struck by lightning. You've got a long dataset that gives you the parameters in which that particular exposure, that particular risk occurs. And therefore, you can price insurance as a way that over time, if you stay within those probabilities, that you can control and manage that risk. What Keynes referred to is irreducible uncertainty where you don't know what the probability distribution is at all. And therefore, you're not talking about managing risk. You're trying to actually control something which is not

Starting point is 00:24:55 controllable, which is uncertainty. You don't know what's going to happen. And I think that if people would focus on that distinction, it would clarify their thinking because right now, what's happened since the financial crisis especially, is that those two things have been conflated such that people think that any decline in the market or any decline in the growth rate of the economy or what the Fed is going to do at the next meeting is a risk that needs to be hedged or controlled or whatever. And that's just part of a broad, I'd say, non-linearity in markets. Markets don't move in smooth pathways. They move in discontinuous ways. And so one of the things that we like to say is if your investment case is going to be blown up by whatever the next thing the Fed does or the next GDP report or the next

Starting point is 00:25:33 earnings report, then your investment case is very flimsy. So you need an investment case that can withstand these uncertain events and uncertain things that happen in the market. And I think that comes with, there are different ways to do that, right? But I think it comes to having a longer term orientation, having a good sense of what the outlines of the probabilities that have historically happened are. One thing that's happened, and I'll wind up on this, is that because the financial crisis was so traumatic for so many people, people in general, and that includes professionals, as well as individuals or retail people have been risk and volatility phobic. We've done wonderfully well in the 10 years that ended the last through the first quarter of this year.

Starting point is 00:26:08 I think you top 1% I think. If we could boil it down to one thing, it was recognizing that the mental scarring of people, the crisis was similar to that which occurred during the Depression. And therefore, they would be much, much more risk-averse and much more conservative. And they would overestimate risk and perceived risk, therefore would be much higher than real risk. And so if you tilted your portfolio towards high perceived risk, you actually did very well because the real risk behind that were much, much lower than the perceived risk. That's still going on today. So I think there's still an opportunity in that space today. And there will be until the big gap between

Starting point is 00:26:43 the 10-year treasury at 2.15 or 220 and stocks at around, you know, 17 times earnings. So bonds at 40 times or close to 50 times a cash stream that doesn't grow versus stocks at, you know, at a call it a 7% or 6% earnings yield that will grow 5% a year, is radically too wide historically. And again, Buffett has said this and people don't pay much attention to it when they ask him if you think stocks are expensive. He says stocks are ridiculously cheap compared to the alternatives. And I would agree with that. So which is why we're fully invested in stocks. Bill, it's truly an honor having a chance to speak with you. Someone who is following value investing and have been following it for quite some time. I think for the next question, it would not so much be a investment question. We

Starting point is 00:27:27 all of your experience, which piece of personal advice would you like to pass on to the next generation of value investors? I would say, first of all, if your psychology is such that value investing makes sense to you, the idea of buying something at a significant discount to what it's worth, for many people, that doesn't make sense. Sir John Templeton told me several decades ago that he said that there are two types of investors out there. Investors, they call outlook and trend investors.

Starting point is 00:27:52 They want to know, what's the outlook for the market, what's the outlook for the company, what trends are we seeing out there that we can take advantage of. And then he said there are price and value investors who want to know what's the value of this particular investment, what's implied in the price. And he said, 90% of the people are outlook and trend investors. They just react to changes in outlook and trend. And only about 10% are value investors. So if you find yourself in that value investing camp, then I would say a couple of things. I would first study the investors that you admire and that are most like you in terms of your psychology. You know, value investors come in many different forms. Second, I would say to understand, you,

Starting point is 00:28:25 You've got to, as Buffett has done so brilliantly over his long, long career, you've got to adapt and you've got to learn. Don't become dogmatic or ideological about things. The world changes, technology changes, things change. And there's always going to be opportunities to exploit discrepancies between price and value. But it's very important, I think, to distinguish between cyclical and secular trends. If you look at secular trends, those are trends which are not going to reverse. You know, we're not going to go back to horse and buggy.

Starting point is 00:28:53 You know, we're not going to, you're not going to heat our houses by candlelight anymore. And Sears and J.C. Penny and Montgomery Ward and Woolworths aren't coming back. So that's secular decline. And that's the kind of thing that the market really hates because very few companies can arrest that, even though they all try and, you know, work their way out of it. So you want to be in a case where you're not in secular decline. Ideally, you're in secular growth, but you don't have to be in that. All you have to do is have stuff that, roughly speaking, is not in secular decline,

Starting point is 00:29:20 isn't a cigar butt, as Warren calls it. In the rest of that universe, then I think most normal valuation techniques and most abilities to assess cash flow, free cash flow, capital allocation can work and add value. But the biggest thing that can be exploited for value investors is behavioral tendencies, how large numbers of people react to specified events. And I'll just end on this thing by saying that we've said for many years, if you don't know your competitive advantage as an investor, then you don't have one, there are only three sources of competitive advantage. One is informational where you know something that's material that nobody else does. Extremely rare, and the government doesn't want you to have that, right?

Starting point is 00:29:54 That's what people go to jail for it if they get that illegally. And then second is an analytical advantage, which is that you don't know anything that anybody else doesn't know, but you place a different level of importance on it to what other people place on it. And that was the advantage that we have with Amazon and some of the other, some of the other names that we've owned over the years. And third, but most enduring is the behavioral advantage to where effectively you can exploit people's tendency to overestimate the short term, all the stuff that's in the behavioral finance literature, you know, to over-emphasize dramatic information, that kind of thing, to over-emphasize risk and especially when it's recent, those things can actually be systematically exploited.

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Starting point is 00:33:56 Yeah, Bill, I love those three points. And if you keep those three factors in mind, we often say that history doesn't repeat itself, but it will often rhyme. What would you say is the most significant thing that has changed since you started investing? Well, when we started our fund in summer, of 1982. At the time, that was the worst recession since the Great Depression. We had come off of interest rates, which were 14% in October of 1981. You know, you could buy good quality businesses on the New York Stock Exchange at four times earnings with seven or eight percent dividend yields. At that point in time, the classical Ben Graham value investing, low P.E., low price to book, low price to cash flow, worked brilliantly. From the time we started our fund until through

Starting point is 00:34:39 1986, before the crash of 87, we were the single best performing fund of all mutual funds in the country, Peter Lynch's Magellan was number two. Classic factor-based value stuff. That all began to change around 1990 or so when Microsoft came public and some of those other companies as technology became a much more important force in the overall market. And I'd say that's been a secular change, which is continuing and is still underway. And so, for example, if you look at the automobile industry, which is undergoing tremendous disruption right now, and so fewer people are driving, for example.

Starting point is 00:35:10 So electric vehicles, though, are in a secular growth mode. But the overall auto industry isn't. You're going to have declining demand for fossil fuel cars and increasing demand for electric cars. But that's in the context of an industry, which is under tremendous pressure. And I think sorting those things out and keeping track of that is important. Fantastic. Bill, thank you so much for taking time out of your calendar to speak with us. I guess I just have one more question for you.

Starting point is 00:35:35 Where can the audience learn more about you and Miller Value partners? We've got a couple of websites. If you look under Miller Value, that will take you there. And we've got, as I said, several products, an income fund, opportunity fund, a partnership, and a deep value product. We'd welcome anybody's interest as long as they are actually long-term patient investors. We're not terribly interested in having people who are either chasing performance or who are trying to jump in and out of the market because they think they can pick off a couple points here or there.

Starting point is 00:36:03 I love that you say that. And we'll definitely make sure to link to all these sites and the different funds here in the show notes. Bill, I'm sure I speak for everyone when I say thank you. and just wow. We always learn so much every time that you come on the show, and we just truly treasure these conversations. Thanks, you and enjoyed it. And then you guys just do great work, so keep it up.

Starting point is 00:36:24 Thank you, sir. All right, so at this point in time on the show, we'll play a question from the audience, and this question comes from Shane. Hi, Preston and Stig. Shane here from Ireland. I've learned much of what I know from your books, podcasts, and YouTube series.

Starting point is 00:36:37 Keep it up. Thanks a lot. You've mentioned in the past, for instance, in your talks with Dr. Richard Smith, that you augment your value investing strategy to also consider momentum. And you're not the only investors who do this. This is done using technical indicators such as MACD, stochastic and moving averages. I like the idea of adopting momentum as it would likely yield me better returns than catching a falling knife or selling my winners.

Starting point is 00:37:00 However, I feel intensely uncomfortable with using technicals as I'm valued the core and don't want to be trading in and out. I'd love to hear more on this topic. I'm wondering how you implement a momentum strategy and which indicators you use. Do you use it as a buy signal or also as a cell signal? Keep up the great work, love every minute of the show. Shane, I think that is a great question. And it's actually very timely that we just had Bill Miller here on the show today. With his credentials, we were surprised to hear how he used momentum.

Starting point is 00:37:29 And this is something we talked about in the very first episode we had him on. And we'll make sure to link to that in the show notes. I just wanted to mention that because at the time, it gave us a validation that even as value investors, we might want to look more into momentum. So, Shane, you mentioned that you are a value investor at heart. You basically want to ignore recent price actions, but you're also open to momentum as it might be able to give you a better yield on your investments.

Starting point is 00:37:57 So the first method is a very classical value investing approach, and you don't think too much about the price action, whether it's a 52-week low or whatever price metric that you're using. That being said, even as value investors, we can observe certain price patterns that do repeat itself in the financial markets. So why would a 52-week low lead to more lows? Down trends tend to stay in downtrends for much longer than most people estimate. And the implication is that even though the price-to-value ratio might be good at that part in time,

Starting point is 00:38:30 and you can make a decent profit, you might even be able to enter at a better price, which is what momentum is all about whenever you apply it as a value investor. And this is not to get the lowest of the low when you buy. As I think we all know, it is impossible to predict, but you can stand on the sideline and observe when the market starts having conviction in the stock again, which is when you would start buying two. And another reason for doing that is that we need to respect the efficiency of the market. Yes, you did hear me right.

Starting point is 00:39:00 There are actually efficiencies in the market. And very, very often if a stock is suddenly dropping in price, there is a really good reason for it. Please don't make the same mistake that I did whenever I started in stock investing, thinking this is selling at a, say, 52-week low, this is so cheap, there must be because everyone is irrational and I'm the one who is rational. There is typically a very, very good reason why the stock is trading at the price that is at. So we just really have to be focused on the price and the value again,

Starting point is 00:39:31 even as we look at momentum here. So, Shane, allow me to sum up, you don't have to use momentum as a value investor. But if it's applied correctly, it can give you an advantage. So, Shane, this is a really great question. I had the same exact reservation about incorporating momentum when I first started learning about it. So the way I personally implement the approach is I apply the same rules for assessing momentum. So what do I mean by that? I guess what I'm trying to say is I don't use technical analysis.

Starting point is 00:40:00 I don't do it differently for one company versus another. Instead, I'm looking at a few factors and I'm using those factors very, consistently with every single company that I look at. So I'm using long-term volatility to understand when the price is operating outside of its normal range. If I determine that the price is operating outside this statistical range, then the pick gets flagged as a stop loss. If I have a pick with substantial capital gains and it gets that stop loss indicator that the trend has changed or the momentum has changed, I will conduct an assessment of whether it's worth it to sell the company based on the dividends and the yields that I would continue and expect to get, even though

Starting point is 00:40:43 I think that the momentum is demonstrating a negative trend. So like Warren Buffett, he's been holding on the Coca-Cola for so long. If that company would come up red for the length of time that he held that, the capital gains that he'd be dealing with, you could make the mathematical argument that even though you expect it to go down and that the momentum trend is bad, because of the purchase price and the capital gains that you'll pay, it might not be advantage. to action the stop loss. Now, if the capital gains on the company are very little or none at all, then it's really easy.

Starting point is 00:41:17 If you get the stop loss indicator or the momentum turns red, I sell the pick and I wait for the momentum status to change again if I still believe that the company is a good value pick. In addition to the volatility range of the price, I'm also assessing the moving average of the company. And the length of the moving average completely depends on the volatility of the specific security that we're talking about. So on the buy side, I use momentum as a final validation factor for buying a stock. So let me explain what that means. I find my value picks based on our TIP

Starting point is 00:41:53 value filter. This tool is simply, it's just looking at the enterprise value of the company or the price after you account for the debt. And it compares it to the earnings, the profit that the companies making before interest and tax. After I find the pick through that filtering process, I'll do a discount cash flow analysis, or I basically dig into it deeper than just the filtering part. I dig into it. I do a discount cash flow analysis. I determine the intrinsic value of the company. I'm mostly doing this through an IRR-based intrinsic value. And then I finally confirm I'm not catching a falling knife by going back to whatever the momentum status is. So that's my final check to make sure I'm not catching a falling knife. So, Shane, this was an awesome question.

Starting point is 00:42:40 We have an online course called our intrinsic value course that we're going to give you completely for free. Additionally, we have a filtering and momentum tool, which we call TIP finance, and it does all this hard work that I just described for you by calculating whether something has a positive or negative momentum trend, and it also does the deep value filtering that I talked about. We're going to give you a year-long subscription to TIP finance completely for free. So if you're out there and you're like Shane and you want to get your intrinsic value course and a full year subscription to TIP Finance, leave us a question at asktheinvestors.com. That's asktheinvestors.com. If you're interested in these tools, simply go to our website,

Starting point is 00:43:20 the investors podcast.com. And you can see right there in our top level navigation, there's links to TIP finance and also the TIP Academy where you'd find the intrinsic value course. So, Shane, thanks so much for asking such a great question. All right, guys. That was all the and I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription

Starting point is 00:43:52 to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP247: Legendary Investor Bill Miller (Business Podcast)

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