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Man vs Index: Was Bill Miller Really That Good, or Just Lucky?

Posted Oct 08, 2009 07:30am EDT by Peter Gorenstein in Investing
Related: lm, spy, dia, qqqq, ^dji, ^gspc, LGVAX

"If you don't have the time, effort and interest, indexing is a great way to go for most people," says Michael Mauboussin, author of Think Twice: Harnessing the Power of Counterintuition.

That's not a particularly noteworthy statement, except when you consider the fact Mauboussin is also chief investment strategist at Legg Mason Capital Management, home of legendary (active) fund manager Bill Miller.  

Miller famously beat the S&P 500 for 15 consecutive years starting in the 1990s, only to take a bath during the market crash in 2008, when the Legg Mason Value Trust fell a staggering 55%. From that one annus horribilis, many observers deduced Miller had either lost his touch or just had fantastic luck during his legendary streak. 

Stellar performance is "a combination of skill and luck," Mauboussin concedes, and even Miller has often cited the role luck played during his years of outperformance. 

As with athletes, even the best money managers like Warren Buffett and Ken Heebner can have a bad year (or two), Mauboussin notes. But just like the best athletes, his research shows the best investors also have tremendous skills and tend to display the following characteristics: 

  • Contrarian
  • Value oriented
  • Employ a repeatable process.

This last point is probably the most important. Retail investors should emphasis the process, not just results. And like a stock reverting to the mean, the best investors will likely rebound from a down year or two. To wit, Milller's Value Trust is up more than 32% year-to-date, far outpacing the S&P 500.

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