Monday, November 21, 2011

Luck or a brilliant value strategy?

Was Bill Miller's 15 year streak at the helm of the Legg Mason Value Trust luck or a skilled implementation of the value strategy (picking cheap stocks)?  

An article in the FT claims that there must have been something to his ability because even though the fund completely tanked in 2007 and hasn't recovered, it did post 15 years of outstanding returns.  

The probability of beating the market 15 years in a row is 0.5 raised to the power of 15 which is about 0.003%.  This is equivalent to about 1 in 33,000.   Obviously he was very very lucky if it wasn't skill.  But I think the FT makes a simple flaw in the analysis.  The fact that we are talking about this guy is because he beat the market for 15 years.  If it wasn't Bill Miller it would have been someone else.  

The point is that we only know he was a 15 year winner after the event.  This is the fundamental problem with active portfolio management - it is easy to pick the winners after the race is over, but impossible beforehand.

Given that Miller's case is so rare, I am inclined to think that he was just a lucky outlier rather than a skilled stock picker.  I have nothing against Mr Miller, I just don't believe that skilled stock pickers exist.  

Without sounding like a broken record, indexing is the only way to go.

Note: with the FT if you want to see the article, you need to register for a free account.  Sorry.