Thursday, December 11, 2008

Fall of a Stock Picker

In yesterday's Wall Street Journal, there was a front page article about William Miller, who I suppose is the manager of Legg Mason Value Trust, a mutual fund which according to the article "outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching". In spite of Mr. Miller's phenomenal run, in this latest market downturn he stumbled so badly that according to the WSJ, "These losses have wiped away Value Trust's years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods according to Morningstar." The WSJ quotes an investor in this fund as saying: "Why didn't I just throw my money out of the window -- and light it on fire?", and complaining that Mr. Miller's strategy "worked for a long time, but it's broken." I would like to point out that throwing your money out the window and then lighting it on fire, is redundant. You could reduce your expenses by taking either action, but both are probably not necessary.

So what's my point? Only this: investing is not about beating the market over the short term. It's not even about beating the market consistently for 20 years. It's about generating enough returns to guarantee your financial future. Even if you think you found a star-performing fund manager, or you think you can pick stocks better than anyone else you know, you should have zero confidence that this streak will continue. Apparently Mr. Miller is a very talented investor. Either that, or he is lucky beyond belief. However, even his market beating returns were completely wiped out by a short term mistake.

What's the answer? As always, my answer is index investing: (i) trust in the long term average returns of the stock market and don't try to beat them because the house always wins, and (ii)  minimize your investment costs because that is the one element that is completely under your control. Oh yeah, and don't freak out and sell when the market turns south. Markets do that on occasion.

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frugal zeitgeist said...

I have a small amount (which is now even smaller) in this stinker. I'm contemplating selling and taking the capital loss just because Mr. Miller has made so many asinine investing decisions in the last few years. He bought into the subprime market hook, line, and sinker - with my money and a lot of other people's money as well.

plonkee said...

I am I the only person that's thinking *I told you so*? I'm such a believer in index funds I get the urge to snigger when I hear about a fund designed to "beat the market".

frugal zeitgeist said...

Plonkee - Say it right out loud if you wish. I bought this fund more than ten years ago and never did anything with it. My investing philosophy has changed over time, but I didn't modify this holding to reflect that.

Wonderful anti-spam word: "boycat"

Shadox said...

What is this "boycat" business??

Index Frugal, index. Say it with me.

Plonkee - it's not nice to gloat... but it is so much fun. Of course, someone is bound to remind us index folks that we also lost about 40% this year...