Wednesday, November 17, 2010

Bill Miller Q3 Letter - Listen to Buffett

I recently read Bill Miller's Q3 Commentary.  I know most everyone has written Bill off as a decent investor becuase of his bad bets prior to the financial meltdown.  Here are what I consider the highlights of his Q3 letter to investors. 


The economy is expanding, liquidity is ample, inflation is under control, profits are growing rapidly and are set to pass their all time high, nominal GDP is at its all time high and real GDP will have fully recovered to its all time high within a quarter - two at the most, profit margins are at record levels, and  orporate balance sheets are the best they’ve ever been, yet stocks languish below where they were in late August 2008, and that was hardly a bull market.


One of the most remarkable things about the investing world is how (correctly) venerated Warren Buffett is and how completely people ignore his investing advice. Since Mr. Buffett has made more money than anyone in the history of the planet solely through investing, one would think that when he says quite clearly what to invest in, people would pay attention. I guess they do pay attention, they just do the opposite. In 1974, near the bottom of the market, he said stocks were so cheap he felt like an over-sexed guy in a harem. In 1999, near the top, he opined that stocks would see returns way below those experienced in the bull market up to that time. From the time of his comments in November 1999 to the end of October 2008, stocks fell over 2% per year. In October 2008, again near the bottom, Buffett published an op-ed in the New York Times entitled, “Buy American. I Am.” telling people to buy American stocks. They promptly accelerated their selling. On October 5


What will bring the public back to stocks? The same thing that always does: higher prices.


The reason for this is that investors practice what I call rear view mirror investing.  Look at the recent history and invest in what has done well the past few years.  The truth is investors would be better served to look at poorest performing sectors of the past ten years and invest there.

Large cap stocks have returned zero for the past ten years and investors shun them for that reason.  To see exactly what I am talking about take a look the valueline investment survey for the Dow 30 (Valueline offers free analysis for the Dow 30, click here).  Take a look at Walmart, Cisco, HP, Microsoft or Johnson & Johnson.  Their balance sheets are rock solid and most are sitting on billions in cash.  These are solid companies that earn very high return on equity, and pay large dividends.  Tell someone that Walmart has more than doubled sales in the past ten years and they look at you funny, and say "really".  Combine the sales growth with the share buyback and improved margins and it adds up to earnings growth of 13% at Walmart for the past ten years.  Incredible. 

If you want a cheap way to and less risky way to bet on the oil markets, Chevron and Exxonmobil sell for single digit P/E's and both have negligible debt (net of cash).  Both companies aren't nearly sexy enough (or risky) for most investors.  Exxon is extremely well run, and have returned significant amounts of cash back to shareholders in the form of dividends and share buybacks.  Both have earned very good returns on captial over the long haul.  Just remember the price of oil is the major driver of these companies. 

Lastly, it is important to act like a business owner when investing in any company.  If you pay in excess of book value you better make sure you understand the value of the intangible assets you are paying for.  If not, you may record a "goodwill" writedown of your investment in the future.

So the choice is yours.  You can either live in fear or seize the opportunity to buy high quality large cap stocks trading at reasonable levels today. 




Best Regards,
Kevin




Disclosure:  None positions, except JNJ in an account I manage for a family member. 

You can read the rest of Bill Miller's Q3 Commentary:
http://www.lmcm.com/pdf/miller_commentary/2010-11_miller_commentary.pdf

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