Bill Miller: The Stock Picker's Defeat

William H. Miller spent nearly two decades building his reputation as the era's greatest mutual-fund manager. Then, over the past year, he destroyed it.

Fueled by winning bets on stocks other investors feared, Mr. Miller's Legg Mason Value Trust outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching.

Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets. Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares continued to fall, he argued that investors were overreacting. He kept buying.

What he saw as an opportunity turned into the biggest market crash since the Great Depression. Many Value Trust holdings were more or less wiped out. After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it.

The financial crisis has created losers across the spectrum -- homeowners who can't afford their subprime mortgages, banks that loaned to them, investors who bought mortgage-backed securities and, as financial markets eventually crumbled, just about everyone who owned shares. But it has also brought low contrarians like Mr. Miller who had been lionized for staying a step ahead of the market. This meltdown has provided a lesson for Mr. Miller and other "value" investors: A stock may look tantalizingly cheap, but sometimes that's for good reason.

"The thing I didn't do, from Day One, was properly assess the severity of this liquidity crisis," Mr. Miller, 58 years old, said in an interview at Legg Mason Inc.'s Baltimore headquarters.

Mr. Miller has profited from investor panics before. But this time, he said, he failed to consider that the crisis would be so severe, and the fundamental problems so deep, that a whole group of once-stalwart companies would collapse. "I was naive," he said.

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Bill Miller Third Quarter Commentary

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Legg's Miller takes new tack on weak performance

Legg Mason Inc.'s star stock picker Bill Miller said yesterday that he is making adjustments in managing his well-known Value Trust mutual fund in light of its weak performance and millions in lost assets.

Miller said he would spread out his concentrated portfolio to include broader allocations across sectors. He may buy mega-cap stocks that are trading at depressed prices, that generate cash and are at the top of their industries.

The moves appear to be deviations for Miller, whose Value Trust owns fewer stocks than most other funds. But Miller characterized the moves as tactical adjustments instead of a major change in his long-term philosophy amid unprecedented financial turmoil. And he insisted that the fund, which has been a big piece of Legg Mason's marketing prowess in recent years, will turn around.

"I'm very disappointed in our results relative to history and to our expectations and how we would have navigated this particular situation," Miller said during a brief interview yesterday at the start of Legg Mason's Thought Leader Forum for investors at Baltimore's Renaissance Harborplace Hotel. "We're responding to that by analyzing the cause and sources just as we did in the late '80s and '90s.

"We're trying to make sure we're always trying to be adaptable and flexible within the context of our core philosophy when events show us that we've been wrong," Miller said. He noted the recent financial crisis was unlike any previous one because it was global and systemic in nature.

Known as a contrarian investor, Miller makes big bets on stocks that have fallen out of favor in the market.

His flagship Value Trust had the distinction of beating the Standard & Poor's 500 index for 15 straight years before the streak ended in 2006. Since then, the fund has struggled with poor performance. The fund's assets have declined to $9.7 billion, from $20.5 billion more than a year ago.

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