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Tuesday, February 15, 2011

The Downfall of a Market Guru

The Big Short: Inside the Doomsday MachineDIY Investor has mentioned in past posts the travails of former super guru Bill Miller of Legg Mason. Bill Miller had outperformed the S&P 500 15 years in a row. He appeared to be invincible. Clearly highly intelligent and super connected with an outstanding track record, he attracted money like a beautiful summer weekend attracts beach goers. And then 2008 came along, Mr. Miller stuck with some stocks that went into a tailspin, and he ended up at the very bottom of the performance heap. Market guru worshippers left in droves - rats jumping a sinking ship.

A vivid description of events at ground level is presented in The Big Short that is worth repeating. DIY Investor feels strongly that a huge jump is taken in investor sophistication when the risk of handing funds to a proclaimed market guru is fully appreciated.

March 14, 2008 Steve Eisman, vocal critic of the subprime mortgage market, is invited to speak on a panel which included Bill Miller. Miller explained why Bear Stearns was a good investment - delivering his panel presentation sitting down. Mike Mayo, bank analyst, introduced Eisman as "...our bear."  Although intended to be a sit-down panel discussion, Eisman headed for the podium. His speech was titled "This Time Is Different."

Right after Bill Miller had argued that Bear Stearns was a good investment, a press release was put out proclaiming Bear Stearns wasn't having liquidity problems.

At 9:49 Eisman is at the podium, Bear Stearns is trading at $47. It had been at $53 the day before.
Eisman: "If (the U.S. financial system) sounds like a circular Ponzi scheme it's because it is."

9:55 Bear Stearns at $43.

Eisman: :"The banks in the United States are only beginning to come to grips with their massive loan problems. For instance, I wouldn't own a single bank in the State of Florida because I think they might all be gone."

10:02 Bear Stearns at $29.

A kid in the back of the room, described as maybe in his early 20s, had been punching up his Blackberry the whole time the speeches were going on. He pointed out that Bear Stearns stock had dropped 20 points since Miller had started talking. He asked Miller if he would buy more. Looking stunned he replied "Yeah, sure, I'd buy more here."

Bear Stearns was eventually sold for $2/share. (p. 230-235, The Big Short, Michael Lewis). DIY Investor feels strongly that, in addition to reading a book on how to invest, books on market history should also be read in the quest for investment knowledge. The Big Short, by Michael Lewis,is one of the best in this genre.


  1. Miller's reputation has sure taken a thumping since 2008. He's always been a gunslinger, taking risks on companies that may not be the best footing, and it paid off handsomely until the late 2000's when he and his shareholders got burned horribly by his high concentration in financial stocks.

  2. He's a smart guy, he takes big bets. Sometimes he wins big. Recently as you say he's taken a thumping. There is a danger coming in after a manager has compiled a great record. If you understand the risks fine - most don't. They learn the hard way.

  3. @The Grouch - agreed, from what I know of him, a bit of a cowboy. That style of money management can only be rewarded for so long. Mr. Market has a way of levelling things out in the long run, high-rollers have to come down from their lofty post just like everyone else.

    I guess that's why it pays be an index investor. Simply ride the wave and enjoy.

  4. I wonder if it was just pride. Maybe he just didn't want to admit he was wrong.