legg mason capital management nyu stern business school may 9, 2005 bill miller chief executive...
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Legg Mason Capital Management
NYU Stern Business School
May 9, 2005
Bill Miller
Chief Executive Officer
“When we think about the future of the world, we always have in mind its being where it would be if it continued to move as we see it moving now. We do not realize that it moves not in a straight line…and that its direction changes constantly.”
- Ludwig Wittgenstein “Culture and Value”
2
“Take as an example the aspects of a triangle. This triangle
can be seen as a triangular hole, as a solid, as a geometrical drawing; as standing on it’s base, as hanging from its apex, as a mountain, as a wedge, as an arrow or a pointer, as an overturned object which is meant to stand on the shorter side of the right angle, as a half parallel- ogram, and as various other things.”
Source: Ludwig Wittgenstein, Philosophical Investigations
3
“I have personally tried to invest money, my client’s and my own, in every single anomaly and predictive result that academics have dreamed up. And I have yet to make a nickel on any of these supposed market inefficiencies. An inefficiency ought to be an exploitable opportunity. If there’s nothing investors can exploit in a systematic way, time in and time out, then it’s very hard to say that information is not being properly incorporated into stock prices. Real money investment strategies don’t produce the results that academic papers say they should.” Richard Roll and Robert J. Shiller, “Comments:
Symposium on Volatility in U.S. and Japanese Stock Markets,” Journal of Applied Corporate Finance, Vol. 5, Issue 1, 1992, 25-29.
4
Fortune’s Year 2000 Guide to Retire Rich
Source: Fortune Magazine, August 14, 2000 *Adjusted for splits** Not including dividends.
July 19, 20007/19/00Price*
Total Investment
12/31/04Price Value**
BroadcomCharles SchwabEnronGenentechMorgan StanleyNokiaNortel NetworksOracleUnivisionViacom
$237$36$73$38$89$54$77$37$57$69
$10,000$10,000$10,000$10,000$10,000$10,000$10,000$10,000$10,000$10,000
$32$12 $0$54$56$16 $3$14$29$37
$1,350$3,333
$0$14,211$6,292$2,963$390
$3,784$5,088$5,362
Total Investment $100,000 $42,773
Percent Loss (57%)
S&P 500 Percent Loss
(18%)
5
DDon’t Believe Everything You Read
Source: The New York Times, February 20,2000; BloombergArticle author Kenneth N. Gilpin asks 10 successful investment professionals to pick one stock they would feel comfortable buying now and holding until Jan. 1, 2010. The 10 investment professionals are John W. Ballen, Laszlo Birinyl, George A. Mairs 3rd, Roger McNamee, Bill Nasgovitz, Bill Miller, Liz Ann Sonders, Justin Thomson, Robert E. Turner and Ralph Wanger.
1999
Return2000
Return2001
Return2002
Return2003
Return2004
Return
Total Return 00-04
Zee Telefilms Ltd. 1610% -75% -62% -12% 55% -22% -84%
JDS Uniphase 830% -48% -79% -72% 47% 20% -96%
Oracle 290% 4% -52% -22% 23% -9% -51%
Nokia 220% -9% -43% -36% 12% 26% -65%
Cisco 131% -29% -53% -28% 85% -5% -64%
Flextronics 115% 24% -16% -66% 81% 14% -40%
Jones Apparel 23% 19% 3% 7% 0% 4% 37%
Medtronic -2% 66% -15% -10% 7% 4% 40%
Waste Management -63% 62% 15% -28% 29% 1% 79%
Henry Schein -70% 160% 7% 22% 50% 8% 423%
Average Performance 308% 17% -30% -25% 39% 4% 18%
S&P 500 Performance 2% -9% -12% -22% 29% 11% -11%
T“10 Stocks for 2010: Buy & Hold Picks From Top Investors”
6
Performance Figures on Total Return Basis*Acquired by MOT 1/5/00. Performance based on owning stock for entire 12 months.
The 10 Uncommon Values® were selected by Lehman Brothers' Investment Policy Committee; each stock was chosen because of its value relative to the opportunity Lehman sees for the company 12 months from today. Every year the Investment Policy Committee reviews each analyst's best idea to arrive at the list of 10 Uncommon Values®. This process has been a fixture at Lehman Brothers.
Symbol Name Subsequent 12 Month
Performance
Prior 12 Month Performance
AOLT
FSRF
GICINTCKLACLLY
MSFTTYC
AOLAT&TFirstarFordGeneral Instrument*IntelKLA TencorEli LillyMicrosoftTyco International
(6)%(43)%(20)%(21)%22%
113%70%35%
(12)%(4)%
297%50%32%-0-
46%59%
134%12%65%47%
Average PerformanceS&P 500
13%7%
74%21%
“Lehman Brothers 10 Uncommon Values® to Own for the Next 12 Months”Stocks Placed on the List 6/30/99
TThe Common “Uncommon” Mistake Investors Make
Performance Figures on Total Return Basis
The 10 Uncommon Values® were selected by Lehman Brothers' Investment Policy Committee; each stock was chosen because of its value relative to the opportunity Lehman sees for the company 12 months from today. Every year the Investment Policy Committee reviews each analyst's best idea to arrive at the list of 10 Uncommon Values®. This process has been a fixture at Lehman Brothers.
Symbol Name Subsequent 12 Month
Performance
Prior 12 Month Performance
ABEASCD
GMSTHWPJNPRLLYMUNT
TLAB
Agilent TechnologiesBEA SystemsCendantGemStar TV GuideHewlett-PackardJuniper Networks Inc.Eli Lilly and CompanyMicron Technology Inc.Nortel NetworksTellabs Inc.
(56)%(38)%39%
(31)%(54)%(79)%(25)%(53)%(87)%(72)%
146%653%(32)%88%60%
498%35%
308%203%
-0-
Average PerformanceS&P 500
(46%)(15%)
196%7%
“Lehman Brothers 10 Uncommon Values® to Own for the Next 12 Months”Stocks Placed on the List 6/30/00
TThe Common “Uncommon” Mistake Investors Make
Performance Figures on Total Return Basis
The 10 Uncommon Values® were selected by Lehman Brothers' Investment Policy Committee; each stock was chosen because of its value relative to the opportunity Lehman sees for the company 12 months from today. Every year the Investment Policy Committee reviews each analyst's best idea to arrive at the list of 10 Uncommon Values®. This process has been a fixture at Lehman Brothers.
Symbol Name Subsequent 12 Month
Performance
Prior 12 Month Performance
AABBBYCSCO
CMCSKCEHDI
LMG.AMIRWMWMI
AlcoaBed, Bath & BeyondCISCOComcast Corp.Concord EFSHarley DavidsonAT&T Liberty Media GroupMirantWashington MutualWaste Management
(16%)25%
(25%)(44%)
7%7%
(40%)(79%)
1%(15%)
37%67%
(70%)10%
113%26%
(36%)59%89%77%
Average PerformanceS&P 500
(18%)(18%)
37%(14%)
“Lehman Brothers 10 Uncommon Values® to Own for the Next 12 Months”Stocks Placed on the List 6/28/01
TThe Common “Uncommon” Mistake Investors Make
Symbol NameSubsequent 12 Month
Performance
Prior 12 Month Performance
AIGAPOLBBBYCOFHRCKLACMCKPFEWENWY
American International Group, Inc.Apollo Group, Inc.Bed Bath & BeyondCapital One Financial Corp.HealthSouth Corp.KLA-Yencor CorporationMcKesson CorporationPfizer, Inc.Wendy’s International, Inc.Weyerhaeuser Co.
(14)%64%7%
(13)%(97)%
5%7%3%
(24)%(14)%
(23)%45%23%(6)%
(20)%(24)%(9)%
(16)%54%21%
Average PerformanceS&P 500
(8)%3%
5%(19)%
“Lehman Brothers 10 Uncommon Values® to Own for the Next 12 Months”Stocks Placed on List 6/26/02
Performance Figures on Total Return Basis
The 10 Uncommon Values® were selected by Lehman Brothers' Investment Policy Committee; each stock was chosen because of its value relative to the opportunity Lehman sees for the company 12 months from today. Every year the Investment Policy Committee reviews each analyst's best idea to arrive at the list of 10 Uncommon Values®. This process has been a fixture at Lehman Brothers.
TThe Common “Uncommon” Mistake Investors Make
Symbol NameSubsequent 12 Month
Performance
Prior 12 Month Performance
AMGNBR
CSCOEXCHETHPQJBLUNXTLTEVAUSB
Amgen, Inc.Burlington Resources Inc.Cisco Systems, Inc.Exelon Corp.Harrah’s Entertainment, Inc.Hewlett-Packard Co.JetBlue Airways Corp.Nextel Communications, Inc.Teva Pharmaceuticals Industries LtdUS Bancorp
(16)%37%41%18%32%1%
10%58%24%21%
56%38%19%18%
(11)%35%22%
374%74%12%
Average PerformanceS&P 500
23%18%
64%3%
“Lehman Brothers 10 Uncommon Values® to Own for the Next 12 Months”Stocks Placed on List 6/24/03
Performance Figures on Total Return Basis
The 10 Uncommon Values® were selected by Lehman Brothers' Investment Policy Committee; each stock was chosen because of its value relative to the opportunity Lehman sees for the company 12 months from today. Every year the Investment Policy Committee reviews each analyst's best idea to arrive at the list of 10 Uncommon Values®. This process has been a fixture at Lehman Brothers.
Source: Lehman Brothers, Bloomberg
TThe Common “Uncommon” Mistake Investors Make
“Lehman Brothers 10 Uncommon Values® to Own for the Next 12 Months”Stocks Placed on List 6/25/04
10.2%5.5%
(9.7%)27.9%1.4%
(5.2%)(3.1%)32.0%7.0%
(7.5%)4.8%
54.6%
39%18%
Average PerformanceS&P 500
38%50%
(13)%45%24%
108%15%24%75%21%
Cendant Corp.CVS Corp.EchoStar CommunicationsIllinois Tool Works, Inc.MBNA Corp.Phelps Dodge Corp.The Progressive Corp.Teva Pharmaceuticals Industries Ltd.Tyco International Ltd.UnitedHealth Group Inc.
CDCVSDISHITWKRBPD
PGRTEVATYCUNH
Prior 12 Month PerformanceNameSymbol
Performance Figures on Total Return Basis
The 10 Uncommon Values® were selected by Lehman Brothers' Investment Policy Committee; each stock was chosen because of its value relative to the opportunity Lehman sees for the company 12 months from today. Every year the Investment Policy Committee reviews each analyst's best idea to arrive at the list of 10 Uncommon Values®. This process has been a fixture at Lehman Brothers.
Source: Lehman Brothers, Bloomberg
Performance6/25/04 – 3/31/05
TThe Common “Uncommon” Mistake Investors Make
Return Sector
Rowan Companies, IncScientific-Atlanta, Inc.Schlumberger, LtdPall Corp.Baker-Hughes, Inc.
1367%1045%1032% 919% 856%
EnergyTechnology
EnergyCapital Goods
Energy
Return Sector
Circuit City Stores, Inc.Limited, IncHasbro, Inc.Wal-Mart Stores, Inc.Dillards, Inc. – CL A
8252%6362%5582%4032%3817%
Consumer CyclicalsConsumer CyclicalsConsumer CyclicalsConsumer CyclicalsConsumer Cyclicals
1970s
Return Sector
Dell Computer Corp.EMC Corp.Solectron Corp.Tellabs, Inc.Clear Channel Communications
88918%80577%20537%16332%14326%
TechnologyTechnologyTechnologyTechnology
Consumer Staples
1980s
1990s
Source: Factset, September 20, 200113
TTop 5 Performing Stocks for Each Decade –in S&P 500
“I don’t buy options. Buying options is another way to go to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lost money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls.”
- Jim Rogers
14
Event Probability Outcome Expectation
A 999/1000 $1 $.999
B 1/1000 ($10,000) ($10.00)
Total ($9.001)
Source: Nassim Nicholas Taleb, “Fooled by Randomness”, copyrighted material, 2001
WWhat is the Bet?
15
Gross Value of $1 Invested March 1994-October 1998
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
Mar
-94
Jun-
94
Sep-
94
Dec
-94
Mar
-95
Jun-
95
Sep-
95
Dec
-95
Mar
-96
Jun-
96
Sep-
96
Dec
-96
Mar
-97
Jun-
97
Sep-
97
Dec
-97
Mar
-98
Jun-
98
Sep-
98
LTCM
S & P 500
Source: When Genius Failed Roger Lowenstein 2000.
LLong Term Capital Management vs. S&P
16
What We Do:
We buy fractional ownership
interests
in companies at large discounts
to our
assessment of intrinsic business
value.
We invest in them long term.
WWe are value investors
What We Don’t Do:
Buy stocks based on price
relationship
to pure accounting based metrics:
P/E,
Price/Book, Price/Cash Flow.
Trade out of stocks when they reach
some predetermined level based on
those metrics.
WWe are value investors