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Bill Miller on Outperformance in Era of Indexing

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In a recent podcast interview, Miller Value Partners founder Bill Miller shared insights on market trends. Here are some highlights of the interview:

  • “I think it’s always difficult to outperform,” Miller said, adding, “It’s trickier now not because of index funds but because of the charged polarity of the market after the financial crisis. Specifically, it was so devastating to so many people that they have become risk and volatility-phobic.” When people perceive increased risk, he explained, they reduce their exposure which leads to “cascading” events like we saw in the fourth quarter of 2018.
  • The trend toward index investing will continue, Miller asserted, because “it’s there for good reason.” Besides the fact that it’s difficult to outperform the market, Miller said that those who try are often merely closet indexers. “The movement,” he said, “isn’t so much from active to passive but is more from expensive passive to cheap passive.”
  • Miller described himself as a value investor, looking to buy businesses at a discount to what they’re worth. The secret, he explained, “is that earnings have very little do with what they’re worth.” He cited the example of Amazon, a company which for fifteen years people said was “grossly overpriced because they weren’t making any money.” But the company was creating value during that time, he argued—it just wasn’t reflected in GAAP accounting.
  • The U.S. market, Miller said, is “very attractively priced relative to alternatives,” except for utilities and consumer staples, which are trading at historically high valuations because of their low volatility–which appeals to investors looking to mitigate mitigation in their portfolios.

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