Here's Everything That's Wrong With Investor Behavior, In One Article

REUTERS/Rick Wilking Legg Mason's Bill MillerA new profile of Bill Miller hit the Wall Street Journal yesterday and boy is it a doozy. If I were teaching a course on behavioral investing, and had lost access to all of the curriculum's text books for a week, I could probably get by just on pull-quotes from this piece.

Something happens to investors when they get around a stock picking manager who's managed to string together a few years of market outperformance - they become giddier than a drunken bachelorette party hanging on the neck of a Vegas magician who happens by their table at the bar (I've seen this in real life, long story).

For the uninitiated - Bill Miller's Legg Mason Value Trust shattered every record on the books by trouncing the S&P 500 for fifteen straight years between 1991 and 2005. And then the fund demolished all the benefit of that fifteen years of outperformance within a two-year period, between 2007 and 2009. It hardly needs to be said that the vast majority of the Value Trust's assets came in toward the top of this record streak - meaning the average dollar invested became a loser even despite all the glory of the track record on its surface.

The entire article is hilarious - through no fault of the reporter, Kirsten Grind, or the subject, Miller himself - whom I regard as a brilliant, if flawed icon of the investment management business. The story here just inadvertently exemplifies every single flaw and fallacy of the investor mentality.

I mean, the headline alone:

And now, a running list of our flaws as investors - which find a way to manifest themselves even when we think we're aware enough to get them under control:

1. We're confusing brains with a bull market, ascribing some sort of meaning to Bill Miller's "comeback":

As though anyone making big bets on a concentrated portfolio in one of the greatest stock rallies of all time couldn't have done this.

2. We're acting as though Miller's behavior during the crisis wasn't true of almost all long-only value managers:

With all due respect, value investors don't cut losses when they're running money in the public eye - they double down and "ignore price", focusing on value and why "the market is wrong." Third Avenue's Marty Whitman blew up in the crisis, as did Fairholme's Bruce Berkowitz, as did almost all of the other "legendary" value mutual fund managers.

3. We're lauding Miller for his guts and having balls - with other people's money:

4. Investors, who fled the fund en masse, are back to throwing money at Bill Miller, now that he's gotten his groove back.

Classic performance chasing behavior. He'll be back up at another peak in AUM just as his performance is about to mean-revert back down to the category average or just as the global economy is once again set to explode into a million pieces again. Dollar-weighted mutual fund returns are always hilarious.

5. This time is different:

That should do the trick.

6. No comment:

The Morningstar analyst quoted neglects to mention that Value Trust's backward-looking rating on the fund at the time was undoubtedly "Five Stars".

7. Industry professionals aren't immune either - Legg Mason got out of "the Bill Miller business" at the bottom and left him with a smaller role at the firm and a less important fund to manage:

8. Bill Miller is betting big once again:

If it works out, he will be a genius again and double his assets under management. If it doesn't, well, brokers will "manage the manager" by firing the fund and just start recommending a new one. There's very little downside for everyone involved. Except the investors.

Same as it ever was.

Source: Mutual-Fund King Bill Miller Makes Comeback (Wall Street Journal)