Preston Pysh  01:14

Well, Bill, we’re very excited to have you back here on the show. We had our audience help us out with the questions for today’s show and we’re really excited to jump right into these. For the first question, let’s talk about shocks to the market. We could have a shock to the system like Brexit, trade wars, tax cuts, you name it. How do you approach the evaluation of a stock if you think that maybe the market is overreacting to this news?

01:39

One specific example that we could talk about is a company called Micron Technologies, which you see right now trading, what Stig and I would believe to be a pretty significant discount, but the discount’s based on the market’s reaction to the trade war. We don’t have to talk specifically about Micron Technologies. You could apply this to any case. We’re more interested in the methodology that you use to think through how this news impacts investments and how you react to that.

Bill Miller  02:09

One of the things that we try and do is abstract away from the day today noise in the market. The future is unpredictable, so nobody has privileged access into the future. So, there’s always going to be new stuff that happens. The market is a real time information processing machine. It basically takes that information and incorporates it into prices.

02:28

What I tend to tell our analysts is, if it’s in the newspapers, especially if it’s in the newspapers every day, then it’s in the price. What isn’t in the price are changes from off that base case. Most of the things that people worry about, and there’s always whenever you say something about what about this? What about this? What about this? It’s those “What about this” that create the opportunity because the “What about” that always some level of problems that you just enumerated some Brexit, trade war, that kind of thing.

02:51

Those usually for us create opportunities because they’re fleeting. So we try and distinguish between things that we call cyclical and that would include things like recessions. I would agree with Peter Lynch, the great former manager at the Fidelity Magellan Fund, who said that more money has been lost worrying about recessions or preparing for recessions than is lost in the recessions themselves.

03:08

We saw that last fall when the market was down 20% on no news whatsoever, except people’s worries. There was no new information at all in the marketplace. We just had a bad May, that also just part of the normal corrective process. There have been, I think, 25 or 26 corrections of more than 5% in this 10-year bull market. So, two and a half a year, whenever the market goes down, we’re down to 6% in May, people flip out, sell everything and push prices down and that creates the opportunity.

Stig Brodersen  03:33

I’m curious to hear about your thought process. Are you more just thinking, “This is not relevant right now” and need to see a bigger change, or not even looking at the price changes and more thinking, “What is the impact of this specific event?” and then take away from the price change?

Bill Miller  03:47

I think trying to assess the impact on a short and intermediate and even long-term basis is important. There are things that are likely to be, I would say temporary and fleeting, and other things that can be more problematic and permanent. But you mentioned Micron and we own Micron. It has fallen from I think of a hive around 60 or so down to the low 30s. It’s fallen that way because they get a significant part of their business in China. I think maybe 12% or 13% is Huawei, which has now blacklisted.

04:13

*Inaudible then prices and people are worried about that, but I think when you look at Micron at $32 a share or so, it trades at five times earnings, and these earnings are depressed. It earns 20% on equity, which is considerably higher than what the market earns on its own and they’ve been buying back stock. The current problems about China are fully reflected in Micron, what isn’t reflected as those problems get resolved. I think they will be resolved over time, maybe not this month or next month but it’s in both countries interest, I think, to have a solid long-term relationship.

04:42

Bill Dudley, the former head of the New York Fed wrote about that this morning. Tom Freedman wrote about it this morning. It’s a process but it is important to distinguish between cyclical issues like that, and secular issues that are things that aren’t going to get solved anytime soon. They are long term trends, so that would be just like the growth of digital over analog, that kind of thing.

Stig Brodersen  05:00

It is a very interesting point and also for full disclosure, I’m long Micron Technologies for exactly the same reasons as you are. It’s kind of interesting with Huawei, that you talked about being blacklisted. Almost a third of the revenue in 2018 came from China for this specific company. It would not be a problem, if this was only a problem for say, three months, six months, then this is definitely way too cheap. If this is going to be an “eternity”, which is never the case whenever you’re talking about the stock market, it would be a severe problem.

05:27

So are you thinking in your assessment “Oh, this might last a year. This is the impact it would have on the discounted cash flows I can expect in the future?” Or are we more saying, “What are the chances of being 2, 3, 4, 5 years? What are the probabilities, and come up with your assessment based on that analysis?

Bill Miller  05:45

Well, I think it’s very difficult to assign probabilities to something that is essentially a political process where you only have partial information. I think you can get a sense – it’s only a sense that it’s in both countries’ interests to have this issue settled because basically it can be just a spiral down if it becomes a matter of saving face on both sides and stubbornness on both sides.

06:07

Right now, it’s following sort of a normal pattern in this kind of thing and one of the things that’s interesting about the trade disputes, they tend to slow growth in the short run, and that then increases the probability that the Fed will cut rates. I think the Fed’s a conservative institution and so I think in many cases, they need a little bit of movement there. These things are highly complex, and I think you can’t think of them as a straight linear extrapolation.

Preston Pysh  06:31

So a little bit back, we were fortunate enough to have Howard Marks here on the show, and one of the things that he was talking to us about was market cycles. He was just talking about the stock market. He was talking about many other cycles that you had to consider before making an investment. For instance, the credit cycle, the cost cycle, or the raw materials a company might use. How do you think about cycles for your stock picks?

Bill Miller  06:54

You know, it’s funny, you mentioned that. Howard’s got a relatively new book out on mastering the market cycle. When you actually get down to it, and I know Howard, he actually believes that it’s virtually impossible to time cycled with any degree of accuracy. But what you can tell him, what he’s done well on, and I think that we’re reasonably able to do the same thing is you can tell when things reach an extreme.  So you can tell when they’re extremely overpriced, or when they’re extremely underpriced relative to other sorts of things.

07:21

That there, I think you can add value, but one of the ways that I tend to think about that is, again, no one has privileged access to the future, and the ability to predict or surf the market and try and catch the waves and cycles on a six month or even one year basis is virtually impossible. If you think about it, probabilistically, roughly 70% of the time since World War Two, the U.S. stock market has been higher year over year, and about 70% of the time the economy grows. Those things aren’t mapped on one to one just the market looks forward.

07:50

Roughly speaking, if you want to think about being involved in the market, you have a 70% chance of making money in any given year. That’s the problem you should be thinking about, not the 30% chance that it might go down for a year or two. I mean, the worst we’ve ever seen before the financial crisis was in fact, included. There were three down years in a row in ’01 and ’02. That was the worst since the Great Depression, but outside of that, if you just work right through it, if you bought stocks at the peak in 2007, and just held them, you’d be fine right now and then just pass right on through this stuff.

Stig Brodersen  08:19

That’s an interesting fact. So we briefly talked about Howard Marks here, and we really had the privilege of speaking to many great investors, such as yourself. We also spoke to Mohnish Mabrai, and Guy Spier. I’m sure you’re familiar with them too. What our audience found very insightful from the conversation we had with them was how they decided to speak or not speak to other people about their investment thesis for a given stock. So, I’m curious to hear about your process. Do you have people you trust, who you run your investment decisions by?

Bill Miller  08:49

The people on our team. I discuss our potential investments with the people on our team; my colleague, Samantha Macklemore, who co-manages the opportunity of trust with us; my son, Bill IV, runs our income fund. We’ve got a couple of young analysts that again, we discuss all of these. I don’t run names before I buy them, by a lot of my friends in the business. If I think they know something about a name we’re looking at, I will ask them about it.

09:11

We do discuss investments. We do discuss how we see the market where we see opportunities, I pay close attention to what other good investors are buying and selling. Just to try and see how they’re thinking about things and especially for value people like Lee Koopman is just running a family office and David Tepper, another one that we followed pretty closely, in addition to some of the others I mentioned. So yeah, I pay close attention to a lot of people, but I don’t run ideas by them before I do something.

Preston Pysh  09:36

So how do you decide on the position size?

Bill Miller  09:39

It’s a question of assessing the risk and reward at the individual stock level and then at the risk of the portfolio level of concentrations and correlations. So, for example, we wouldn’t buy probably a 5% position or 6% position going in in a stock that we thought was going to triple because the risk management would force us to sell it because it became too big a part of the portfolio. So, we might use down a 3% going in position. it has to do a lot with, as I said correlations and how we see the opportunities in the overall portfolio.

10:09

I’ll just repeat again, if we don’t think that we can make something as an individual stock that isn’t part of a pair like three auto stocks. If we don’t think we could make it a 3% position, we’re probably not going to buy it because it doesn’t make any difference. What does make a big difference in terms of how we think about trying to add value is what the academics called Active Share. So, the percentage of your portfolio which looks different from your benchmark, and there’s a lot of evidence that high active share very much increases the probability of outperforming over long periods of time.

10:36

Our Active Share is among the highest in the country at around 100%. Very, very different look in the portfolio from the weightings that the indices have. The problem with high active share and when it comes along with is high tracking error and a lot of people are happy with high tracking error if the markets up 10 and you’re up 30 but they’re not tapping the type tracking error if the markets down five and you’re down 15.

10:55

That’s what comes with the territory and as my colleague, Samantha, likes to say, in the post-Financial Crisis period, volatility is the price you pay for performance. If you can’t take volatility, you’re just not going to do well in the equity market. If you don’t want volatility, then just put your money in cash but no volatility, but you won’t make any money either.

Stig Brodersen  11:12

I think it was Charlie Munger that said that if you can’t lose 50% of your portfolio two or three times every century, you shouldn’t invest in stocks in the first place.

Bill Miller  11:19

Somebody asked Charlie about, I guess both Todd and Ted, were working there at the time, I’m not sure. But asked how those guys had done in their relative to the market. Did they beat the market in 2008? You know, it was down like 35%, and he said, “No, no, they were behind the market.” Then he paused and said, “In fact, anybody who wasn’t down over 40% doesn’t know what they were doing.”

Stig Brodersen  11:40

Absolutely love to just say that. Speaking of Ted and Todd, at least one of them took a position in Amazon. You mentioned Amazon before, that was an amazing investment. You have a large percentage of your portfolio on Amazon. I actually think it is the largest and you also have small positions in Alibaba and Alphabet. Not so much talking about the specific picks but they’re all major players in Cloud Computing. How do you see the future of Cloud Computing? And which impact would it have for us as stock investors?

Bill Miller  12:07

So Cloud Computing is part of a broad secular trend that can be summarized in but venture capitals, Marc Andreessen, in his comment from 8 or 10 years ago that software is eating the world. That whole move towards Cloud Computing is one of those things that’s strategic, the digitalization of, I guess, corporate processes.

12:24

The poster child for that is Amazon’s AWS which completely dominates that part of the business. The outsource computation part of the business, and that’s still in its very, very early, early stages. I think that AWS is running probably around $30 billion, annualized run rate. I asked Jeff Bezos a couple years ago, what the addressable market was for that, and he said, trillions and trillions. So, it’s very, very early, very, very early days on that.

12:52

The other companies that are involved in that space, I’ll just name a some but we don’t own that. I wish we had gotten in earlier. We don’t own them but ServiceNow, Atlassian, Workday, Shopify, Twilio, Ana Plan, those kinds of things are all cloud computing companies. Interestingly enough a day like today where the markets basically going nowhere, but has kind of bad breath, all of those companies are up.

13:15

It’s the kind of thing that if you own cloud computing companies, which by and large are very expensive, then you have to have a very long time horizon and be willing to take substantial volatility if you’re going to get out of them if they go down 20 or 30%, then you’re never going to make any money in those names.

Stig Brodersen  13:31

Interesting. Bill, I was speaking to a friend of mine here the other day and we were talking about the best value investors. We are very nerdy like that. So sometimes we meet up and we talk about who are the best value investors. Of course, I had to name drop you and I was super excited to have a chance to speak you. One of the other guys said, “Well, Bill Miller is not really a value investor. He’s not in the old fashion sense, like he bought Bitcoin and he bought Amazon.”

13:54

For a lot of value investors, they might be thinking, “Wow, that doesn’t really make any sense, and you bought them at a really, really good time, without perhaps talking necessarily about Bitcoin. I’m talking about Amazon. How are you thinking about, let’s call it emerging moats of companies or securities, in general?

Bill Miller  14:11

Those two are probably pretty decent examples. I’ll give you another one of how we think about that. I would first of all dispute the notion that we’re not value investors, I would say that we’re not simple accounting-based factor value investors. So, anything that can be put into an algorithm can be replicated, and therefore any advantage of those factors can be arbitrage away. This is why the old Ben Graham, stuff of low P/E, low price to book, low price-to-cash flow. It hasn’t worked in probably 25 or 30 years because it’s so easily replicated.

14:40

Buffett and Munger have both talked about, they’d much rather pay up for a really good business and by what Warren calls a cigar butt, it’s super cheap on the accounting factors. I’d say where we might have differed is we’re always trying to buy things that traded a large discount to our assessment of intrinsic business value.

14:56

An intrinsic business value in the classical value investors’ definition, John Burr Williams theory of investment value is the present value of the future free cash flows of the business. It’s not a low P/E on the current earnings of the business. It’s the present value, the future free cash flows. Warren’s talked about this over and over and over again, when we looked at the Amazon, for example, and one of the things that we figured out with Amazon early on, was that the gap accounting measures P/E, price-to-book price-to-cash flow had very little relevance to Amazon.

15:25

That can perhaps best explain that by looking at something that we’ve already seen how it came out, like John Malone, the great cable investor, who own telecommunicator was a CEO of Telecommunications Inc, for 25 years. If you put $1 in TCI, when he became the CEO and held it for the 25 years that he ran it until he sold it to AT&T, that $1 became $900. He never reported a profit in 25 years, there was a lot more to value creation than reporting gap accounting profits.

15:26

One of the things that I like to say is that there’s a reason that they’re called generally accepted accounting principles and not divinely inspired accounting principles or immaculately conceived accounting principles. They attempt to get at something more fundamental, which is the underlying economics of the business. So that’s the kind of thing that we’re looking at.

16:11

I would say, I talked to Warren about the airlines when they were in effect asked question at the Berkshire annual meetings 2014-15 about them. He had famously said many times that he was a member of a airlines anonymous, where anytime he thought about getting an airline, he got himself out of that. But then what happened was that things changed, and the industry consolidated, and the incentives were different. Now he owns big positions in Delta and the other and the other airlines. It’s a great example of being flexible and adaptive, and trying to understand how things will change.

16:42

Now, I’ll be much less long winded, and I mentioned Bitcoin, and another company Intrexon which we own. Both of those I considered interesting technological experiments. That is to say that the value of those businesses is purely, the value of Bitcoin and the value of Intrexon, which has got products on the market such as the so called Arctic Apple, which doesn’t brown, and salmon, which grows at twice the rate of other salmon with just half a feed.

17:07

That company’s a portfolio of real options on a transformative technology called Synthetic Biology. None of that may work to justify the current 700 million market value. But if it does work, if even a couple of those things work, then that 700 million market value could be 70 billion. The probability distribution, the probability may be low, but the payoff is very high. So the position sizing on something like that, for us, would be a small position, because if it doesn’t work, if it goes to, won’t go to zero, but if it just never goes up, right? It’ll cost less than the opportunity cost of having something that didn’t work.

17:39

With Bitcoin, it’s even more different because Bitcoin is something that can very well go to zero for a wide variety of reasons. But so far, it hasn’t. It’s now around $7,500. I mean, it came out at about a nickel or a dime, and so it’s been probably the best performing investment opportunity of the past 10 years in the overall market. It could still fail. I think there’s so much venture capital money going into it, and I know that many of the great investors and businesspeople have been very skeptical of Bitcoin.

18:05

I own Bitcoin, a lot of Bitcoin personally, and we own it in our in our partnership. It’s not that I’m a Bitcoin bull, I’m just a Bitcoin observer. What I’ve observed is that it’s something which has a) done well, b) has a lot of optionality. Its value, in my opinion, is as a potential as a kind of digital gold, which is not a controversial opinion, but the value of Bitcoin is about 100, about a 170 billion or something like that, if memory serves, and the value of gold is about 8 trillion. So, it doesn’t have to get much of the gold market to be valuable.

18:36

People say it’s not a currency, it can be a currency. It’s a very bad currency. I mean, the Venezuelan currency is a currency. The German market in the 20s was a currency. They’re just terrible currencies. So, Bitcoin is not a good currency right now, and it’s not a good payments mechanism right now. It may never be, and it may never work out. But again, the potential market value of it is so large that if you put money into it that you can afford to lose, it’s an interesting experiment.

18:58

One of the things that’s interesting about it is that even though all those great titans of finance have been and still are skeptical, I think Howard Marks has come around a little bit on it. But one thing that’s interesting is that there’s a group of people who have not dumped on it and who are bullish on it. Those are the venture capitalists.

19:13

Those are the guys whose job it is to look at brand new technologies and decide if they’re promising. There are many venture capitalists that don’t have position in Bitcoin, but many of the very best venture capitalists have significant positions and it’s telling me that that’s in their wheelhouse. That’s, that’s what they’re paid to do. You know, Mr. Buffett isn’t paid to look at brand new technologies and opine on which ones are going to work. So, it’s hard to find a venture capitalist that thinks it’s rat poison or whatever Warren called it.

Preston Pysh  19:39

Bill, let’s talk about investor behavior. Since the financial crisis, there’s been hyper focus on managing risk. At the same time, many financial historians are familiar with John Maynard Keynes and the idea of what he called ‘irreducible uncertainty’ which equals inherent financial instability. I’m curious to hear your thoughts on some of these ideas and how you approach these important concepts in your own investment approach?

Bill Miller  20:05

So I think that’s a very much neglected topic because everybody kind of parrots the word risk management and risk control. Risk management is what the insurance companies do. They can calculate, roughly speaking, how many people will choke to death on meat, how many of you will be struck by lightning. You’ve got a long data set that gives you the parameters in which that particular exposure that particular risk occurs, and therefore, you can price insurance as a way that over time, if you stay within those probabilities, that you can control and manage that risk.

20:35

What Keynes referred to is irreducible uncertainty where you don’t know what the probability distribution is at all. And therefore you’re not managing risk. You’re trying to actually control something which is not controllable, which is uncertainty. You don’t know what’s gonna happen. I think that if people would focus on that distinction, it would clarify their thinking, because right now, what’s happened since the financial crisis, especially, is that those two things have been conflated such that people think that any decline in the market or any decline in the growth rate of the economy, or what the Fed is going to do at the next meeting is a risk that needs to be hedged or controlled or whatever.

21:07

That’s just part of a broad, I’d say nonlinearity in markets. Markets don’t move in smooth pathways; they move in discontinuous ways. So one of the things that we like to say is if your investment case is going to be blown up by whatever the next thing the Fed does, with the next GDP report, or the next earnings report, then your investment case is very flimsy. So you need an investment case that can withstand these uncertain events and uncertain things that happen in the market.

21:31

I think there are different ways to do that, right? But I think it comes down to longer term orientation, having a good sense of what the outlines of the probabilities that have historically happened are. One thing that’s happened and I’ll wind up on this is that because the financial crisis is so traumatic for so many people, people in general, and that includes professionals, as well as individuals or retail people have been risk and volatility phobic.

21:53

We’ve done wonderfully well in the 10 years that ended the last two the first quarter of this year. We got top 1%. If we to boil it down to one thing, he was recognizing that the mental scarring of people, the crisis was similar to that which occurred during the Depression. Therefore, they would be much, much more risk averse and much more conservative, and they would overestimate risk and perceived risk, therefore be much higher than real risk. So, if you tilted your portfolio towards high perceived risk, you actually did very well, because the real risk behind that were much, much lower than the perceived risk.

22:25

That’s still going on today. So, I think there’s still an opportunity in that space today, and there will be until the big gap between the 10 year Treasury at 215 or 220, and stocks at around you know, 17 times earnings. So, bonds that 40 times or close to 50 times a cash stream that doesn’t grow versus stocks that you know, at a call to 7% or 6% earnings yield that will grow 5% a year has radically too wide historically. Again, Buffett has said this, and people don’t pay much attention to it when they ask him if you think stocks are expensive. He says stocks are ridiculously cheap compared to the other alternatives, and I would agree with that. So, which is why we’re fully invested in stocks.

Stig Brodersen  23:04

Bill, it’s truly an honor having a chance to speak with you. Someone who is following value investing have been following me for quite some time. I think for the next question, it would not so much be an investment question. With all your experience, which piece of personal advice would you like to pass on to the next generation of value investors?

Bill Miller  23:24

I would say, first of all, if your psychology is such that value investing makes sense to you – the idea of buying something at a significant discount to what it’s worth – for many people, that doesn’t make sense. Sir John Templeton told me several decades ago that he said that there are two types of investors out there:  Investors, they called outlook and trend investors, they want to know what’s the outlook for the market? What’s the outlook for the company? What trends are we seeing out there that we can take advantage of?

23:47

Then he said there are price and value investors who want to know what’s the value of this particular investment, what’s implied in the price, and he said, “90% of the people our outlook and trend investors, they just react to the changes in outlook and trend, and only about 10% are value investors. So, if you find yourself in that value investing camp, then I would say a couple things. I would first study the investors that you admire and that are most like you in terms of your psychology. Value investors come in many different forms.

24:12

Second, I would say, to understand, you’ve got to, as Buffett has done so brilliantly over his long, long career, you’ve got to adapt, and you’ve got to learn. Don’t become dogmatic or ideological about things. The world changes, technology changes, things change. There are always going to be opportunities to exploit, discrepancies between price and value.

24:32

It’s very important, I think, to distinguish between cyclical and secular trends. If you look at secular trends, those are trends which are not going to reverse. We’re not going to go back to horse and buggy. We’re not gonna you’re not gonna heat our houses by candlelight anymore. Sears, JC Penney, Montgomery Ward and Woolworths aren’t coming back. So that’s secular decline.

24:52

That’s the kind of thing that the market really hates because very few companies can arrest that, even though they all try and work their way out of it. So, you want to be in a case where you’re not in the secular decline. Ideally, you’re in secular growth, but you don’t have to be in that all you have to do is have stuff that roughly speaking is not in a secular decline isn’t a cigar butt as Warren calls it, and the rest of that universe, then I think most normal valuation techniques and most abilities to assess cash flow, free cash flow, capital allocation can work and add value and but the biggest thing that can be exploited for value investors is behavioral tendencies have large numbers of people react to specified events.

25:29

I’ll just end on this thing by saying that we’ve said for many years, if you don’t know your competitive advantages as an investor, then you don’t have one. There are only three sources of competitive advantage. One is informational, where you know something that’s material that nobody else does extremely rare, and the government doesn’t want you to have that, right. That’s why people go to jail for if they get that illegally.

25:46

Second is an analytical advantage, which is that you don’t know anything that anybody else doesn’t know, but you place a different level of importance on it to what other people place on it. That was the advantage that we have with Amazon and some of the other names that we’ve owned over the years.

26:01

Third, but most enduring is the behavioral advantage to where effectively you can exploit people’s tendency to overestimate the short term. All the stuff that’s in the behavioral finance literature. To overemphasize dramatic information, that kind of thing, overemphasize risk, and especially when it’s recent, those things can actually be systematically exploited. That’s the source of most of our advantages, I would say.

Preston Pysh  26:22

Yeah, Bill, I love those three points, and if you keep those three factors in mind, we often say that history doesn’t repeat itself, but it’ll often rhyme. What would you say is the most significant thing that has changed since you started investing?

Bill Miller  26:36

Well, when we started our fund in summer, spring of 1982, at the time, that was the worst recession since the Great Depression. We had come off of interest rates, which were 14% in October of 1981. You could buy good quality businesses on the New York Stock Exchange at four times earnings with 7% or 8% dividend yield. At that point in time, the classical Ben Graham value investing low P/E, low price to book low price to cash flow worked brilliantly.

27:03

From the time we started our fund until through 1986. For the crash of 87, we were the single best performing fund of all mutual funds in the country, Peter Lynch’s Magellan was number two classic factor based value stuff that all began to change around 1990 or so when Microsoft came public in some of those other companies as technology became a much more important force in the overall market. And I’d say that’s been a secular change, which is continuing and is still underway.

27:28

And so for example, if you look at the automobile industry, which is undergoing tremendous disruption right now. Fewer people are driving, for example, but still electric vehicles, though, are in a secular growth mode, but the overall auto industry isn’t. You’re going to have declining demand for fossil fuel cars and increasing demand for electric cars, but that’s in the context of an industry which is under tremendous pressure. I think sorting those things out and keeping track of that is as important.

Stig Brodersen  27:54

Fantastic. Bill, thank you so much for taking time out of your calendar to speak with us. I guess I just have one more question for you. Where can the audience learn more about you and Miller Value Partners?

Bill Miller  28:06

We’ve got a couple of websites, if you look under Miller Value that will take you there. We’ve got, as I said, several products, Income Fund, Opportunity Fund, a partnership and a deep value product. We’d welcome anybody’s interest as long as they are actually long-term patient investors. We’re not terribly interested in having people who are either chasing performance or who are trying to jump in and out of the market because they think they can pick off a couple points here or there.

Stig Brodersen  28:29

I love that you say that and we’ll definitely make sure to link to all of these sites in the different funds here in the show notes.

Preston Pysh  28:36

Bill, I’m sure I speak for everyone when I say thank you and just wow. We always learned so much every time that you come on the show, and we just truly treasure these conversations.

Bill Miller  28:47

I actually enjoy it, and you guys do great work. So keep it up.

Stig Brodersen  28:51

Thank you, sir. All right. So at this point in time in the show, we will play a question from the audience. And this question comes from Shane. Hi, Preston Stig Shane here from Island. I’ve learned motiva enough in your books, podcasts and YouTube series. Keep it up. Thanks a lot.

29:05

You’ve mentioned in the past, for instance, in your talks with Dr. Richard Smith, that you augment your value investing strategy to also consider momentum. And you’re not the only investor to do this. This is done using technical indicators such as MACD, stochastic and moving averages. I like the idea of adopting momentum as it would likely yield me better returns than catching a falling knife or selling my winners.

29:26

However, I feel intensely uncomfortable with using technicals as I’m valued to the core and don’t want to be trading in and out. I’d love to hear more on this topic. I’m wondering how you implement momentum strategy and which indicators you use? Do you use it as a buy signal or also as a sell signal? Keep up the great work love every minute of the show? Shane, I think that is a great question. And it’s actually very timely that we just had Bill Miller here on the show today, with his credentials. We were surprised to hear the how he used momentum. And this is something we talked about in the very first episode.

29:58

We had him on We’ll make sure to link to that in the show notes. I just wanted to mention that because at the time, it gave us a validation that even asked value investors who might want to look more into momentum. So Shane, you mentioned that you are a value investor, it’s hard, you basically want to ignore recent price actions. But you’re also open to momentum, as it might be able to give you a better yield on your investments.

30:23

So the first method is a very classical value investing approach. And you don’t think too much about the price action, whether it’s a 52-week low, or whatever price metric that you’re using. That being said even as value investors, we can observe certain price patterns that do repeat itself in the financial markets. So why would a 52-week low lead to more lows downtrends tend to stay in downtrend for much longer than most people estimate.

30:51

And the implication is that even though the price to value ratio might be good at that point in time, and you can make a decent profit, you might even be able to enter at a better price, which is what momentum is all about whenever you apply it as a value investor. And this is not to get the lowest of the low and you buy, as I think we all know, it is impossible to predict.

31:12

But you can stand on the sidelines and observe when the market starts having conviction, the stock again, which is when you would start buying too. And another reason for doing that is that we need to respect the efficiency of the market. Yes, you did hear me right, there are actually efficiencies in the market. And very, very often, if a stock is suddenly dropping in price, there is a really good reason for it. Please don’t make the same mistake that I did. Whenever I started in stock investing, thinking this is selling at a say 52-week low.

31:43

This is so cheap, that must be because everyone is irrational and I’m the one who is rational. There is typically a very, very good reason why the stock is trading at the price that it’s at. So, we just really have to be focused on the price and the value again, even as we look at momentum here. So, Shane, allow me to sum up, you don’t have to use momentum as a value investor. But if it’s applied correctly, it can give you an advantage.

Preston Pysh  32:09

Shane, this is a really great question. I had the same exact reservation about incorporating momentum when I first started learning about it. So, the way I personally implement the approach is I apply the same rules for assessing momentum. So, what do I mean by that? I guess what I’m trying to say is I don’t use technical analysis, I don’t do it differently for one company versus another. Instead, I’m looking at a few factors and I’m using those factors very consistently with every single company that I look at.

32:38

So, I’m using long term volatility to understand when the price is operating outside of its normal range. If I determine that the price is operating outside this this statistical range, then the pic gets flagged as a stop loss. If I have a pic with substantial capital gains, and it gets that stop loss indicator that the trend has changed or the momentum has changed, I will conduct an assessment of whether it’s worth it to sell the company based on the dividends and the yields that I would continue and expect to get, even though I think that the momentum is demonstrating a negative trend.

33:12

So, like Warren Buffett, he’s been holding on to Coca Cola for so long. If that company would come up red for the length of time that he held that the capital gains that he’d be dealing with, you could you could make the mathematical argument that even though you expect it to go down and that the momentum trend is bad, because of the purchase price and the capital gains that you’ll pay, it might not be advantageous to action to stop loss.

33:38

Now, if the capital gains on the company are very little or none at all, then it’s really easy. If you get the the stop loss indicator of the momentum turns red. I sell the pick and I wait for the momentum status to change again if I still believe that the company is a good value pick. In addition to the volatility range of the price, I’m also assessing the moving Average the company. And the length of the moving average completely depends on the volatility of the specific security that we’re talking about. So, on the buy side, I use momentum as a final validation factor for buying a stock.

34:15

So let me explain what that means. I find my value picks based on our tip value filter, this tool is simply it’s just looking at the enterprise value of the company or the price after you account for the debt. And it compares it to the earnings the profit that the company’s making, before interest in tax. After I find the pick through that filtering process, I’ll do a discount cash flow analysis or I basically dig into a deeper than just the filtering part I dig into it, I do a discount cash flow analysis, I determine the intrinsic value of the company. I’m mostly doing this through an IRR based intrinsic value.

34:54

And then I finally confirm I’m not catching a falling knife by going back to whatever the momentum states So that’s my final check to make sure I’m not catching a falling knife. So, Shane, this was an awesome question, we have an online course called our intrinsic value course, that we’re going to give you completely for free. Additionally, we have a filtering and momentum tool, which we call tip finance. And it does all this hard work that I just described for you by calculating whether something has a positive or negative momentum trend.

35:23

And it also does the deep value filtering that I talked about, we’re going to give you a yearlong subscription to tip finance completely for free. So if you’re out there, and you’re like Shane, and you want to get your intrinsic value course and a full year subscription to tip finance, leave us a question at ask the investors.com that’s ask the investors calm. If you’re interested in these tools, simply go to our website, the investors podcast calm, and you can see right there in our top level navigation, there’s links to tip finance, and also the tip Academy where you’d find the intrinsic value course. So Shane, thanks so much for asking such a great question.

Stig Brodersen  35:59

All right, guys, that was all the Preston and I had for this week’s episode of The Investor’s Podcast. We’ll see each other again next week.

Outro 36:06

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