Let’s not bury the lede. When Bill Miller joined Barry Ritholtz on the Masters in Business podcast, he admitted the secret of his success. Ready?
Lifehacker can’t write an article about that.
But, there was another answer too. It wasn’t articulated, but it was there. I had to listen carefully to find it, thankfully I’ve done that before.
In my youth, when time was plenty, the internet allowed people like me to find the answer to the deep questions of life, like, if you play Led Zeppelin backwards could you hear satanic messages? I wanted to know, not for fiendish reasons but engineering ones. Was it possible to make something sound coherent forwards and backwards?
Using this same detective style, I figured out the secret to Miller’s success: He succeeded because he does a lot of small things right everyday.
Is this more helpful than ‘luck’?
That’s all it takes to have the success of Bill Miller. Do lots of small things well and get lucky. Well, it takes more than that, here’s some other things I noted:
1/ Why Moneyball no longer works. Miller says he’s a “long-term oriented value investor with a contrarian mindset.” Not like Graham and Dodd, “those things no longer work because they became replicable.”
If you aren’t familiar, Moneyball is the idea brought to light by Michael Lewis’ book Moneyball. It’s the story how one not-so-good baseball team improved by looking at statistical areas other teams undervalued, but that led to wins. Their success like an Apple design, led to a slew of imitators.
As more settlers crowded the fertile ground of ‘valuable things’ the value became harder to find. The smartest teams searched for new ground.
The champion Chicago Cubs, for example, pivoted away from the Moneyball angle and look for soft skills. The original Moneyball club, the Oakland A’s moved away from Moneyball too. The Pittsburgh Pirates have also broken off in a new direction.
Baseball, like investing, is a Red Queen Effect world. It’s a place where you can improve absolutely but where the results are relative. Your 5K time may improve, but so too does everyone else.
If you want to do more than anyone else, you have to do things differently than everyone else (more at #3).
2/ Measure headwinds and tailwinds. “If the economy is in a recession or a boom, we’ll tend to normalize that. If the economy is growing more rapid than normal, we’ll bring it back to a normal growth rate.”
Here Miller is pointing out that as his team evaluates companies they evaluate the type of environment too.
In November you can plant tomatoes in Florida, but not in Ohio. That’s a big difference if you want to compare the tomatoes each area has in a few months time. Conditions matters and it helps if you can normalize success or failure.
Judith Elsea said that in 2006/2007 venture capital was a different game because, “there was less competition for these deals. The valuations were super low. The aqui-hire machine didn’t start with the dial set at 11.” Auren Hoffman refused to give investment advice because everyone investing at the same time he did, did well. Warren Buffett compares it to a rising tide that lifts all boats (and ducks). Coca-Cola could only have been started in Atlanta. The ‘Black Soxs’ players did throw the World Series only because they were corrupt, but also because they were poorly paid.
Conditions matter. At the minimum, figure out which way the wind is blowing and factor that into the results.
3/ Be different. IF there is a ‘secret sauce’ this is it. Much like ‘be persistent’ and ‘get lucky’, ‘be different’ isn’t that instructive. It’d be much tidier if Miller confessed his magic ratio, but we already know silver bullets don’t exist.
“I think it is essential to remember that just about everything is cyclical.”
Here’s what Miller said:
- About Price/Earnings ratios in 1999, “we knew the growth wasn’t going to be linear and some interruption would occur.”
- About Q1 results in 2000, when 70% of managers beat the benchmark, “that told me that everybody was in tech.”
- “Because we were contrarian value investors, we were liquidity providers when people wanted out of something.”
Miller’s success partially comes from zigging while other zag. If people are selling, he’s buying (“liquidity providers”). If people are buying, he’s selling (“everybody was in tech”). “So at the extremes, which are created by ‘most people believe,’ most people are wrong,” writes Marks. Much like our point about Moneyball (#1), value is inversely related to participants. When more and more people do a thing, the value becomes less and less.
Miller explains that being different isn’t easy. It’s hard to go against the crowd, but easier if it’s at an individual stock level. When I write about this, it’s this difficulty that’s hardest to convey. “Accepting the broad concept of contrarianism is one thing,” writes Marks, “putting it into practice is another.”
Companies like Nike, Sam Adams, and Instagram all did something different, but it was never easy. Listen to and read their stories (Nike, Sam Adams, Instagram) and you’ll start to understand that being different is difficult.
4/ Fighting the last war. “We had a pretty robust strategy,” BUT “this particular crisis was different because it was as asset based crisis and not a liquidity based crisis.”
Miller’s admission surprised me. You think someone like BILL MILLER who worked at LEGG MASON with MICHAEL MAUBOUSSIN would be immune to mistakes like recency bias and lack of imagination.
Of course it makes sense to account for the last thing. Fool me once, shame on you. Fool me twice, shame on me. In addition to solving the last thing though, let’s extend our understanding using a technique Charlie Munger and Seth Klarman suggest; inversion.
During the Mercury, Gemini, and Apollo missions the astronauts and engineers involved were learning as they went along. No one was an expert. Gene Kranz writes “all of us learned to say ‘I don’t know.'”
One thing they had to figure out was the hatch system for the Apollo capsule. During the Mercury missions, Gus Grisson’s hatch had opened during the water landing, the capsule took on water, and sunk. This mistake was “not easily forgotten,” Kranz writes.
To solve for this the Apollo 1 hatch was “a brute, heavy and awkward.”
“Given the design, a rapid escape from the spacecraft was impossible. But the NASA and North American designers hadn’t been as worried about escape contingencies as they were about the possibility of a hatch popping open into the vacuum of space or another inadvertent opening during a water landing.”
During the Apollo 1 ignition sequence, a fire spread through the capsule and killed all three astronauts. No missions were named Apollo 2 or 3 in honor of the crew and for Apollo 4 the hatch could swing out and be opened in 10 seconds.
Fighting the last war meant the hatch withstood outside forces but not the inverted, opening from the inside.
Fighting the last war meant planning for a liquidity crisis but not the inverted, an asset one.
Fight the last war, but also think about the opposite.
5/ Partnerships. “When we’re in the office we’re talking all the time. When we’re not there we’re emailing and talking on the phone.”
Successful teams align on the ends and most, but not all, of the means to get there.
No one is right all the time. Good partnerships mean better ideas, faster.
Thanks for reading, I’m @mikedariano on Twitter.