For Advice on Stocks, Value Managers May Not Be The Way To Go

by | Jul 16, 2008 | Stock Market Comments

Ever heard of Bill Miller? He runs the Legg Mason Value Trust (LVMTX). Miller is literally splattered all over CNBC and other media outlets. He’s a value manager, which means he likes to buy stocks at a discount, and then essentially sit on them, until they appreciate. He made a name for himself as he outpaced the S&P 500 for 15 straight years.

Last quarter, apparently he purchased 35 million shares of Freddie Mac (FRE). So, shares he bought in the first quarter of 2008 would have an average cost somewhere between $25 and $30. Any shares bought in the 2nd quarter would have cost between $16 and $25/share.

Today the stock is below $10.

Now, value managers have really long term perspectives. So he may ultimately come out smelling like a rose on these trades. But that could be YEARS from now. Let’s throw some MORE cold water on this…

Similarly, last year, Miller was featured in a Business Week article (here) where he discussed buying shares of Countrywide Mortgage and Citibank. Miller states the fair value of Countrywide is three times the current price. Yet, Countrywide was down 65% in 2007.

Now, what if a well-meaning broker or adviser recommended Mr. Jones put $10,000 into that stock earlier in 2007?

When Mr. Jones gets his statement and sees his $10,000 now worth just $3500, do you think he’s happy? Do you think he is focusing on some mutual fund manager’s opinion that “the fair value of the stock is more than 3 times the stock price”?

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