Published March 19, 2008
Current market has rich rewards in longer term
By GENEVIEVE CUA
LEGG Mason Capital Management chairman Bill Miller is often likened to Warren Buffett in his conviction in value. Here is an excerpt from his commentary for Q4 2007:
'In the 25 years since we started the Value Equity mandate, we have had six calendar years of underperformance. Despite that 19-6 record against the market, all losses are painful. They are also unavoidable and unpredictable. It would be great if we could figure out how to never underperform. No one has been able to do that, but that does not make it any less painful.
About the only advantage of being old in this business is that you have seen a lot of markets and sometimes market patterns recur that you believe you have seen before. It is not an accident that our last period of poor performance was in 1989 and 1990, and I think there is a reasonable probability the next few years will look like what followed those years.
All the poorest performing parts of the market, housing, financials and the consumer sector - with the exception of consumer staples - are at valuation levels last seen in late 1990 and early 1991, an exceptionally propitious time to have bought them. The rest of the market is not expensive, but valuations cannot compare with those in these depressed sectors.
What took us into this malaise will be what takes us out. Housing stocks peaked in the summer of 2005 and were the first group to start down. Now housing stocks are one of the few areas in the market that are up for the year. They were among the best performing groups in 1991, and could repeat that this year. Financials appear to have bottomed and the consumer space will get relief from lower interest rates.
Investors seem to be obsessed just now over the question of whether we will go into recession or not, a particularly pointless inquiry. The stocks that perform poorly entering a recession are already at recession levels. If we go into recession we will come out of it. In any case we have had only two recessions in the past 25 years, and they totalled 17 months. As long-term investors we position portfolios for the 95 per cent of the time the economy is growing, not the unforecastable 5 per cent when it is not.
I believe equity valuations in general are attractive now, and I believe they are compelling in those areas of the market that have performed poorly over the past few years. Traders and those with short attention spans may still be fearful, but long-term investors should be well rewarded by taking advantage of the opportunities in today's stock market.'