Book Reviews

Book Review of The Man Who Beats the S&P: Investing with Bill Miller

Book: “The Man Who Beats the S&P: Investing with Bill Miller” by Janet Lowe.

This is quite an old book (200) about Bill Miller of Legg Mason. Its a very easy read, something that you can finish in a day.

Some of the things that stand out are

  1. Miller tries to be as fully vested in stocks as possible.
  2. He does not shy away from stocks/companies that does not have a track record like the dot-com companies during the boom.
  3. He realised that S&P500 was so difficult to beat because it has low turnover, companies are held for the long term, and I suspect that the top 500 companies do imply some degree of quality.
  4. Holding period is long, 5-10 years.
  5. He performs scenario analysis, DCF is done over 5-10 years. Discount rate is adjusted for riskiness of cash flows.

Overall its a decent read.

Investment Approach

  • Buy companies that trade at large discounts to intrinsic value, have sustainable competitive advantage and high returns on capital.
  • Seeks companies that are undervalued on a 5-10 year basis and chooses the best available buys.
  • Tries to be as fully vested in stocks as possible. Peter Lynch: Historically, I don’t know about the direction of the next 2,000 points for the market, but the next 10,000 will be up. Profits grow at 9% each year, and stocks go up because of profit growth.
  • Lowest average cost wins.

Asset Allocation Strategy

  • 11% dynamic growth stocks (high-growth)
  • 43% global franchise stocks (large-cap growth)
  • 46% traditional value (higher dividend yield stocks and small-mid-cap stocks)

Portfolio Management

  • Focused portfolio of 15 to 50 companies.
  • Stocks are held an average of 5 years, and sometimes as long as 10 years.
  • Turnover between 10-15% each year.
  • Realised that S&P500 is difficult to beat because it is long-term, has low-turnover, is tax-efficient, and doesn’t change company and industry weights often.
  • Use Modern Portfolio Theory (MPT) to consider risk/reward and determine allocation for individual stocks.

Sell Criteria

  • The stock is fairly priced. Cannot expect to earn an excess return with a fairly priced stock.
  • There is a better bargain. Tries to remain fully vested in stocks, keep cash holdings small, and sell his least attractive holding if a better bargain comes along.
  • The investment situation changes. E.g. change in business model, shift in regulations, permanent changes in market conditions.


  • DDM, DCF and FCF analysis. Project cash flow out from 5 to 10 years under a variety of scenarios (e.g. current growth continues, does better, does a lot worse), then try to figure out the ‘central tendency of business value’. If each scenario analysis cluster around the same thing, then there is pretty high confidence in the particular valuation range.A range of discount rates are used for the scenario analysis.
  • Discount rate used depends on the type of company. The faster a company grows, the discount rate. Miller used ~30% discount rate when analysing AOL compared to ~10% for slower-growing companies.
  • Comparative analysis of companies with similar economic models are also done. Comparative valuation using future looking, historic, and scenario-based methods
  • P/E, P/B, P/CF, both future looking and historic. Value is not defined in terms of low P/E or low P/CF. Practicing investors use those metrics as a proxy for potential bargain-priced stocks. Sometimes they are and sometimes they aren’t.
  • Private market and liquidation value analysis
  • Volatility, to consider the extent that it allows him to buy low and sell high.
  • Before using historical figures, ask how much relevance the past will have on future earnings and profits.
  • Fair value is time sensitive; a strong, expanding business will continue to grow in value, even if the stock is no longer cheap on a P/E basis.
  • Any company that earns more than its cost of capital is a rising value, and it has a rising margin of safety.

Qualitative Assessment

  • Companies’ products, competitive positioning, strategy
  • Industry economics and dynamics
  • Regulatory frameworks

On Macroeconomics

  • Too many people underperform because they have a money management style that makes no sense. Namely they try to forecast variables that are unforecastable. Nobody can forecast interest rates or GDP numbers. People who base their portfolio on forecasts are basing it on something that is inherently subject to large error.
  • Miller pays attention to markets, interest rates, gold, oil, and commodity prices, for signs of potential inflationary pressure. Inflation changes the valuation of a market.

On Cyclicals

  • Most cyclicals operate in undifferentiated commodity businesses with little or no control over product pricing, have fluctuating and unpredictable earnings and cash flow streams, no significant competitive advantages, poor returns on capital, and have little or no free cash flow after taxes and capital expenditures.
  • Their earnings bounce around a lot and usually go up as the economy improves. Even when earnings begin to materialize, the stocks lag. When the market expects recession, the stocks fall sharply, and earnings collapse later.
  • To earn above average returns requires one to buy and sell at precisely the right time, such timing having little to do with careful analysis of business values and everything to do with guessing inflection points in the economy and market sentiment.
  • Miller will buy cyclicals if they are cheap for some fundamental reason other than earnings cycles, or if they have a specific advantage over other stocks.

On New Tech Investing

  • Economies of high tech lends itself to market domination by a few superior companies.
  • Corporate histories and financial figures were limited. Miller used current numbers and trends to create pictures of the future based on various assumptions. They developed a long-term model of what the business is, the dynamics of the market, and created many scenarios. As the real numbers come in, they adjust their scenarios and re-evaluate how the new information could affect the future.
  • Amazon is very similar to Dell in that both have negative working capital, and similar operating margins. Their fulfillment cost (e.g. packaging, delivery) per unit is similar, however Dell’s goods have higher dollar value so that margin per unit is higher (compared to Amazon’s low value books). Amazon’s situation improved when it began to sell higher value products such as electronics.


  • Since inception in 1982 to 2002, Legg Mason Value trust has 18.24% CAGR.
  • Miller graduated with honours from Washington and Lee University in Lexington, Virginia in 1972. He then went to do a PhD in philosophy at John Hopkins University, became fascinated with finance and did not complete the doctoral dissertation. He worked later as a treasurer at J.E.Baker Co. in York, Pennsylvania and oversaw their investment portfolios.
  • His wife Leslie Miller worked as a broker and assistant to Legg Mason’s star broker. Miller got attention for reading Legg Mason’s research reports voraciously. Leslie then introduced him to Ernie Kiehne, Head of Research at Legg Mason and co-founder of Legg Mason Value Trust.
  • Miller got hired in 1981 to do sell-side research, and became portfolio manager of Legg Mason Value Trust in 1985.


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