Bill Miller interview notes

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Tuesday, February 28, 2012 by

CSIMA Conference : Value Investing Conference at Columbia (Feb 2012) : Notes 1 of 5

Rare Interview with Bill Miller
  • Insights on equity markets
    • Likes stocks that provide protection against inflation as well as economic slowdown.
    • Throughout great recession, corporate profits outperformed the macro.
    • Even if economic activity deteriorates from hereon, underpinning of the businesses won't do that bad.
    • In recent years, business cycle turned from expanding credit to de-leveraging.
    • S&P 500 companies in 2011: Top line grew 12%, Earnings grew 15% but market was flat.
    • Look for companies with reliable dividends.
    • LTRO marked the bottom of financials in Europe.
    • 2008 crisis was a balance sheet and collateral crisis. That makes it unique.
  • Growth stocks
    • You are likely to make mistake in either 
      • a) Duration - How long the growth lasts, 
      • b) Magnitude - How fast it grows?
    • When evaluating growth stocks. focus on 
      • a) Is the competitive advantage sustainable?
      • b) Is the return on capital greater than cost of capital.
  • AMZN
    • AMZN's business required high upfront investment to get it off the ground. During 2000s, market was willing to finance it via high valuation of the stock.
    • The key question is - what is the operating margin in the long term.
    • It seems that Amazon wants to keep the operating margins low for its AWS (Amazon Web Services) business.
    • AMZN is likely to keep low margins for a considerable time.
    • All retailers are having a revelation now. AMZN is to them, what WMT was to K-Mart and Sears.
    • Retailer does not know much about you. AMZN knows so much about you.
    • Value driver is still the sales growth.
    • Amazon is in a dis-inter-mediation business.
    • Prime membership is modeled after Costco's membership model.
    • Amazon has already disrupted books business. Disruption in electronics goods is in progress. Also, successfully competed in a high touch, high value business using Zappos.
  • GOOG
    • Google has internal issues with the discipline in capital spending.
    • Valuation is very compelling.
    • Tremendous optionality at current valuation.
    • Growth rate with GOOG is farely linear, unlike facebook. GOOG is a relatively matured business.
    • It is difficult to do projections on Facebook, because the growth rate is not linear. 
  • Wisdom
    • General propositions don't determine the concrete cases.
    • Try to figure out exceptions to the base rate.
    • Advise on starting fund in today's market. Be different & be right. You will do very well.
    • Business lesson from personal experience - To retain business and AUM (Assets under management), avoid loss aggregation. You will be wrong from time to time and incur losses. Do not allow losses to aggregate.
    • In today's markets, historical valuation is less pertinent as we have moved from credit expansion to deleveraging.
    • Permanent loss is really bad.
    • 2008 experience made people go defensive very quickly in (Aug-Sept) 2011.
    • Bond market sell off will be very positive for equity markets.
  • Themes
    • Housing stocks look very bullish. The recent uptrend in New housing starts is very encouraging.
    • Insurance companies that are trading below book value look very interesting.
  • Airlines
    • Major consolidation in airlines industry in recent years.
    • The economics in airlines are turning around. Historically, the industry was dominated by cut throat competition. 
    • After recent mergers, Delta (DAL) and United (UAL) control more than 50% of market share.
    • Airline companies are showing +ve free cash flow, +ve ROE for over two years since 2009.
    • Balance sheets are getting stronger.
    • Picks
      • United (UAL) is most balanced of the airlines. United has more than $5 in free cash flow. Its debt could become investment grade in 18 months.
      • US Airways (LCC) is a highly levered (high beta) bet.
      • Alaska Airlines (ALK) is among the safest. (Note - This is my personal favorite. No debt, good cash and niche and less competed routes)
  • Banking 
    • In response to a question about how to assess banks assets. You don't know exactly what they hold. Look at the category of assets such as agency mortgages, non-agency etc.
    • Banks as a group are mispriced. The relative discount between banks is not all that great.
    • BAC will be the biggest beneficiary of housing recovery.
  • Potential tail risks
    • Oil prices
    • Policy errors in Europe
  • Liked Nestle. Company had steady margins even during the great recession and commodity shock.
Note - My big thank you to Columbia Business School. The comments made by speaker are off the record. I tremendously benefited from this event. This event is very unique in terms of the highest quality of speakers that it attracts at a negligible fee. The purpose of this post is to share the knowledge and increase the awareness about this great annual event organized by CISMA (Columbia Investment Student Management Association). I hope this post will encourage more and more students and practitioners to benefit from this great annual conference. The accuracy and accurate attribution to the speaker is not a guarantee.

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