How The Fund Manager Who Beat the S&P 500 Index 15 Years In a Row Ended Up Being a Bitcoin Fan
June 7, 2023
In our June 1 post, we created a hypothetical employee who just started their new job at the SEC and was tasked with reviewing a couple of recent alerts around crypto “investing.” After researching Buffett and Munger’s, Damodaran’s and Dimon’s positions on crypto, the hypothetical employee’s research now shifts to reading about crypto supporters.
“Today is the day when I change gears,” you say to yourself. “True research means I have to be neutral and listen to all sides. The positions of Buffett, Munger, Damodaran, and Dimon, when it comes to Bitcoin, are clear and a bit concerning, but let me listen to the other side as well.”
Since you started with a well-known investor in Buffett, you want to explore other well-known investors, but those that are pro-crypto. You remember seeing a rebuke from Bill Miller to Warren Buffett recently and decide to start there.
Who is Bill Miller? He may not be as famous as Buffett, but he is quite well-known in finance circles. Bill Miller famously beat the S&P 500 index for 15 years in a row, before infamously blowing up in 2008.
You start reading up on Bill Miller and realize that he and Warren Buffett did not differ all that much just 10 years ago. They were both considered ‘value investors,’ a term you want to think about some more later, because it seems to you all investing is value investing. Bill Miller founded Miller Value Partners, LLC in 1999. A succession plan (PDF) was announced just a few days ago, and Bill Miller’s son, Bill Miller IV, is taking over.
So what is (was?) Bill Miller’s strategy? Right there, the Miller Value Fund’s website says it, emphasis and all:
Our strategy has been and will remain consistent: we attempt to buy companies whose shares trade at a substantial discount to our assessment of intrinsic value and to hold those shares long-term.
You go back to your notes. You remember this is exactly what Damodaran said:
To invest in something, you need to assess its value, compare to the price, and then act on that comparison, buying if the price is less than value and selling if it is greater.
“What if people panic?” you wonder. That’s generally bad for asset prices. But wouldn’t it actually be good for investors? You remember that Buffett touched on it in one of his investor letters back in 2013 (PDF):
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
Makes sense. Since investing is about estimating value, comparing it to price and acting on that comparison, does Bill Miller think the same way? According to his fund’s website, he does:
We look for investment opportunities during periods of uncertainty, typically investing in businesses, industries and sectors that are out of favor with current market sentiment. We think there are three sources of edge in markets – informational, analytical and behavioral. The most enduring of these three is behavioral, as humans tend to react emotionally, especially during abnormal and volatile times. As a result, we tend to see the greatest investment opportunities when markets are in a state of panic.
A “climate of fear,” as Warren Buffett called it in his 2013 investor letter, or a “state of panic,” as Miller still calls it on his fund’s website today, are friendly and desirable environments for investors. “It makes perfect sense,” you say. “Substantial mispricings are more likely to happen in these types of environments and astute investors could capitalize on them.”
It’s not exactly a secret that both men were richly rewarded when sticking with this philosophy. Warren Buffett’s Berkshire Hathaway not only beat the S&P 500 index over a 57-year period, but generated twice the returns. Bill Miller himself beat it 15 years in a row. There is a little bit of a debate on whether Miller is skilled or just got lucky; one mathematician estimated the probability of such an event happening to be 3%. In addition, if one considers the probability of such an event happening in any 15-year period, the probability could be as high as 75%. Under that view, that the world would produce one asset manager with such extraordinary success was not inevitable, but it was more likely than not that it would happen.
In any event, what is not debatable is that Bill Miller’s investment philosophy has changed. When Buffett said he wouldn’t buy all the Bitcoin in the world for $25, Miller immediately raised his hand and objected:
The objective of investing is not to own productive assets, the objective is to make money.
“There is nothing wrong with wanting to make money,” you say. “Don’t we all?”
Now, it’s Damodaran’s turn to whisper in your ears: “You don't invest in Bitcoin, you trade it,” and now you see the problem. There is nothing wrong with wanting to make money, but calling every money-making opportunity investing - that is a problem.
In fact, there is another problem. It seems to you that Bill Miller is saying one thing, and his fund’s website is saying another. He is touting the Buffett view of investing, but then keeps half of his net worth in Bitcoin. More, what is his response to Bitcoin not having intrinsic value?
You can’t believe your ears. You rewind and listen to it again:
Well, I mean, what is the intrinsic value of that Mickey Mantle baseball card that sold for $5.5 million dollars? It’s just cardboard.’
You remember Coinbase saying something about trading cards. What was that again? You switch to a different tab on your browser and re-read p. 17 of the amicus brief (PDF) Coinbase filed in the Wahi case:
The Coinbase-listed assets flunk both criteria. Most critically, the SEC has not alleged—and could not allege—that the assets involved any contracts, much less that the defendants’ secondary market transactions did. The Coinbase-listed assets are simply assets, like gold or trading cards.
“This is simply wrong,” you say to yourself. “Coinbase uses the trading card analogy to argue why the crypto tokens are not investments (even though they actually sell it as an investment), and Bill Miller uses literally the same analogy to argue why Bitcoin is a good investment.
You hit the whiteboard again:
GOLD has no intrinsic value → GOLD is not investing
TRADING CARDS have no intrinsic value → TRADING CARDS are not investing
BITCOIN has no intrinsic value → BITCOIN is not investing
Basically, Bill Miller refers to Bitcoin as “digital gold,” and when he responds to the intrinsic value question, he rationalizes it by giving the example of trading cards. Once gold unravels as an “asset” that has no intrinsic value (thus not investable), and it does per both Damodaran and Buffett, the whole thing unravels.
“It’s a mess,” you say to yourself, but in order to understand Bitcoin, or crypto in general, we need to understand gold first. Gold is the starting point of all this confusion.”
You browse your library of books. One in particular, one that you recently purchased, but haven’t had a chance to start reading yet, catches your eye: The Power of Gold: The History of An Obsession. You wonder whether it could help you understand how gold came to be perceived as an investment opportunity…
