Bill Miller himself once said: “This is a brutal business, success equals survival. If you have survived, you will have succeeded”. We have said it a little differently since 1988: to finish first, you must first finish.

Mr. Miller, famous for his 15-year streak of beating the S&P 500, has announced that he will step down as co-manager of the Legg Mason Value Trust in April 2012 (he will remain at the firm as Chairman). Investors of a certain age have certainly read a lot about this fund. Is Mr. Miller’s rise and subsequent fall a matter of genius becoming overconfidence or simple probability theory playing out as per Taleb? Not knowing the inside workings of Legg Mason Capital Management, no one can really claim to know the answer. To help us think about it, we collect several links inside.

The summary: Bill Miller took the reins of the Value Trust on April 16th 1982, and in the time since then he has “produced an annual return of 11.25%, according to Lipper“. The S&P 500 in the same period returned 8.3% p.a., not including dividend reinvestment. But in the 15-year period from 1991 to 2005 the fund beat the S&P 500 every year, which made the fund’s (and Bill Miller’s) fame global. Fortune Magazine called him “the greatest money manager of our time” in November 2006.

Well, ever since then it’s been downhill and the fund is now down a compounded 9.7% per year. The list of “mistakes” is all over the web, and it included Eastman Kodak, the mother of all case studies on cultural chains that bound a company to its past. As early as 2008 the press, so happy to boost him before, was calling for his head. Just remember that it’s always hard to call if it is a research, sizing, timing mistake or simply a matter of probabilities playing out unfavorably despite a good process.

Either way, even though the company did beat the S&P 500 over 15 years starting on Jan. 1st 1991, the returns are actually slightly lower than the S&P 500 from that same date until Bill Miller’s announcement on Nov. 16th (7.4% p.a. vs. 7.7% for the S&P).

Is this a case of people/ press deifying a man and a team because they were measuring “performance” as simply “outcomes” and forgetting about “processes”? In other words, was Bill Miller an “articulate coin flipper”? Here’s the odd part: Bill Miller and his company have always been concerned about investment as a multi-disciplinary, psychologically-driven, incentives-based field. He has studied widely and fostered innovative thinking in the industry – he has even hired Michael Mauboussin to be a “chief instigator” of sorts (official title: Chief Investment Strategist). Legg Mason, Mr. Miller, Mr. Mauboussin and others have been active members (Mr. Miller was Chairman of the Board and is Chairman Emeritus) and supporters of the Sante Fe Institute, a research powerhouse focused on “complexity research expanding the boundaries of science”. That doesn’t mean their processes were above questioning, nor that they couldn’t fall prey to some of the traps of success, but there’s at least the appearance that they had it covered at Legg Mason.

Overconfidence? Here’s an excerpt from Bill Miller’s letter to Value Trust shareholders in January of 2006, only days after completing the 15th straight year beating the S&P: “I thought it might be helpful, in addition to saying how much we appreciate your confidence in allowing us to invest your savings, to say a little about the principles…” (…) “You are probably aware that the Legg Mason Value Trust has outperformed the S&P 500 index for each of the past 15 calendar years. That may be the reason you decided to purchase the fund. If so, we are flattered, but believe you are setting yourself up for disappointment.” – Sure, it could be just lip service. But for over 12 years we have been reading his shareholder letters and he seems to really be the person who gave this interview to Money Magazine in 2007.

Could it be the old problem of size trumping performance? At its peak in 2007, Value Trust ballooned up to $27 billion in assets (when Mr. Miller resigned it was down to $2.8 billion). Again, not necessarily since there is evidence of long-term market outperformance with even larger assets (e.g. Berkshire Hathaway).

Mr. Miller has been rumored to be retiring and had been complaining about two things: “The huge rise of exchange-traded funds, which allowed people to buy baskets of things which caused correlations to rise, and of course the rise in algorithmic trading.” And this Financial Times LEX article on November 18th checks that out and says yes, correlation is going steadily up. But this is also certainly not enough.

Finally, it is worth noting that Mr. Miller is another one in a list of recent departures: George Soros and Stanley Druckenmiller have also recently quit. And in a big story in August of this year, the Financial Times noted that “several of the industry’s most prominent names have had a disastrous year so far.” That list in 2011 also includes John Paulson (the best of all active money managers in the five years that ended on December 31st, 2010) and Bruce Berkowitz of Fairholme.

There are no easy lessons here, no fingers to point. Remarkable, yet just another occasion to provoke thought, rekindle humility and remember once more that to finish first, first you must finish.

One thing we can say right off the bat is that, having attended both, the Ira Sohn Investment Conference is a better event: shorter in length, better attended and with better speakers, more focused and, we dare say, with more committed speakers.

David Einhorn: Short Green Mountain Coffee Roasters (Nasdaq: GMCR). Both Reuters and Bloomberg‘s stories are accurate enough accounts. That said, they don’t fully capture what appears to be another case of relentless research by Mr. Einhorn. Again, he may be right or wrong, but it’s hard to argue that his team hasn’t worked hard at this. This reminds us of Einhorn’s must-read book Fooling Some of The People All of The Time. And the Einhorn effect remains intact: by the time his talk was over, the stock was dropping 13%.

Jim Chanos: Global Value Traps. He presented the many features of a “value trap”-kind of investment, some of which can occur simultaneously. Then he distilled five value traps he’s focused on and named names. One of them? Brazil’s Vale, one of the world’s largest mining companies. While he’s always fun to watch, we’d prefer one-two main ideas and derive his investment process from them. If it sounds like David Einhorn’s presentations, it’s because we prefer the deep-research presentations.

Vladimir Jelisavcic, Long Acre: DryShips, Inc. (Nasdaq: DRYS) – long the convertible bonds. This was a tough one to watch and a reminder of the need for synthesis/”packaging” skills. A bad presentation detracts from the actual message and influences our perceptions about the speaker. While it’s obviously important to keep this in mind in order to avoid being “charmed” by an outstanding speaker, it’s also important for the speaker to present well and avoid an undeserved bad impression. And lo and behold, by the time Mr. Jelisavcic got to the details it was clear that he had done the work on the convertibles – assuming he’s correct about the difficulty of increasing capacity in the UDW ships/rigs (UDW=ultra deep water).

In the Q&A question, Vladimir discussed his fund’s philosophy/goals: to attain equity-like returns via distressed debt investing. His point is that if the debt is distressed, there’s a high probability that the stock is also distressed, in which case the debt investment gets you “closer to the assets”. That is, you buy something with potential price upside (from the bond price and conversion premium) but with higher seniority. The problem is that it’s always an investment research process that’s heavy in legal advice, consulting and so on.

Timothy E. Hartch, Brown Brothers Harriman: Long Dentsply (Nasdaq: XRAY). Re-reading the notes it’s clear the presentation was heavy in data, but not much conviction to be found here. He started by saying that Dentsply is “the one company” in his portfolio that he’d “invest and leave the money there for 20 years”. He called it the best business he knows. While we know and like the company, there are plenty of other businesses we’d prefer to that one. And this observation – that preferences/weightings/risk appetites/experiences/mental models of Investor A will differ from those of Investor B – ties up very well with the interesting story he told about his first assignment at Brown Brothers Harriman (henceforth BBH for carpal tunnel syndrome-prevention reasons):

Mr. Hartch began as a Corporate Finance analyst, and the first assignment was to help a client sell his media company. After valuing the company and sending the pitch book to four interested strategic buyers (all media companies as well), it was time to hear their bids. Companies 1 and 2 had the same valuation: US$ 10-15mm. Company 3 had US$ 25-30mm. He was still concerned because he told his client it could fetch US$ 40-45mm. Then Company 4 siad it’d buy the company for US$ 90 million… The valuable lesson (and best part of his presentation): “Same company, same data, same day, yet very wide range of values. Valuation in an estimate. Be humble about your own.”

There was also an interesting long case on “micro-cap” Energy Solutions, but still very little meat in our notes.

The last speaker was Alexander Roepers of Atlantic Investment Management. He was very generalist, and we were hoping he would spell out his case for McGraw-Hill Companies, an activist case. So we’ll leave you with his first sentence:

“I’m glad none of my ideas were trashed by either Jim Chanos or David Einhorn!”

In the interview linked above Mr. Van Den Berg mentions Microsoft, Cisco, Dell and many others. He described in more detail Microsoft and other cases in his November 2010 “Value Investor Newsletter”, an 84-page monster PDF available for free in Century’s website. The first 47 pages are dedicated to macro considerations – the official line, as per the second answer in the above interview, is that they only care about inflation and interest rates.

Our first contact with Mr. Van Den Berg was in an 2004 interview/ talk transcript on Outstanding Investor Digest. All 20 pages are very interesting and, at the time, became the subject of a “study group” meeting for our analysts. The link above requires a subscription, and if one is serious about value investing then one will pony up for OID – it’s that simple. OK, Century Management has an 18-page PDF in its website (PDF) that pretty much solves the problem, but again: OID is worth it.

We found a free link to a 1996 OID transcript that we couldn’t yet read entirely but it’s already interesting, and on CM’s website there’s a link to a 26-page PDF excerpt of the full, 45-page 2006 OID piece. Hint: they say in that page that you can ask for the entire article and we’ve done just that. If they let us publish the full monty here, we’ll update this post with it.

There are 8 of Century’s own videos on Youtube and a further GuruFocus interview with him back in December 2010.

We’ll embed a few videos here as soon as possible, but there’s a lot of material nonetheless.

It’s also bound to teach the interested reader a thing or two about time management: this page alone, called “reading packet“, would take some time to digest…

WSJ’s July 31st, 2010 piece on Li Lu as Berkshire’s next CIO post-Buffett (video below):

A Columbia MBA alumni, Li Lu gave a lecture for Bruce Greenwald’s Value Investing class in 2010. The transcript is great (and you can find another link to notes from Li Lu’s 2006 lecture at Columbia), but you can also listen to the audio here – it starts after some 3 minutes. We used the “low speed” version and it worked great.

The Wall Street Journal article draws its “background” section almost entirely from this 1998 article on the New York Observer. In it, one of Li Lu’s early investors says of him: “If you said that someone was going to make a billion dollars and be the head of the largest country in the world, all in one lifetime, he could be the guy.” Impressive.

Unrelated with investments, but interesting nonetheless, a 1996 Charlie Rose talk (17mins) about the Tiananmen Square demonstrations of 1989, of which Li Lu was one of the organizers.

Part 1 of 10 (9:52)

Part 2 of 10 (10:00)

Part 3 of 10 (9:07)

Part 4 of 10 (6:33)

Part 5 of 10 (8:32)

Part 6 of 10 (8:29)

Part 7 of 10 (9:34)

Part 8 of 10 (8:48)

Part 9 of 10 (6:28)

Part 10 of 10 (7:52)

LINKS:

- A recent Graham and Doddsville newsletter with Mr. Greenberg on the cover (A 2mb PDF file).

- A very good 2006 lecture at Columbia University (just scroll down to his name). We still haven’t finished seeing the 2010 lecture – by the way this link has a great store of videos.

- A summary of a 2005 talk at Wharton, with a brief profile.

- A 2005 Fortune article about David Swensen with a revealing quip about Glenn Greenberg: “Years ago he was interested in a manager named Glenn Greenberg, a Yale grad, who typically owns only five or so companies in his $4 billion fund, Chieftain Capital. So Swensen and his team called the heads of the companies Chieftain owned–Burlington Resources and Freddie Mac among them–and asked, “Who’s your smartest institutional investor?” Unsolicited, each CEO mentioned Greenberg, recalls Swensen: “That’s when we decided to approach him.” Swensen has been one of Chieftain’s biggest investors for over a decade.”

- A 2003 profile of Glenn Greenberg as a top sportsman (helps understand his drive). – A curious note: Glenn Greenberg is the eldest scion of legendary, hall-of-fame slugger Hank Greenberg!

- A Motley Fool 2004 interview with Columbia’s Bruce Greenwald, in which he mentions Glenn Greenberg as “just about the value investor out there.” (…) “He’s got a phenomenal record.” (…) “He’s just a brilliant, sort of natural industry economist. And he’s just naturally good at judging these franchises, almost unconsciously so. And I think that’s the thing I would find most impressive. I think Seth (Klarman) has it. I think Glenn Greenberg has it. I think there’s some other value — and, Buffett, obviously also has it.”

- A whole chapter (ironically, chapter 11!) in Bruce Greenwald’s 2001 book, Value Investing: From Graham to Buffett and Beyond.

- An excerpt of a Barron’s 1992 interview – we can’t seem to find the entire piece, so thanks to the Noise Free Investing blog for the excerpt.

- A 1989 article by Fortune magazine about potential “future Buffetts”… Impressively, the line-up chosen was “killer”: Tom Sweeney, Jim Chanos, Glenn Greenberg, a 32-year-old Seth Klarman and a 27-year-old Eddie Lampert. And others.

We don’t have any intention to be the “ultimate source for all things Buffett”, as a lot of people already do a great job at this and we thank them for uncovering these pearls. But this video is special. The parts on “moats” add up to some of his most detailed comments yet on the subject.

We don’t think it’s any exaggeration to say that Buffett has transcended the investment realm and that this is interesting for people in all walks of life. We’re certainly making backup copies.

Price is the key, and many investors forget that it’s not enough that the business is great and the managers competent and even that the company has the “outside signs”/ usual “seals” of corporate governance or credit ratings – or even environmental best practices – when it comes to estimating a range of values… Corporate governance and alignment must be great in the real world. Unfortunately, that is very hard to find and hard to quantify, so those seeking algebraic approaches to long-term investing do so at their own risk.

Which takes us to “Anti-portfolio one”. This comes courtesy of a reader who was discussing precisely the issue of price with us a few days ago. Then he found a pearl of an article in the New York Times dated February 20th, 2000 – the peak of the Internet/ Nasdaq bubble – where a few managers listed their chosen stock to own until January 1st, 2010. That is, if you could own only one stock from early 2000 for the next ten years, what would it be?

The answers are interesting because a few of these companies haven’t survived, one was the object of a major accounting scandal, and so on. But we don’t want to focus on the companies themselves, but on the reasons given, the “case” made at the time. The arguments, especially regarding the earnings multiples at the time, seem preposterous and could be dismissed as “bubble talk”, but recent years have proven that we don’t learn this kind of lesson easily… And we go back to the point of price: yes, multiples can be misleading, but regardless of the measure, the price you pay has to take into consideration that even the best-planned strategies executed by the best managers can go wrong in too many ways.

In the other corner, “Anti-portfolio two” was found by our Healthcare analyst when he was researching a relatively newcomer to the sector and found that traditional VC firm Bessemer Venture Partners was one of the seed investors. The firm itself built an “anti-portfolio” section in their website that, well, has to be seen to be believed – and still Bessemer has done quite well… This example is about what Buffett calls “sins of omission” – he often mentions Wal-Mart, which he tried to penny-pinch and ended up losing “Billions” over time as the company became the behemoth it is today.

Finally, we’d like to thank our reader and urge others to follow his example! As always, send us your suggestions via the e-mail editor@buysiders.com .