Bill Miller vs. the S&P 500 Index

October 22, 2009

If I were to ask you which one performed better since 1986, would you tell me Bill Miller-managed Legg Mason Value Trust or the S&P 500 Index, which one would you pick?

If you picked Value Trust you’d be…

WRONG!

Much was made about the end of Bill Miller’s 15-year streak of beating the S&P 500 Index a few years ago. Fifteen years of consecutively beating the index is a pretty mean feat. But, as you can see from the graphic below, a 15-year streak can go down the drain quite quickly with a few years of underperformance:

Bill Miller vs. The S&P 500 Index

Notice that those numbers INCLUDE 2009’s performance through October 20th. In other words, even including 2009’s performance, Mr. Miller is STILL trailing the S&P 500 Index since 1986.

One other interesting thing to note is the difference between the average returns and the geometric average returns. If you’ll notice that average returns are neck-in-neck between the two. But, the geometric averages are vastly different. This is due to the fact that Value Trust is a highly volatile mutual fund. It has years of great performance and years of really bad performance. In other words, it’s a much bumpier ride on the Value Trust train than on the S&P 500 Index train.

Once again, this just proves how hard it is to beat the index on a long-term consistent basis and the risk that investors take when pursuing such performance.

7 responses to Bill Miller vs. the S&P 500 Index

  1. “Fifteen years of consecutively beating the index is a pretty mean feat.”

    Is it really as great a feat as it sounds?

    Given the massive number of people that try, is it that unusual? If you get enough people together, odds are that someone can correctly guess a coin toss 15 times in a row.

    While 15 years sounds impressive, Miller didn’t beat the S&P 500 3,765 days (15 years of trading days) in a row. He beat it in 15, independent, consecutive events, measured January 1 through December 31 (if the year started and ended in April or August, we probably wouldn’t even be talking about him). 15 times is great and all, but thousands of other managers tried and didn’t. That’s kind of amazing too.

    I think that’s what really proves how hard it is to beat the index on a long-term consistent basis.

  2. I see what you’re saying, Dylan, but I’m not ready to dismiss Miller’s performance as luck.

  3. I don’t think he’s saying that Bill Miller got lucky. Rather, given a large enough population, it becomes more and more likely that someone will beat the market.

    Each investor has his or her own ideas of which stocks will perform and which ones won’t. Some might think energy sector stocks are the way to go. Others might like financial companies. They use their ideas to form a strategy for investing. The more people that there are with different strategies the higher the likelihood that one of those strategies will beat the market.

    It may be fairly common to see most strategies beat the market for one year but as each year passes and the length of time increases the number of strategies that continue to work will decrease dramatically.

    I think the truly hard part is trying to find a fund that will do just that. There is no reliable way to tell how a fund will perform until it has already happened. That’s why most people are better off sticking to an index fund to begin with.

  4. I’m pointing out that luck is a very plausible explanation for his performance. It’s not lucky that a manager beat the calendar year performance of the S&P 500 fifteen times in a row, that’s bound to happen every once in a while, even if every manager based each buy/sell decision a coin toss. It may be luck that it was him (i.e. if not Bill Miller, we’d be talking about someone else’s skill or luck).

    Humor me for just a moment and assume that it was luck; wouldn’t it sill appear to be skill anyway?

    The laws of probability are not always intuitive, but they are still there.

  5. Even though no fund managers can beat the market in a long-term consistent basis, investors still HOPE they can make money during the funds’ outperforming years.

  6. I’ve always thought comparing his fund to the S&P 500 was a mistake. I know that is ‘the market’ but his value style of investing should, over the long term, beat that type of index. It might be interesting to compare his performance versus the appropriate index.

  7. Independent George October 30, 2009 at 11:22 am

    The problem is it’s really easy to find a Bill Miller after he’s beaten the S&P for 15 years. The trick is to find the next Bill Miller before he’s done it. I have yet to see a convincing explanation of how that’s done.