Miller is a monkey with a typewriter.

Miller vs. Dodge and Cox

I agree with you if you’re saying what I think you’re saying.

I use Bill Miller as an example because he is well-known and received a lot of press attention the last few years. Personally I would rather have a fund that beat Bill Miller over the 15 years even if it didn’t beat the index every year. I think that’s what you’re saying.

Outperformance over a long period of time is more important than annual outperformance, assuming you can keep invested during the entire period.

It’s path independent. Let’s suppose I have the choice between two investments. The first is the Bill Miller portfolio. It beats the index every year for 15 years and quadruples my money.

The second investment, on the other hand, loses money for 14 straight years, but in year 15 it produces such an amazing return that I end up with six times my money for the 15 year period.

I choose the second, assuming I can stay invested during the entire 15 years.

On the other point, you correctly said: “And to your first point, what would the conditions be to prove either position? I think it’s rather impossible. Both sides can only point to evidence.”

Exactly. Some people choose to draw conclusions based on a single piece of evidence. I call them “first graders.” After first grade the world gets more complicated and we have to learn to deal with conflicting facts.

It’s like a court of law. Both sides have certain facts that fall in their favor. They emphasize those facts to the jury. But neither side is supported by each and every piece of evidence.

That’s why the jury gets paid the big bucks to weigh the evidence and determine a winner. If it were easy work they would just pull anyone off the street to do it. Oh wait, they do.

Thanks for your well-thought out comment.

I’m not a fanatical proponent of active management, but I would offer a counter point.

Why is annual outperformance the metric of success? If you’re a value investor, for example, why would we expect an active manager to outperform over every twelve month interval? There are periods where the market is generally overvalued or the market is ignoring the values the manager sees. It doesn’t make sense to me that you’d expect to always beat the market within those arbitrary time intervals.

And indeed, if you look at the late nineties, a lot of value managers actually had to close up shop. They simply couldn’t keep investors during the bubble period when they were underperforming.

In contrast, Miller was actually more of a momentum investor in the late nineties and was killed during the crash. Yes he lost less than the S&P, but still performed horribly vs. many traditional value funds.

So, anyway, I’d like to see a similar analysis of something like Dodge & Cox stock fund or one of the other deep value managers who’ve been around for decades (Dodge and Cox started in 1930 or something, IIRC). I have no idea how many periods they underperformed the indexes, but it would be interesting to see how many rolling 10 or 15 year periods they underperformed.

And to your first point, what would the conditions be to prove either position? I think it’s rather impossible. Both sides can only point to evidence.