Rational Advisor

Legg Mason fund manager Bill Miller tells a wonderful story of a visit he made early in his career to an institutional money manager in Boston, to whom he was pitching the shares of RJ Reynolds, then trading at four times earnings.

As Miller says “When I finished, the chief investment officer said “That’s a really compelling case but we can’t own that. You didn’t tell me why it’s going to out perform the market in thenext nine months, ” I said I didn’t know if it was going to do that or not but that there was a very high probability it would do well over the next three to five years.

“He said ‘How long have you been in the business? There’s a lot of performance pressure, and performing three to five years down the road doesn’t cut it. You won’t be in business then, Clients expect you to perform right now,”

“So I said: Let me ask you, how’s your performance?”

“He said: ‘It’s terrible, that’s why we’re under a lot of performance pressure.”

“I said: ‘If you bought stocks like this three eyars ago, your performance would be good right now, and you’d be buying RJR to help your performance over the next three years.”

Whether from the pressure of demanding investors to do something, or the psychological pain of watching an investment do nothing - or worse - over extended periods, the short term thinking of Miller’s client is the norm among investors. This creates opportunity, however, for those with patience to take a longer view.

In an environment with massive data overload and with everyone trying to exploit short term anomalies in the market, the market looks extremely efficient in the short run. The inefficeinces are likely to be looking our beyond, say 12 months.”

Rational

Comments RSS