Most real-world systems are multiplicative in nature. Multiplicative systems are counterintuitive because human brain tends to think in terms of averages. In this post, we explore the connection of mathematics, through the study of multiplicative systems, with Charlie Munger’s idea of avoiding serious mistakes for ensuring superior performance over the long term.
The story of this fund manager is fascinating, instructive and true.
For fifteen consecutive years (1991-2005) Legg Mason Capital Management Value Trust fund, run by Bill Miller, outperformed the S&P 500 index. Not just the overall fifteen-year performance but for every single year in that period. In a world where less than twenty-five percent of the fund managers beat the market in a given year, doing it for 15 calendar years in a row is noteworthy. Even legendary investors like Peter Lynch couldn’t achieve this feat, i.e., consistently doing better than the broader market for such a long time.
Let’s put Miller’s performance in a more tangible form. If you invested $10,000 with Mr. Miller fund at the beginning of 1991, you would have $98,000 at the end of 2005. That’s a 10-bagger in fifteen years, i.e., close to 15 percent CAGR. Not bad. Not great either. However, what’s remarkable was the consistency of market outperformance. The returns came like clockwork. Year after year.
Could it be the case of survivorship bias? Pure luck? Michael Mauboussin, a very successful money manager and author of numerous useful books on investing, estimated that the probability of beating the market in the 15 years ending 2005 was 1 in 2.3 million. Conclusion – it wasn’t luck. Bill Miller was smart and knew his game.
Jason Zweig, a noted financial journalist and official editor of Benjamin Graham’s classic The Intelligent Investor, wrote this about Bill Miller in one of his articles –
Steadfast in his convictions and imperturbable under pressure, Mr. Miller was the ultimate iconoclast. He ran a fund with “value” in its name that feasted on technology
He bought Amazon.com during the Internet bubble. He bought Google in its initial public offering, when it was considered insanely overvalued by many. Your garden-variety fund manager studied economics in college, got an MBA and went straight into money management. Mr. Miller, by contrast, worked as an Army intelligence officer, pursued a Ph.D. in philosophy and was chairman of the Santa Fe Institute, a think tank devoted to the study of complexity in nature and society.
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