Few investors have melded the growth and value schools of investing better than Bill Miller, manager of the Legg Mason Value Trust LMVTX mutual fund. Some value-investing enthusiasts disagree that Miller is one of their own. While his practice of valuing stocks on the underlying businesses is acceptable, Miller has made some questionable "value" plays. Some famous examples include America Online (which later became part of Time Warner TWX), Dell Computer DELL, and Amazon.com AMZN. Though none were of the traditional "value" mold, all these stocks made substantial price gains after Miller bought them.
Critics characterize Miller as a growth investor in a value investor's clothing, but a look into his thought process reveals Miller's knack for seeing value where others don't. This ability has allowed the Legg Mason Value Fund to beat the S&P 500 for over a dozen consecutive years--a remarkable feat.
Like any value investor, Miller looks for businesses with strong competitive advantages that are trading below his estimates of the firms' worth. He uses a discounted cash-flow model to determine intrinsic value. Unlike many value managers, however, Miller is willing to make fairly optimistic assumptions about growth, and he doesn't shy away from owning companies in traditional growth sectors. In his fund, pricey Internet stocks rub elbows with bargain-priced financials and turnaround plays. Miller will also let favored names run, allowing top positions to soak up a large percentage of assets. This portfolio concentration may fly in the face of modern portfolio theory, but Miller isn't one to accept the conventional wisdom.
A more recent example of Miller's value/growth mix is his purchase of Google GOOG, a rapidly growing Internet search engine. While many investors shied away from this stock due to valuation concerns, Miller scooped up shares during its IPO. The stock doubled quickly after the company went public. While it's still too early to tell where Google will be five or 10 years down the road, this purchase was done in classic Bill Miller fashion--investing in a wildly profitable company that few investors understand or appreciate.
Marty Whitman >>