Docteur, I’ve held that Legg Mason fund since 1999, and I sold it yesterday. Bill Miller wasn’t always right. He admits losing 4% in returns last year because his internet stocks were down. Next year, he’ll have to admit he lost 6% in returns because his homebuilders were down. I disagree with his decision to load up on homebuilders, so when I reviewed my investment portfolio (for the first time since 2000), and saw what the large exposure to RE, I sold it immediately.
This is what Bill had to say in an interview 2 weeks ago:
Q: How are you positioning the fund? Have you made any changes recently?
A: We run the fund with a long-term orientation. We try to buy businesses that are cyclically undervalued due to the economy or specific to the company. We have no energy exposure. We’ve been increasing our technology exposure for the first time since 1995. We’ve went to 38% to 40% in tech.
We recently added Dell (DELL) and H-P (HPQ) to the portfolio. We think they’re as cheap as they’ve been since ’95.
We also added homebuilders, but we’ve bought a cluster of them, such as Centex (CTX), Pulte (PHM), Ryland (RYL), and Beazer (BZH). The biggest mistake people make in the markets is confusing the trend of fundamentals and the direction or attractiveness of stocks. Builders are just too cheap at six times earnings, even with housing weakening, which it undoubtedly is.
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As a value investor, Bill looks for companies/industries which are temporarily out of favor, betting that in time, they will shine again. He’s betting that their strong balance sheets will overcome their bad timing in the market. I bet he will lose money on that portion of his portfolio. He’d be better off putting that homebuilder money into commodities: copper, coffee, sugar, lumber, gold, palladium silver.
Here are some bullish arguments in favor of homebuilders from MSN Money.
