B (5:09)

Sure, they've got home too.

A (5:11)

Yeah, that's true, that's true. I'm sure they're not living in a tiny thousand square foot place. But his friend says he still wears simple shoes from Nordstrom to work and that he cares more about, quote, winning in markets than the money. This seems like a real big trend among investors that we follow, they're focused on being the best, not just making money. The Money will follow 1981. To pick it back on the timeline, Miller joined Legg Mason. I don't know if Legg Mason is around today. Was all a giant mutual fund company as a securities analyst and he quickly rose through the ranks. Long story short, he was elevated to lead the Legg Mason value trust in 1991. And from 19912005 he put up 15 straight years of beating the S&P 500 index. While clearly impressive, Miller himself says he had some calendar timing luck with the streak although it is still technically the best ever. And in the late 80s, maybe mid-80s and early 90s when Miller was starting the fund and working as I think maybe a vice president or kind of what you described maybe as a vice president before got the promotion to lead it, he was looking at financials and how they collapsed due to what I believe was the savings and loan crisis. He talked to Peter lynch, the biggest mutual fund manager of the day who tipped him off to Fannie Mae and Freddie Mac. Here's a quote from an article in 1984 Mr. Miller paid a visit to influential Fidelity investment manager Peter lynch who suggested Mr. Miller take a look at Fannie Mae. Much like today, the mortgage company had a portfolio full of troubled loans. Traders would pay were betting it would go bust. Mr. Miller found Fannie's case compelling. The bad loans would soon roll off its books. The government backed company would be able to borrow at preferred rates and its low cost structure could make it hugely profitable. Is this thing really trading at only two times what it's going to earn in three or four years? Mr. Miller recalls asking Mr. Lynch in a follow up phone call. And we'll leave that one there because that's going to relate to our great financial case study and how maybe while Miller made a lot of money there, he potentially learned the wrong lesson. That led to his performance during the great financial crisis and I'll read another quote from his history. During the savings and loans crisis in 1990 and 1991, Mr. Miller loaded up on American Express and Freddie Mac and struggling banks and brokerages. Financials eventually made up more than 40% of his portfolio. He looked wrong at first but these stocks eventually propelled Value Trust to the top of the performance charts. In 1996, Value Trust gained 38% outpacing the S&P 500 by more than 15 percentage points. By then Mr. Miller was loading up on AOL computer makers and other out of Favor tech stocks. Which leads Ryan to our first case study in Dell Computer.

B (7:58)

Yeah, he made tons of successful investments over the years. I mean you kind of have to in order to outperform the market for 15 straight years. But Dell Computer was one of his best. He started buying Dell around 1996. And I think when most people think of the 90s, they probably think about roaring tech stocks and the dot com boom and think it was like a very successful period for tech stocks broadly. But that was really the end of the 90s. There were prior to 1996 it wasn't quite as glorious and there were several short lived corrections in tech stocks specifically. One of those was, one of those stocks was Dell computer. And in 1995, 1996 there was sort of a mini panic about a potential slowdown in PC demand. It's always funny looking back like 30 years and obviously PCs have taken over the world. They're so pervasive today. But the, the fact that people were feels dumb when you look back and think why were they worried about PC demand? There was 30 years of a tailwind behind them. But we probably do it today with all sorts. I mean I'm sure people do with AI. Like are we, you know, are we getting ahead of ourselves? There gonna be a slowdown in demand and maybe 30 years from now we're gonna be laughing at each other.

A (9:32)

Yeah, different size industries in the trillions of dollars versus whatever Dell Computer is that. But you're totally correct at that point it was less of the Internet growth even though that was still in the very early innings as opposed to the at home computer usage. Because if you look at the timeline of the history of the computer, it was first research and then second at work where you would have the computer at work that you could use. It was those giant machines you could work with at the office. And then the second revolution which Intel, Microsoft and then eventually Dell took off as well as Apple was the at home computer, the PC, the personal computer. And there was a multi decade, what we call secular tailwind where by the. What would you say early 2000s maybe we don't have the precise timeline there, but maybe, maybe a little later, maybe the 2010s almost every person had a personal computer at their home. And of course Dell has been one of the biggest beneficiaries.

B (10:28)

Yeah, there's a lot of interviews with Bill Miller himself but there's also, I found it an insightful interview with Robert Hagstrom who is a friend of Bill's, I think worked with him for A long time. And he's also the author of the Buffett Way, which is a good book. And he actually talks about Bill Miller and I found some of his quotes insightful. So here's how he described the entry opportunity that Bill Miller got in 1995. 1996, he says, during a market correction in 1996, Miller looked at cyclical stocks like steel, cement and paper companies, which were cheap and down and acting badly, just the sort of thing we tend to like. However, he decided to pass and instead invested in several technology companies. Dell computer was selling at about five times earnings and he bought it together with Finnish mobile phone leader Nokia, obviously not the mobile phone leader anymore. And he also invested in AOL when people thought it was going bankrupt. Now, aol, a lot of us probably think, well, that didn't turn out so well. It did. That was a phenomenal investment for him, even though it's not relevant today. In 95 buying a AOL, you had like five or six years of rock solid returns. But what exactly did Miller like about Dell? Dell was operating sort of a revolutionary model at the time. And the revolutionary part was the returns on capital. And specifically what Miller liked was the negative working capital cycle. I'm sure they were not the first to ever do this, but they seem to be one of the big case studies. When you look back on like what companies had great negative working capital cycles, Dell is constantly one that's referenced. So here's another quote from Hagstrom. He says you may remember that the process of buying a computer back then was customers would call Dell, choose configurations such as monitor, keyboard, processor, storage capacity, etc. Then Dell would quote a price and promise delivery within two weeks. Customers would use American Express, for example, for payment and the funds are credited to Dell's account on the same day. However, Dell waits 30, 60 or even 90 days before paying its suppliers. That this means that it relies almost entirely on customer prepayments to sustain its entire business model. It is this negative working capital model that has enabled Dell to achieve a 100% return on capital. Now, I believe Hagstrom said this was the first company that he had ever seen with more than a 100% return on capital. So you could see why it stood out. A lot of people were worried about PC demand and just didn't appreciate the negative working capital cycle that Dell was benefiting from. And Miller believed that Dell was, in his words, the Walmart of the PC industry. I was trying to look through the returns for Dell, but it's a little tough Because a, they went private in I think 2013, came back public in 2018. So any of the stock charts you see today are basically up until like 2018, 2019 and they had a ton of different splits. So I looked at all this. Dell actually has some long page on their website of the end of day closing price split adjusted of Dell shares. And it's just a long PDF with page after page of end of day closing prices. And if you look at March of 1996, which is apparently when he started buying shares, Dell shares were trading at roughly 93 cents per share split adjusted by the start of 2000. So just over four years later the stock was trading at more than $50 a share. So this was more than a 50 bagger actually in less than four years for him. I don't, I know he started trimming the position around the top so he, he generated an actual 50 bagger during that time. But I believe he got back in around like 2002, 2003. So I'm not sure what his total returns ended up being. But for that five year period, friends have said in interviews that it was dell was a 50 bagger for him. And I, I, it's weird to say that this is like controversial because we look now and think, well Dell Computers, that was sort of an innovative company of its time, but it was trading at 5 times earnings peop like investors were, a lot of investors were probably discarding it. This was not, I can't imagine this was very popular investment in the mid-90s, especially among the value investment cohort. If you're a regular listener to chitchat stocks, then you've probably heard us talk about Interactive Brokers. Here are three reasons why we think Interactive Brokers is better than any other brokerage platform. Number one, they've got it all. Stocks, bonds, ETFs, options, crypto, you name it. 170 markets, 36 countries, 28 currencies. We believe they are the absolute best platform for global investors. Two, best in class pricing. They have zero commissions on US listed stocks and ETFs and offer margin rates up to 54% lower than the average industry. Three, you can ditch the separate High Yield Cash account. Interactive Brokers offers up to 3.14% interest on instantly available cash held in your investment account. Head on over to ibkr.com Rate subject to change Margin evolves, Risk restrictions apply. Interactive Brokers is a member of sipc.

A (16:08)

Yeah, I agree. And what's interesting about this one, especially with that working capital cycle. One, he is Someone that has repeatedly said that you can use GAAP numbers, but when you actually look at the business, each business is different and there's going to be different characteristics that lead to the long term cash flow characteristics and what cash is actually accumulating on the balance sheet that they can use to either, you know, reinvest for growth or return to you as a shareholder. Yes, some of that is working Capital Dynamics. And a lot of people say, well, don't look at the free cash flow because of XXX and X. And that is true if you're kind of doing a liquidation value or if you were thinking, well, what could they actually return to you as a shareholder? But in growth mode this can be highly attractive. And the reason is, is if you have this negative working capital, the faster you grow, the more cash you get in. So unlike most companies which we're seeing with the AI businesses today, the AI startups, the faster you try to grow, the more money you lose. Which leads you to need to raise money, you need to dilute shareholders, you need to raise a bunch of debt, you can add a bunch of interest pay payments on your income statement. A company like Dell Computer with this negative working capital cycle, we have companies like this today, I think that we own in our own portfolios. It can be highly attractive to try to grow without needing that outside capital. And what I think Miller saw along with the durable, maybe the underrated tailwind in PCs and PC growth and PC spending, what was, was this. That's what led him to have a 50 packer here. Most analysts were probably looking at it and saying the true earnings aren't that good, but in reality that cash flow helps them grow and the earnings will catch up over time.

B (17:58)

Yeah, he's a great example of how Gap earnings just aren't made equal. And we're going to talk about Amazon in a second Gap, especially for early days, same thing. Yeah, Gap can change over time, but Amazon's a great example where Gap was just not very truly reflective of what the business was earning under the hood. Now if you're able to be, if you're able to think differently and figure that out, there's definitely returns to be had.

A (18:28)

Yeah, and what's funny is that Amazon had that negative working capital cycle, but when AWS keeps getting bigger and bigger, they actually have the opposite. So you might, there's arguments to be made out there that the original E commerce marketplace is actually a better business from that standpoint, than aws, even though people just absolutely adore the cloud computing business. But let's move on to the second case study. This is the big mistake of his career. At least one of them, at least the most notable. And it's the great, what I'd like to call the great financial crisis misread. I think that's a good way to describe it. And if we look at, you know, we have the context of this timeline. Ryan just talked about the big Wins during the 90s. I talked about the investments in American Express, Fannie Mae back in the day. He's done well in tech, he's done well in financials. He's done well looking at out of favor stuff, cheap stuff that he believes are good enterprises. And by the onslaught of the gfc, Miller was riding high. I got conflicting numbers out there and maybe mutual funds were reporting this publicly so there could be a number, I just confound it, find it. But it looks like the Value Trust had about $20 billion in AUM. But either way what the exact number was. By 2005 he had tens of billions in AUM, making it one of the largest individual funds in the world, maybe the largest mutual fund at the time. But if not for the entire investment fund universe, he was one of the largest investment managers by aum. And then the GFC hit. Many listeners will know the story by now. As housing prices fell, defaults went badge mortgage loans and the credit market for mortgages began to seize up. And slowly. I think listeners listening today should remember that this was a two year process by the government. So it wasn't like the COVID thing where maybe they learned their lesson. They had to be fast and you can't just delay and delay and delay and keep changing your mind. The government, you know, kind of decided to meddle, make pronouncements, do different funding things, do different bailout things for the financial sector. And a lot of decisions were being made that could and would permanently change outcomes for shareholders. And this presented a terrible setup for a contrarian investor like Miller who thought that financials looked cheap and would turn around. He made similar bets, you know, in the 90s that, you know, those investments in Fannie Mae and Freddie Mac and the. His thinking was the next year or two were going to be ugly, but the companies would come out on the other side, they're protected by the government and everything would be fine once the economy turns around. He saw similar opportunities, distressed financials across the board in 2008 he invested in. And listeners who know these stories are going to just wince at these companies. Aig, Wachovia, Bear Stearns, And Freddie Mac now that is. That's a tough dart board to to hit there. And when once asked whether it could be a mistake to keep doubling down on fallen stocks such as these which is something he tends to do that others don't. There's that famous quote from I think who is it? Paul Tudor Jones maybe, maybe not. Who's someone maybe we should cover on the podcast, you know losers, average losers. Well Miller took that to like to harden. Kind of did the opposite. He said well the stock's going to survive. I'd rather buy more and more and more. But he said the only time he wouldn't keep doubling down on a stock is if there weren't any quotes left out there. And well that kind of happened with these businesses.

B (22:01)

It's. It seems obvious in hindsight because people have watched the big short and they make.

A (22:10)

He's probably not a fan of that movie.

B (22:12)

Yeah, they make people seem anyone that was bullish on these companies they make them sound like they were just not looking at the financials or didn't understand the businesses. They made them look dumb frankly in the movie. But it would have been so easy I think to fall trapped to its housing. It's massive. Is the whole housing market really going to fall apart? It's been so stable for a century. The government is helping here or it's in their best interest to help. These companies have been around forever and not actually know what's under the hood of those CDOs. So I think it was called CDOs at the time. I can't remember. Maybe it was just part of it.

A (23:02)

Yeah, that's part of it sure.

B (23:05)

So I do kind of sympathize with them a bit. But you're going to get to it. It's a good example of concentration has repercussions.

A (23:16)

Yeah, that's fair. What he would maybe argue and I've heard people say is that well this is a very notable mistake but this is one of one mistake and he's made a lot of right decisions as we'll get into two other really really right decisions. And a lot of the people that are the perma bears that were right during the big short, not all of them, some of them have great track record since then but a lot of those people were right once and then they're paraded around like they won't the World Series. So as we'll get into the numbers here didn't kill his overall returns. But let me get to. And there is a nice Wall Street Journal article From I think 2009 or 2010. That goes through the whole timeline on this. It's very, very long. I think it's about a 20 minute read. But quote, In 2008, Mr. Miller continued to accumulate Bear Stearns. At a conference on Friday, March 14, he boasted that he had bought just that morning morning at a bargain price north of $30 a share, down from a recent high of $154. That's some psychological fortitude. Think about how the stock price talks to you when it falls so quickly. I mean, you see that with what Constellation Software as we mentioned at the start of this episode, unbeatable when it was at 50, 100 times earnings, people weren't asking any questions. Now prices cut in half. People are really wondering what exactly is going on. Well, I continue to quote. Bear Stearns collapsed that weekend in a takeover brokered by the Federal Reserve. J.P. morgan acquired the storied investment house in a deal that first valued it at $2 a share. And what he talks about in a post mortem here is that even though his valuation on Bear Stearns over the long haul was technically correct, he looked at, I think he even talked to Jamie Dimon himself and said hey look, this is why these were my numbers. Did you guys comment anything different? They apparently said look, yeah, it's the same. There's a reason that JP Morgan was willing to take on that risk because they said look, the business will be come out clean on the other side and be okay, we think especially when you can absorb them onto a larger balance sheet like J.P. morgan. But he underappreciated that there was major quote run on the bank risk as well as liquidity risk that could just destroy this company even if the actual earnings. I mean this is similar to Silicon Valley bank, it's similar to First Republic Bank. It is the risks that perhaps kept people away from. Remember when Charles Schwab was facing similar issues, not nearly, maybe as bad, but potentially if that banking tantrum, what was in a 2022 kept continuing. Those are the type of things that can be very, very hard to underwrite. But if we look at 2008, the pain didn't end there. Even after this mistake, he doubled down on AIG and Freddie Mac. He dismissed that the government would nationalize the gse, Fannie Mae and Freddie Mac without making shareholders whole. And this was wildly incorrect. In September of 2008, the government announced it would be taking over Fannie and Freddie. A bit of a surprise and making the shares worthless. Now I wonder if he still held on and the fact that these companies might go public again. He could be in for a rebound and do okay over a 20 year period. But he outlined why this was very what he thought even though he lost a lot of money. Unwise for the government to do in his Q3 letter of 2008 because it was a wrong example and caused all the quote sheep of Wall street, you know, he included himself in that to panic when there needed to be calm. Here's the quote. The GSE nationalization created what Karl Marx would have called a contradiction in the capitalist system. The contradiction was that the government repeatedly said financial institutions needed more capital, that it wanted private capital to solve the problem. But the government also indicated that if it needed to provide additional assistance in the future, then shareholders who had provided capital should be completely or mostly wiped out. Private capital will not be forthcoming if it believes it is the policy of the government to wipe it out, should intervention later be necessary. Still, prior to the seizure, there had been enough private capital around to put large amounts of money into Merrill Lynch, AIG and Lehman. But when the government preemptively seized the GSEs not because they needed capital and could not get it, Fannie Mae had $14 billion in excess capital and Freddie Mac several billion above regulatory requirements, but because believe they would run out in the future, then shareholders of every other institution that need, or were perceived to need capital did the only rational thing they could do. Sell in the case government decided to peremptorily wipe them out. Essentially. Long story short, if investors believe the government may wipe them out with no recourse, you're going to sell it. You wouldn't want to own that. I mean, that makes logical sense to me. I wouldn't want to touch any of these things that brings even more capital out of the system at the time when they need capital to go in. And I really get his point here. But at the end of the day, he was still wrong to make huge bets on these financials because of these risks. And you could see it in the returns. All of the outperformance, at least by certain metrics, was gone by the end of 2000, I think 2008, maybe 2009. My question is, does this show that Miller's strategy works through the cycle if he was matching performance at his worst moment? Or does it show the quote, luck and randomness of his highly risky contrarian strategy where it's kind of like, oh, as some people see it, well, he's betting on, I don't know, the rules of roulette that well, but he's betting on like one of those numbers and putting all his money there and just oh, okay. Well, it hit on there and I guess it went up 20x. Yeah.

B (28:43)

I don't know what the lesson to take away is here because there's a lot of lessons to take away from him being him outperforming the market for 15 years straight and a lot of his great investments. Like we're going to talk about, we talked about Dell, we're going to talk about Amazon here in a second. There's a lot of good lessons to take away. Part of this does feel like he did the right work. It sounds like he did great work, but the future's random. And the run on the bank, like stuff with Bear Stearns, the government nationalizing these, he couldn't have foreseen that. So I guess my takeaway is.

A (29:24)

No.

B (29:25)

Matter how right you think you are, have some level of diversification. Don't let, don't get to a single point where one position or two positions or even like industry exposure could be the thing that, and it's not like he necessarily got wiped out, but it's pretty staggering to erase 15 years of outperformance in two years.

A (29:53)

Yeah, that's a good point. I think it also shows maybe who we just studied, Chris Hone was right to just not mess with financials because you have that risk. You can go to zero. Maybe if you are going to mess with a lending business that's very, very hard to see what's actually on their balance sheet. Never size it up too much. But let's keep moving here. Let's talk about one of his well known bets, one of his, maybe his best investments ever. And that is a company that every listener is going to know. Amazon.

B (30:25)

Amazon, I believe, is Bill Miller's best investment ever. He first started buying Amazon for the Legg Mason Value Trust. I think it was a mutual fund in 1999. That might sound like a. Whoa. He bought back in 99. But that really wasn't great timing. It was actually two years after the IPO and he bought at, I believe, essentially the dot com peak. So this ended up.

A (30:53)

You have this chart here, Ryan. It says that he started first in 1996, right? Or is that Dell?

B (30:59)

No, that one's Dell. So Dell's on the left, AOL's in the middle, Amazon's on the right. So he started buying late 1999. It was literally almost the top. But he ultimately ended up doubling down as the stock price came down. Which it sounds like he's had. It sounds like he had a lot of success doubling down leading up to the gfc, which is maybe what hurt him so much. Anyways, here's what Miller had to say on the Amazon investment at the time. He says it's hard to imagine that the trade of a lifetime buying more Amazon stock in the middle of the dot com bust was controversial and difficult. But Miller admitted that we were clearly wrong in buying when we did. And averaged down. Miller eventually shifted from Amazon stock to the convertible bonds, which also allowed him to realize a tax loss. He remained steadfast in his belief in the company's future. Most people try to maximize the number of times they're right, he said. The real question is how much you make when you are right. It is. I think that's like a point that's maybe worth talking about is buying Amazon and maybe we could do a whole episode on this. Would we have bought Amazon at the turn of the century? Because for the traditional value investor community, it didn't check any boxes.

A (32:26)

Yeah. Unprofitable. Yeah. Little high starting valuation. I do think that would be a fun series. Would we have bought Amazon, Apple, Microsoft, what have you? Google.

B (32:37)

Google's S1.

A (32:38)

Yeah. They came out so, so hot. It's such a big valuation already. That one's a little bit tougher and maybe not as the returns aren't as, as powerful. But I think it could be a fun theme as a sidebar for future episodes and on Amazon. Yeah. Do I do agree you have a lot of things that people would not have liked. You also have the fact that you could have just said, ah, they're exposed to the dot com bubble. There's going to be a lot of fallout here. I don't know when to time the bottom. Maybe that could get you to go in. But the numbers were going to look very, very ugly in 2001 and 2002, even though the core underlying business was kind of starting to slowly gain that momentum.

B (33:21)

Yeah. By 2001, after continuous buying of Amazon shares, Bill Miller had taken a 15% stake in the company. Apparently he was the second largest shareholder behind Bezos himself. So what exactly did he see in Amazon? Apparently a few years. A few years earlier, he met Jeff Bezos at a brokerage conference prior to the Amazon ipo. So it's probably like the IPO roadshow and they were on stage together. I think he was interviewing him and Bill asked him at the time, what is your business model? How are you different from Barnes and Noble? Jeff Replied, our model is Dell, which.

A (33:59)

For that gets the hairs on his forearms to just start tingling. He goes, oh, okay, right, Yeah.

B (34:07)

I mean, for Bill Miller, that's probably music to his ears.

A (34:09)

Bezos. Bezos understood as a financials analyst, he was a guy that understood income statements in the cash flow statement that kind of separated him from the pack. I think he understood the power of that going back to his financial analyst days.

B (34:23)

Yeah, it still exists today. Like, it's pretty rare that you get a technical software founder, or maybe not software, but tech founder, that has a true grasp on Wall street and financial analysis. And Bezos was kind of a savant in that. That way. But Bezos, when he elaborated on why they are like Dell, he went on to explain that books can be stocked for six months or even longer and can sometimes be returned for free. In other words, he hardly needed to tie up any capital, especially since they started out operating out of a garage with very low cost. So the capital efficiency is something that Miller often mentioned to investors when he explained why he owned Amazon because a lot of people would grossly overestimate what Amazon's cash burn was. And the quote is, he says Amazon generated its first $600 million in sales on just $28 million in capital. It's that negative working capital cycle. We mentioned it for Dell where the customers are funding the business for Amazon. In this case, they're getting the books from the book sellers, holding it for free, potentially for free returns. Customer sells it, they don't have to pay the supplier back for a little while. So it's very nice. Here's a quote on why they ultimately decided to invest in Amazon. I actually think this is a really, really good quote, he says. With Amazon, for example, we performed a regression on about 200 variables against each other to see what was really correlated to Amazon stock price. As you might expect, it isn't GAAP earnings. It isn't free cash flow even. It was growth of gross profit dollars. That was a really interesting thing and something we suspected. Jeff Bezos made a comment about 15 years ago that he wasn't focused on margin, but on growth of gross profit dollars. Lo and behold, that had a 95% correlation with Amazon stock price. This makes perfect sense because gross profits, in essence, is the cash they had to work with after the cost of, after cost of goods sold. Everything they did with that cash was an investment. If the aggregate for those things was earnings above the cost of capital, then that was a perfect correlation. I think this is a good lesson because I'm looking at coupang these days and it's so often that you see, especially for a real capital intensive business like this, this was music to my ears where it's like below the gross profit line, that's investments. And so he was basically looking at the income statement and the financials differently than everyone else. He didn't care about GAAP earnings. There was a. I don't know if I wrote it down here, but basically, okay, I did. So he would go to these value investor conferences or something like that and they would criticize him because it looked expensive on an earnings multiple basis. And they would ask, and he would ask them, do you think Amazon has made or lost money over the last five years in aggregate? And everyone would say they've lost money. And estimates range from hundreds of millions to billions of dollars in money lost. I can't remember what year this was. And he said no, in my opinion they've made money. You just don't see it in the GAAP earnings. So he was just looking at it differently. And I think he came to the conclusion that they had made 100 or $200 million before reinvestments back into the business. That was what allowed him to I guess view Amazon differently. He's owned it for 26 years straight now. I don't know his exact returns.

A (38:07)

Sounds like he's had a lot of it. Yeah, yeah.

B (38:10)

Shares are up 55,000% since 2002. I'm going to venture that this was a pretty darn good investment for him. Probably more than a 300 bagger at least.

A (38:22)

And they doubled down I think coming out of the GFC as we'll get to. One of our other bets here wasn't necessarily what helped the fund, but bets on both Amazon and Netflix coming out of the GFC were what helped recover the fund's returns. And those were fantastic times to buy both of those businesses. It reminds me of someone we know, right, David, David Gardner buy the Amazon. It might be overvalued today, but we're gonna bet on this very, very sharp founder in a growing industry and they'll figure out the biggest business model on the way. And I think what any never makes sense to me at least nowadays as someone who's trying to learn about business models for the last and I guess coming up on a decade, the PE stuff is just, it's, it's, it's too simplistic thinking where you have to ask yourself, all right, over a five year period if the cash generated and put onto the balance sheet is Higher or lower? Like, what would you call that? Would you call that earning money or losing money? Because the only way you can actually make money as a shareholder is returning cash to you by the business through dividends or buybacks. And the only way they can do that is by piling up more cash on the balance sheet. It's simple.

B (39:49)

The PE multiple is the greatest lie investors are told, and everyone falls victim a lot of.

A (39:57)

Everyone falls victim a lot of.

B (39:59)

Yeah. Where it's just. You can either be misled in a positive way by thinking it's extraordinarily cheap, or you can be misled by omitting companies. But I think it's thinking it's cyclical.

A (40:13)

Miner at the top. Yeah. You buy it. Oh, PE5 is cheap or. Yeah.

B (40:19)

And it's actually a good lesson because it's a good reminder to not. Don't start your research process by charting multiples. I really believe that, like, it can be.

A (40:32)

I like looking at maybe a gross or profit or revenue multiple, honestly, even first for that. Just because, like, all right, if you're trading it 30 times sales, maybe just check that and go, oh, okay. I don't want to waste my time researching at that point.

B (40:47)

I do it. I do it all the time. I just chart, like, whatever, forward EV to ebit, whatever. But I shouldn't, because the only thing that matters is what I think or what they actually end up earning in the coming years relative to what you're paying today. And a trailing multiple is really not telling you that. So it.

A (41:07)

Yeah, yeah. It's a fair point or profit potential where a lot of people go, well, the company maybe is expending so much on new projects or the current management team isn't disciplined on capital spending or operating expenses or what have you. But I think that can also underrate it because at some point, if you. If you're confident in the competitive advantage or growth Runway or business model, eventually you will get an operator in there that'll trim the costs to get those profit margins up to what they could be. That's kind of how I look at Airbnb today, where you have that balance where. Okay, is the moat going to be there 10 years from now? Sure. All right. Eventually the profits will show up and the stock price will follow that. Now, let's talk about something that.

B (41:51)

Something that has no cash flow.

A (41:53)

Yeah, yeah. We were thinking the exact same thing there. Yeah. Company with no earnings that maybe even on a percentage basis is number one investment. No, not a company. It's a. It's Something. It's out there and it is Bitcoin.

B (42:11)

All right folks, before we move on, let's talk about our home for investment research, Fiscal AI. Fiscal AI is the complete stock research platform for fundamental investors. We use it every single day here at Chit Chat Stocks. It has everything you need to research individual companies from 20 years of financial data to company specific segments and KPIs earnings call transcripts, Morningstar reports and insider ownership data and much, much more. And they just lowered the price of their Highest tier by 60%. If you want to complete enterprise grade financial data terminal, check out Fiscal AI. If you use our link Fiscal AI Chitchat, you will automatically get two weeks of Fiscal Pro for free, no card required. And if you want to upgrade, our link will get you 15 off any paid plan. Again, that's fiscal AI slash chit chat. The link will be in the show notes.

A (43:00)

All right listeners, I want to take this time to remind you about the Emerging Moat Stock Research Service, a newsletter that will produce a stock research report every four weeks and regular updates on existing stocks in the emerging moats universe. We an upcoming schedule including a research report on Wix.com we have interactive brokers, American Express, Nintendo, Airbnb, Nelnet and much more. Please if you want, reach out and get a complimentary free trial. You can do that by contacting me through the link in the show notes and giving me a DM on substack. I hope you'll try out the service. This one is going to be maybe painful for Ryan and I since we are bitcoin skeptics. But you have to admit, looking at the numbers, Bill Miller's bitcoin bet looks like an intelligent and quite profitable Kelly Criterion type investment that has worked out wonderfully for him. He and his son had this to say about the currency quote. Our thoughts process on Bitcoin is a representative example of our probabilistic value approach. Even though the asset may not hit the radar screens of more traditional value investors. They wrote this in 2005. At the time Bitcoin was trading in between $200 and $300. 2015. Sorry. Thank you. Thank you. Misspoke there. So about 10 years ago, 2005, it wasn't invented yet.

B (44:17)

Correct. That's why I made sure to buy.

A (44:19)

Yeah, yeah, that would have been embarrassing. They were not allowed to buy it for the fund and there's restrictions on that for mutual funds and what have you. But they wrote that they both owned it in their personal accounts. This is what they had to say about it going further. Quote According to the World Gold council, less than 175,000 to of gold have been mined since the beginning of existence at a spot price of $1,000. Roughly that means an aggregate value of $6.4 trillion of all gold ever mined. Bitcoin achieves that capitalization on a base of 21 million coins. Each coin would be worth $314,000 or over 1,000 times the current price of $230 and sitting at $100,000 today. Ryan, we're pretty close. We're pretty close to that. And here's where they had to follow up based on their probabilistic value here. That leaves US with a 97% probability that Bitcoin is a failure worth nothing. However, using our aforementioned assumptions, the probability weighted value of the cryptocurrency would be $1200 today for an intrinsic value or five times greater than where it actually trades. Now we know what the price is a Bitcoin right now. So even if they assign a low probability here, the bet clearly worked out. And now Miller has claimed that Bitcoin and Amazon are somewhere around 50 and 50 of his 50%, 50% of his personal portfolio portfolio. Not a bad set of returns there. The exact exposure to crypto for Miller's family is not known, but he is what you might call a maxi on the cryptocurrency and he has said that it is sizable, so I'd assume that it's worth over a billion dollars given his personal wealth. And here's a quote from his son that could probably easily be for from him, but shows how much over the last decade they have gotten into the the bitcoin maximum play as the store of value quote this perspective is not new and has often been repeated since Bitcoin's inception 16 years ago, while more people arrive each year at the opposite conclusion. Markets currently ascribe nearly $2 trillion worth of value to the technology and the collection of Bitcoin. ETFs launched less than 12 months hold over a hundred billion dollars in assets with billions of dollars in average daily volume. There are over 70 companies on global public exchanges collectively owning nearly 600,000 Bitcoin and MicroStrategy is now part of the NASDAQ index. Leading United States politicians are talking about establishing a strategic Bitcoin reserve. So clearly they while not all in as we're going to look at that portfolio for the Miller value partners, it has worked out for them. They seem to think that momentum begets more momentum with Bitcoin because more people are in now. It's kind of like, all right, we're all in this thing. We have a wealth of writing on the line, things like that. What do you think of the bitcoin bet they made? Can we learn anything from it? Because I have trouble outside of the fact that back in 2015 you could say I'll make it a tiny position. If it works out, it works out. I kind of worry that they're doing the same thing they did in the gfc. Well, maybe not as large of exposure, but going, okay, we made a bet on bitcoin, let's bet on microstrategy, let's bet on all this other stuff. And those seem even more risky than the underlying Bitcoin itself. So curious what your thoughts here on this one, Ryan. It's been a good return for them, almost a thousand beggar. But I'm not a fan of the currency.

B (47:48)

Yeah, My thinking here is that if we use the initial thesis from them, which was the assigning probabilities based on like the gold market cap.

A (48:01)

Right. Tiny percentage. But if it works, thousand beggar, if.

B (48:06)

You assign the same probabilities, this probably would be a net negative potential return here because for the Kelly, they said, look, it's a, you know, you've got a 1000 bagger potential with 2 1/2% probability it's worth the risk even at 2.5% chance I'm right if I get the returns. So those returns basically played out. Now if you think the probabilities are still similar, this is a negative expected return, I assume using that same ideology or methodology.

A (48:44)

So to me, right at this point, do you sell? Right.

B (48:49)

That's basically what I'm saying is it's a very different investment today at $2 trillion worth of market cap in bitcoin than it is in 2015. So it feels weird to kind of be doubling down when the forward returns using the same methodology they made 10 years ago are so much worse. So. But anyway, to me there's not a ton of lessons to be learned here because it's not really how I invest. Maybe one day I'll change, but it's hard for me to adopt this. I feel like I could get burnt pretty bad adopting this sort of investment methodology.

A (49:30)

Yeah, that's a fair point. I think they might argue that the higher the price goes, the more of like the bitcoin is de risked. But if you take that logic.

B (49:42)

But isn't that just.

A (49:44)

That's the logic of my. Yes, but I also think it's it's a little illogical because if you take that to its end, like there's no limit and it should just go higher. The higher it goes, the more certainty you should have. It's kind of the micro strategy thing where it's like, oh, the more people are in it, the more people that are going to come in it. And it kind of makes me think at some point you are the size of the entire gold market and the risk isn't really worth it anymore.

B (50:10)

The whole analyzing cryptocurrency thing has always just felt very circular to me. Like confidence gains. If price drives narrative, narrative drives price higher, price higher probability that it's it just, I don't know, it all feels very circular. Let's look at his actual Miller Value Partners portfolio, which you can find it's.

A (50:34)

His son, but yeah, yeah, I think.

B (50:37)

He stepped away in 2023, so I might be wrong in that year. But his son runs the portfolio or the Value Partners portfolio. Now. If you want to check out the portfolio, you can look up Bill Miller on Fiscal AI. You'll get a nice little pie chart there. I'm just going to read off his top five positions. Number one neighbors industry or nabbers industry 10% of the portfolio. Number two Lincoln National 8% gray media 8% quad graphics 7 no 6% bread.

A (51:15)

Financial 6% that's a funny one.

B (51:18)

I don't know any of those companies.

A (51:20)

Have not heard of any of them. Maybe Lincoln national, but either way, I mean, I don't know what any of these businesses do. It's interesting, they are very flexible type of investors. This is a huge pivot into just deep value names. I don't know if you name the PEs here, but they're quite cheap. This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored Jobs to find the right people with the right skills fast.

B (51:48)

It's a simple way to make sure.

A (51:50)

Your listing is the first candidate. C According to other each Indeed data, Sponsored jobs have four times more applicants.

B (51:56)

Than non sponsored jobs. So go build your dream team today with Indeed.

A (52:00)

Get a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply.

B (52:08)

No, I didn't mention them. But the pe on all five of those top positions is below 15 times. Three of them are below basically seven times. But again, we just talked about the uselessness of the PE metric. Most of these companies I've never heard of. That's probably a good sign if you're in the value investing world. I really don't know if there's a whole lot to be taken away from looking at this portfolio since a his son runs it now and you kind of have to have a view on him as a manager as opposed to Bill Miller. And we just spent the whole episode studying Bill Miller the third.

A (52:45)

So.

B (52:48)

There'S not a whole lot to say there. I will maybe mention quickly there are some more familiar names in this portfolio that are small positions, build a bear ups Verizon strategy, but they're very small. I do, however, want to take this quote from Bill Miller iii, the one we're actually talking about. And this is his thoughts on portfolio management. I think it's really helpful and I actually think it's kind of something that I've maybe accidentally adopted, which is he says we construct portfolios by using factor diversification. We own a mix of companies whose fundamental valuation factors differ. We have high PE and low pe, high price to book and low price to book. Most investors tend to be relatively undiversified with respect to these valuation factors, with traditional value investors clustered in low valuations and growth investors in high valuations. It was in the mid-1990s that we began to create portfolios that had greater factor diversification, which became our strength. We own low PE and we own high pe, but we own them for the same reason. We think they are mispriced. I think it's a really good example of basically what we talked about, which is the only thing that matters is what they earn in the future relative to what you're paying today. And a lot of people have a hard time with that, a hard time forecasting and want to rely on trailing numbers. So anyways, I thought that was kind of a cool way to say it is basically doesn't matter what the headline multiples are today. You own them because you think they're undervalued.

A (54:28)

I think that leads right into our final question we do on every Super Investor episode. What did we learn from studying Bill Miller? I can go first and then Ryan can introduce anything later. I'm going to have three things here. One, and this relates to what that last quote, I guess all three do. Really thinking from first principles. Miller does not care what other investors think about his investments, which allowed him to invest in Amazon when it was the stock that people made fun of for value investors for owning or value investors made fun of for owning. Same with Bitcoin in 2015. It was kind of a joke back then. Many, many investors would be afraid of making these decisions publicly because of how it would reflect on them in their community. I mean, think about it, people, especially if you can look on Twitter, right? You admit you say, oh, I'm getting long. This people go, oh, this guy. That is just a quote tweet out of nowhere. This guy's going to be ruined in three years. Good luck to this guy. I mean, oh boy.

B (55:32)

Actually it's interesting looking back at his career and specifically at the gfc, I wonder how much it discouraged him from speaking out about what he invests in, speaking publicly about what he invests in because now he's kind of been chastised for it. They put him in a movie and made him look like the villain.

A (55:55)

Well, he said that now that he's not running a mutual fund, the part of the public speaking was marketing to get the fund bigger and that was what they wanted to do as part of his business. And now he says he doesn't care, especially he's older too.

B (56:07)

Yeah, that's fair.

A (56:08)

All right, any other lessons? Yeah. Second one, don't pin yourself down on a style. Ryan just mentioned in this he invests in a wide range of security types. A problem you see many, many people out there is pinning themselves down as oh, I'm deep value guy or I'm growth guy or a day trader, what have you. Oh, I'm a forex guy. I don't know if anyone does that. But this is a self imposed limit on your investment universe which makes no logical sense. If something looks cheap, buy it. Doesn't matter what type of business it is. Third one, don't bet big with liquidity or zero risk or go to zero risk. I think the GFC mistake would be avoidable if Miller took the heed from Buffett's never go to zero mentality. This means avoiding stocks where the balance sheet can totally blow up as a large position in your portfolio or not running into a liquidity crisis that can implode your position. Now you say that and Buffett owns a bunch of banking stocks, but that never happened to him. At least I don't think or you really shouldn't be betting on a government acting in shareholders best interest in a crisis.

B (57:13)

Yeah, the only other two that I'll add, I just wrote these two down for myself after talking this over. Number one, trailing multiples don't matter. We just talked about that. Two, don't let someone who doesn't know the investment discourage you from your investment. So for example, when he bought Dell at 5 times earnings, I think it had run up like 10x in the first year or two. So many people were asking, when are you going to sell? When are you going to sell? It's looking more expensive on an earnings basis. Don't be discouraged by people who haven't necessarily done the work that are telling you it's overvalued or, you know, they don't have the same assumptions that you do on the business, that kind of thing. So that would be, I guess, my, my two lessons along with what you have here. He definitely never pinned himself down to a certain style, which worked out for a long time. And it also allows you to earn returns in years when your preferred style might not be working. I don't think he would have been able to generate consecutive years of strong returns, 15 consecutive years, if he only had one style.

A (58:26)

That's a fair point. All right. I think that's going to close things out. I hope everyone learned a lot about Bill Miller's investing style. We did as well. You can look at our old catalog, maybe by searching names within the podcast feed. I know there's a way to do that, but if you just scroll through or kind of search for it, you will be able to find the, I think over a dozen at this point. Investors we've covered. We're going to be covering more this year. If you have a specific person we haven't covered that you would like us to analyze, let us know. We're kind of looking for the last ones we should do. Besides that, keep on the lookout for, you know, each week we're going to have a power out there for everyone and fun interviews, an investment analysis for different stocks and more Super Investor episodes coming people's way. Oh, along with thematic investments. Go listen to our defense one. We're going to have a lot more of Those coming in 2026. Let's hit the disclosure and get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guest may hold securities discussed in this podcast, may have held them in the past or may buy, sell or hold them in the future. Thank you everyone for listening to this episode once again and we'll see you next time.

B (59:51)

Your Wish is yous Command is being called the greatest success book of all time. With over 100,000 5 star reviews.

A (59:58)

I went from 5k on my bank account to 8 million.

B (60:02)

My income doubled.

A (60:03)

I was able to retire at the age of 31.

B (60:06)

It reveals the missing key to the law of attraction. Your Wish Is yous Command is now available on Amazon. Search youh wish is yous command on Amazon to get your copy today.