Three investment techniques helped Bill Miller become a millionaire

After leading Legg Mason Capital Management Value Trust to an unprecedented 15-year run of outperformance against the S&P 500 index, Bill Miller is an American investor, fund manager, and philanthropist who is largely unknown in the world of investing. This, of course, far exceeded any standard by orders of magnitude. But during the course of 18 months, his wealth dropped by more than 70% as a result of his decision to invest in Bitcoin.

Miller does not identify as a value investor, even if he supports the idea of value investing, which involves focusing on cheap businesses with strong fundamentals. His success in the stock market might be connected to this departure from the label. But a deeper look at the ideas that successful fund managers follow shows that he places greater weight on ideas like intrinsic company value and margin of safety.

Bill Miller’s success as an investor is based on these three principles:

Concentrate only on free cash flow
Miller emphasizes the value of free cash flow (FCF) as a better gauge of a company’s true profitability and sustainability than relying just on traditional measures like profits per share (EPS). The cash that a business really makes after deducting capital expenditures and operational costs is referred to as free cash flow (FCF). Miller places a strong focus on free cash flow (FCF) because he wants to find businesses that can consistently generate cash flow so that they may reinvest in the company to drive development and, eventually, create value for shareholders.

It is indisputable that Bill Miller’s approach to estimating projected return by using free cash flow yield and growth is astute and logical. According to Miller, a stock’s expected return may be calculated by adding the projected growth rate and the FCF yield. Examining this viewpoint from an analytical angle reveals that FCF yield represents the cash return on investment that is received immediately, while growth represents the possibility of future increases in cash flow that might result in capital gains. This supports his claim that it is essential to keep an eye on a company’s free cash flows before making an investment choice.

In the end, Miller looked for businesses whose free cash flow yields were higher than the market’s cutoff point of 6–8%, and he stuck with them as long as they fit his overall investment philosophies.

Forget about investment labels.
Miller avoids following certain investment philosophies, such as “growth” or “value,” to the letter. He argues that regardless of classification, any stock that trades at a significant discount to its real value qualifies as a value investment. His ability to adjust allows him to take advantage of chances in a variety of industries and market situations.

Unlike his contemporaries and mentors, Miller never followed the conventional notion of value investing. He did not base his evaluation on a company’s price-to-earnings ratio (10x or 100x). Value investors still shudder at his well-known statement, “Metrics like P/E and P/FCF should be guideposts for further research, not the end-all-be-all of investment decision-making.”

This explains why Miller preferred to invest in technology and software firms as well. Miller focused on cash flow, while conventional value investors focused on net income. For fifteen years, Miller profitably followed his unique technique even as the world continued to emphasize value investment.

Purchasing and hanging onto at low expectation inflection points
Miller is well-known for his contrarian approach to investing, often entering into deals when the market is down and expectations are low. His goal is to identify businesses that are going through a transformation or that have significant untapped potential that the market hasn’t yet recognized. Once he makes an investment, he shows incredible patience, holding onto his holdings for years or even decades, which allows the company’s underlying potential to materialize and provide large profits.

This shrewd investor knows when to get out of the market, which explains his amazing ability to buy businesses at a discount to market value. Miller begins by assuming that there are “low expectations.” He takes advantage of these times of lowered expectations by being patient. He not only buys at these below-average prices, but he also usually holds onto jobs for more than five years. His portfolio turnover is around 20 percent, which is far lower than typical managers’ turnover averages of 100 percent. This shows his patience and propensity to hold onto his stocks.

Keeping assets rather than just purchasing and selling them has intrinsic worth. Getting an edge means looking at things from a different angle than other investors. The term “time arbitrage” is used by some to describe the practice of gazing further into the future than others. Ultimately, before adding these firms to their investment portfolios, investors should be well-versed in their operations, prospective obstacles, and any significant competitive advantages they may have (if any).