How Bill Miller's Streak Exposed the Illusion of Infallibility

Bill Miller. Once hailed as the Oracle of Baltimore, Miller's legendary 15-year streak of outperforming the S&P 500 made him the toast of the investment world. But as Ken Griffin wisely noted, "Historical happenstance has a way of making people look like geniuses." Miller's subsequent fall from grace serves as a stark reminder that in the world of investing, sometimes it's better to be lucky than good.

From 1991 to 2005, Bill Miller's Legg Mason Value Trust fund beat the S&P 500 every single year. This feat was unprecedented and seemed to defy the laws of probability. Investors flocked to Miller's fund, believing they had found the holy grail of investing – a manager who could consistently beat the market. At the peak of his success, Miller was managing over $70 billion, and his every word was treated like gospel by the financial media.

Think of Miller's streak like flipping a coin and getting heads 15 times in a row. It's possible, but the odds are astronomically low. In the world of investing, where countless variables affect outcomes, such a streak is even more improbable. Yet, it happened, and it made Miller look like a genius.

But here's where Griffin's wisdom comes into sharp focus. Miller's streak, impressive as it was, was at least partly the result of historical happenstance. The period of his outperformance coincided with the dot-com boom and the subsequent recovery. Miller's strategy of buying beaten-down tech stocks after the bubble burst paid off handsomely as the market recovered. It wasn't just skill; it was being in the right place at the right time with the right strategy.

This is like a surfer catching a once-in-a-lifetime wave. Sure, it takes skill to ride it, but being in that exact spot when that perfect wave comes along? That's luck.

The true test of Miller's "genius" came when market conditions changed. From 2006 to 2011, Miller's fund underperformed the S&P 500 for five out of six years. In 2008, at the height of the financial crisis, his fund lost a staggering 55% of its value. The same strategy that had made him a star during the tech recovery now led to massive losses.

It's as if our surfer, having ridden that perfect wave, suddenly found himself trying to surf in a swimming pool. The skills hadn't changed, but the environment had, and what once looked like genius now looked like folly.

Miller's story teaches us a crucial lesson about investing: past performance is not indicative of future results. This isn't just a boilerplate warning; it's a fundamental truth of markets. What works in one market cycle may fail spectacularly in another.

Consider this: If you had invested $10,000 in Miller's fund at the beginning of his streak in 1991, by 2005, you would have had about $98,000. An impressive return by any standard. But if you had invested that same $10,000 at the peak of his fame in 2005, by 2011, you would have been left with just $4,900. The same manager, the same strategy, but vastly different outcomes due to changing market conditions.

This is where the danger of mistaking luck for skill becomes apparent. When we see someone succeed spectacularly, our natural inclination is to attribute that success to their superior abilities. We want to believe that there are investing geniuses out there who can consistently beat the market. It's a comforting thought because it suggests that if we just find the right guru, we too can get rich.

But as Griffin's quote suggests, and Miller's case proves, what looks like genius is often just a fortunate alignment of strategy and circumstance. It's like praising a weather forecaster for predicting sunshine in the desert. Sure, they got it right, but how much of that was skill, and how much was just the nature of the environment?

For the average investor, the lesson here is clear: be wary of chasing past performance. Just because a fund or a manager has done well in the past doesn't mean they will continue to do so in the future. Markets change, conditions shift, and strategies that worked brilliantly in one era can fail miserably in another.

Instead of trying to find the next Bill Miller, focus on time-tested principles of investing: diversification, low costs, and a long-term perspective. These may not make you look like a genius in the short term, but they're far more likely to lead to sustainable success over time.

Ask yourself: Is this true genius, or just historical happenstance? Because in the world of investing, sometimes what looks like brilliance is just a lucky roll of the dice. And as any gambler knows, eventually, the house always wins.