Cardiff Garcia at FT Alphaville has an excellent piece on the departure of Bill Miller from the Legg Mason Value Trust fund. Mr. Miller stepped down from the fund last week, ending a fascinating run: His fund famously beat the performance of the S&P 500 for 15 straight years, and then underperformed the benchmark index just as spectacularly over the past several years.
This hero-to-flameout cycle raises a number of questions, mostly directed at whether or not Mr. Miller really was a talented stock picker. To get to the answer, FT Alphaville turned to The Drunkard’s Walk: How Randomness Rules Our Lives, a book by physicist Leonard Mlodinow.
When Mr. Miller was on top of his game in 2003, an analyst at Credit Suisse-First Boston calculated the odds of beating the S&P 500 for 12 straight years (Mr. Miller still had another three years of outperformance ahead of him) at an astounding one-in-2.2 billion. The suggestion here is that luck couldn’t have anything to do with it; the odds were just too slim.
But Mr. Mlodinow takes a different approach, as explained by FT Alphaville: “The statisticians like those from CSFB were considering the odds that a specific fund would outperform for 12 straight years if the fund begins investing at a specific time. But as Mlodinow explained, maybe the better question to ask is actually this: given the number of mutual funds that have existed in the modern era, what are the odds that any of them would have beaten the market over any 15-year period of time on chance alone? Answer: 3 out of 4.”