Miller is chairman and chief investment officer of Legg Mason Capital Management and currently oversees the Legg Mason Opportunity Trust Fund. He formerly ran the Legg Mason Value Trust, which beat the S&P 500 Index for 15 consecutive years, from 1991 to 2005.
What’s your outlook for the U.S. market?
We expect the U.S. stock market to be up between 6% and 12% this year, so a very nice return. One of four areas of opportunity is housing. The U.S. housing market went through a five-year slump and has just come out of it. I expect housing stocks like PulteGroup and Lennar to do very well. Another area is financials, in part because many of them are related to housing through issuing mortgages. That would be everything from JPMorgan Chase to Genworth Financial. The airline industry has been dramatically restructured and significantly consolidated. I think the airlines have a long way to go, and our favourite is United Continental Holdings. Lastly, stocks in the technology sector, especially larger names, are very cheap by historic standards and have very high free cash-flow yields. We like Apple and Microsoft.
What would you do with a $100,000 windfall?
I would put it in a diversified portfolio of U.S. or global stocks. Part of the reason why the stock market has done so well is because it got too cheap after the 2008 financial crisis. The market has gone up, but it is still nowhere near where it is likely to go in the next several years.
What was your worst investment?
The worst among individual stocks is an investment we made in Eastman Kodak in 1999-2000. At the time, it was trading very cheaply, with a good dividend yield. Our mistake was staying with it year after year, despite the fact it continued to miss its own targets, and the business continued to deteriorate. For a broader category, we lost more total money in financials in 2008, mainly from misreading the credit crisis.
What keeps you awake at night?
A repeat of our mistake in 2008. We did not recognize soon enough the seriousness of a change in the macro environment.
What’s the best advice you ever received?
The late American stock trader Jesse Livermore once said that the big money is made in the big moves in prices. There were big moves in the stock market from March, 2009, to now, and from 1982 to 2000. It’s the same with bonds for the past 30 years. Most people are obsessed with the short term. Is the market going to correct? What is the stock going to do in the next quarter? All of that is pretty much irrelevant for most people.
What advice would you give investors now?
Think long-term, be patient and ignore the day-to-day news. In this kind of environment, people should have a maximum of 75% of their assets in stocks. People are too underinvested in equities because of the 2008 crisis, and that is because they are looking backward, not forward.
What is the most important investment metric?
We tend to first look at free cash-flow yield. A high cash-flow yield tells you that you’re getting a high current cash return on your investment. There is good evidence that that metric gets you into companies that are going to do well.
Do you have a favourite investment motto?
“Be fearful when others are greedy, and be greedy when others are fearful.” That comes from Warren Buffett. You are not going to make money doing what everybody else does at the same time.