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THE CONTRARIAN

Bill Miller

BALTIMORE | Most fund managers can't beat the market, but veteran stock picker Bill Miller is legendary for topping the S&P 500 index for 15 years straight until 2005. That winning streak ended when his Legg Mason Value Trust stumbled during the financial crisis, and he later stepped down from the fund. He now runs his own firm, Miller Value Partners, after parting ways last year with Legg Mason Capital Management. Still, the 67-year-old value manager hasn't lost his market-beating touch. Last year, his flagship Miller Opportunity Trust handily outpaced the S&P 500's 21.8% gain, including dividends. Miller talks about why he's so bullish on both Amazon and bitcoin.

How do you see the U.S. stock market behaving this year?

It will probably look a lot like last year, absent any geopolitical event or something out of left field. We have a global synchronized recovery for the first time in many years. Inflation is low. Unemployment is low. Interest rates are low. Central banks around the world, for the most part, are accommodative, so we think the path of least resistance for stocks is higher. Stocks are still cheap compared to bonds. And interest rates are headed higher, which is not good for bonds. I think returns probably in the 6% to 12% range would be the central tendency, but you certainly couldn't rule out gains like we saw last year.

What sectors offer the best opportunities?

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Airlines are one of the best places to be. The banks look good, and there is a fair amount of opportunity in technology. Maybe the most egregious opportunities are in things like specialty health care, which has been hit pretty hard. They include names like Valeant Pharmaceuticals, Endo International and Mallinckrodt Pharmaceuticals. The worst sectors, in my opinion, are bond proxies, like consumer staples and utilities.

Most value investors view Amazon as a pricey stock. Why are you a fan?

If someone thinks a company is expensive based on something like a price-to-earnings ratio, it is an extremely simplistic way of valuing a business. Amazon has a business model that generates returns way above the cost of capital. Even now, at a $500-billion-plus (U.S.) market capitalization, Amazon's sales
are growing by 25% to 30%. We also think its stock is underpriced, especially when you look at its cloud computing business, Amazon Web Services, which is the fastest-growing enterprise company in the history of the world.

What other stocks are long-term favourites?

We like synthetic biology company Intrexon Corp. It produces apples that don't brown and salmon that can grow twice the normal rate and don't require antibiotics. It is also involved in cancer immunotherapy, topical medicines that can do things like remove tattoos and animal cloning. It's very early days, but it's the leading company in its field. We also like Delta Air Lines. It's the best managed of the U.S. airlines; it generates a 12% to 13% free cash flow yield and has been raising its dividend at roughly 50% a year.

Your firm has a sizable investment in bitcoin, having purchased the digital currency for an average of $350. Given all the naysayers, including Warren Buffett, what's the attraction?

It's possible that skeptics are right about bitcoin. Nobody knows how this area of cryptoassets will play out over five to 10 years. So far, it is playing out the way every major disruptive technology—going back to the steam engine, railroads, electricity, computers, the Internet and biotech—has done. They were accompanied by a bubble, speculative frenzy and then collapses along the way. But that is what brings capital into the space. This is the first technological advance in finance in thousands of years. I think of it as digital gold. If it does work, you can make a very significant amount of money. Bitcoin is also not correlated with the stock market, what Trump tweets or what the Fed does. Therefore, it serves as a classical economic function of diversification.

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How do you invest your own money?

I am the largest holder in my equity, income and hedge funds. Among my liquid assets, over 90% would be in my funds or in stocks such as Amazon and airline companies that are owned by them. While bitcoin is the largest position in one of my hedge funds, I own bitcoin outside my funds too.

What advice can you give retail investors now?

They need to be long-term and patient. The biggest problem is that they buy stuff after it has gone up and sell after it has gone down. They should be doing the exact opposite. Have a minimal allocation to bonds and a maximum allocation to stocks. The majority should be in index funds, because most actively managed funds don't beat the market over time and charge too much. But some carefully selected active funds with managers who have good track records and processes should give better returns. A good combination would be two-thirds in index funds and one-third in actively managed funds.

Your rare-book collection ranges from Shakespeare's First Folio to the first edition of Adam Smith's Wealth of Nations. You also paid more than $1 million for Bob Dylan's lyrics to "Blowin' in the Wind," written on stationery from New York's Taft Hotel. Does buying collectibles differ from investing?

My approach to buying rare books is the same as buying stocks. I am trying to buy books I think are undervalued but also in those areas where I have a personal or intellectual interest. The rare-book market generally has given returns greater than the stock market, but with less volatility and more predictability than something like Impressionist paintings or contemporary art. In the case of Dylan's lyrics, I went along with my book dealer's recommendation. He convinced me—to use a bitcoin analogy—that it was a diversifier. He argued, to my surprise, that it was undervalued. As it turns out, Dylan won the Nobel Prize in literature last year.

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/Interview by Shirley Won

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