Legg Mason Value Trust fund outperformed the stock market every year from 1991 to 2005. The word “legendary” would often precede the name of its manager, Bill Miller. He was legendary for building positions in companies by dollar-cost averaging down while other investors were selling. His style is described in The Wall Street Journal article “The Stock Picker’s Defeat”:
Mr. Miller’s swing-for-the-fences approach makes even other value investors flinch. Christopher Davis, a friend of Mr. Miller’s and a money manager at Davis Funds, recalls discussing his investment strategy with Mr. Miller in the early 1990s. “One of my goals is to just be right more than I’m wrong,” Mr. Davis recalls telling Mr. Miller. “‘That’s really stupid,’” Mr. Miller countered, according to Mr. Davis. “Bill said, ‘What matters is how much you make when you’re right. If you’re wrong nine times out of 10 and your stocks go to zero—but the tenth one goes up 20 times—you’ll be just fine,’” Mr. Davis recalls. “I just can’t live like that.”.
In 2008, Miller dollar-cost averaged down Bear Stearns right up to its collapse. He added to Freddie Mac and insurer AIG until, in September, Freddie Mac, which had been as high as $34 during the year, dropped to less than a dollar as part of a government takeover. At that point he decided to sell AIG, but the damage had been done.
Legg Mason Value Trust lost 58% in 2008. In December its assets under management had dropped from the year before, due to market performance and withdrawals, from $16.5 billion down to only $4.3 billion. Its “legendary” market-beating performance was wiped out, putting it in Morningstar’s worst-performing fund class for one-, three-, five-, and ten-year periods.
From 1997, relative to the stock market Legg Mason Value Trust has been less than extraordinary, especially for those who got in near the peak. The simple and tragic math for recovering from a 58% loss is a gain of 138%. The fund still has some ground to make up. Imagine how that must feel for the retiree who’s been counting on it.