Bill Miller Reveals Secrets of His Success

If you were learning to play golf, you'd probably be pretty grateful to get a few pointers from Tiger Woods. And if you were taking up tennis and John McEnroe offered to help you with your backhand, you'd probably listen. So it is with investing and Bill Miller, the manager of Legg Mason Value Trust, a past master of Wall Street. Until last year, he had beaten Wall Street, as measured by the Standard & Poor's 500 index, for a record 15 consecutive years.

Miller says that if you want to find value in the market, you shouldn't just look for stocks that appear cheap compared with their net assets or next year's projected earnings. He says the real value investor needs to look at a company's stock price compared with all of its future cash profits -- including those many years in the future.

"As I often remind our analysts," he writes, "100% of the information you have about a company represents the past, and 100% of the value depends on the future."

When Miller screens stocks for those likely to beat the market, he pays close attention to two things: companies with a high cash-flow yield, which means high cash profits compared to the stock price, and companies that are spending a lot of money buying back their shares.

Miller says he finds a sustained edge by fighting Wall Street's mob mentality, which he calls "the source of the only enduring anomalies in an otherwise very efficient market." Wall Street, he says, tends to overreact to short-term events. The market may also be too slow to change its mind about a company with a troubled past.

Miller says that that's how he once got a good deal on shares in Xerox (XRX) and that it's why he thinks he has a bargain now in Sprint (S) . He is happy to buy a good stock caught up in a scandal, when most people are too afraid to.

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