We’re well into the fifth year of this bull market, and aggressive long-only investors are being rewarded as you would expect, but a recent Wall Street Journal profile of famed stock picker Bill Miller shows how little awareness there still is that big, potentially principal destroying bets don’t work over the long haul.

Bill Miller
Bill Miller

Bill Miller became famous as the Legg Mason Inc (NYSE:LM) portfolio manager who beat the market for fifteen straight years, and then undid all that incredible work in two short years when he refused to back off Bear Stearns, Countrywide Financial, and other doomed companies during the financial crisis. His strategy of making highly concentrated bets on unpopular stocks and sticking with them to the bitter end meant that both his wins and his losses were outsized. That’s not to say he isn’t a great stock picker (really, who else has had such a long winning streak?), but if one of the all-time great stock pickers couldn’t make the strategy work, doesn’t that prove that it’s a bad strategy?

Bill Miller ‘isn’t a changed man’

“Yet he isn’t a changed man. His resurgence largely reflects more of the same: steadfastness in his beliefs, a stock-picking strategy dominated by big bets on beaten-down companies, and comfort taking risks that frighten away other investors,” writes Kirsten Grind at The Wall Street Journal.

Even if he is a virtuoso stock picker, if that means starting back at zero when the next crisis hits, what’s the point? If he hasn’t changed his overall investment approach, then there’s no reason not to expect the same results, even if it is years away.

Investors aren’t just bad at picking stocks

One of the arguments in favor of low-fee, passive ETFs is that people are just as bad at picking asset managers as they are at picking stocks, and for roughly the same reasons. When a stock is hot, people start buying and drive its price up further. When the price starts to correct, the sell into the downturn and the price falls lower than it probably should.

When Bill Miller’s big bets fell apart, people started pulling funds out of Legg Mason Inc (NYSE:LM); now that he’s back on top they are chasing performance. Miller’s motivation is easier to understand – he’s being paid to make huge bets with other people’s money, and he can expect to pull in a handsome salary for at least as long as this bull market lasts. It’s harder to understand why other people would invest with him after watching the previous meltdown.