“The Key to Market Returns Is Time and Not Timing”

Bill Miller IV, Dan Lysik, and Bill Miller recently discussed the state of the market, offering insights into how the team thinks about opportunity. This is a recap of the main points of that discussion.

If you haven’t read Bill Miller IV’s Q1 and Q2 letters – it’s a good place to start as the set up for his recent comments on the market. Read here and here.

Bill IV makes the point that people have been expecting a bad macroeconomic environment and the main reason for that has been the inverted yield curve. While an inverted yield curve has been villainized as a predictor for a recession, Bill IV suggests that investors take a closer look at understanding why the yield curve inverts and what it actually means. He offers this:

“There is no fundamental linkage between an inverted yield curve and a recession. None whatsoever. The only thing that an inverted yield curve means is that the bond markets’ expectation for the so-called neutral rate of interest, which is the rate of interest that the Fed sets which will neither stimulate nor put downward pressure on the economy, is lower than it is today.”

He points out that the ~5.5% on the upper bound of the Fed Funds rate is significantly above where it has been for the past 20 years. And, that we’re coming off of a unique period in history where record amounts of money were printed, stimulating the economy in a significant way.

The Fed’s inflation goal continues to be 2%. Policymakers know more today than ever. There will inevitably be panics in the future, but the more we understand the system, the better we are able to operate within it, including managing interest rates.

One challenge to operating in markets is the vast amount of information. Where do investors focus their attention, their time? Right now, many macro-thinkers are focused on the inverted yield curve. They aren’t paying attention to other powerful signs in the markets, like homebuilders breaking out, strong mortgage rates and consumer demand for new housing.

“The key to returns in the market is time and not timing.” This is central to our philosophy as long-term investors. You have to not only believe this, but also put it into practice to influence how you think about information.

We’re not trying to predict where the economy is going and then look for bets within a forecast. Forecasts/predictions are too often wrong.

As Bill Miller states on the call: A lot of people in the market try to use the economy and their view of the economy to determine where the market is going. And that’s exactly backwards because the economy does not predict the market. The market predicts the economy. The market is people who have real money at risk, and the totality of that is how the market acts.

Bill IV explains that at MVP, we are looking at what the market has already priced in. We’re trying to understand the expectations for the future cash flows of a business. We’re picking businesses to invest in that we believe will deliver over the long term.

So where does that leave us today? We think Small Caps and Lower Valuation securities are compelling. Dan Lysik gives evidence on the call; here is a clip:

Also, read his latest letter here.

Overall, the takeaway from the call is that we see opportunities in this market and we are going to actively manage our portfolios to navigate a constantly changing environment. Our goal is to continue to offer not only compelling investment strategies that add value to our investors’ portfolios, but also to share how we’re thinking about the environment and why we’re investing the way we do.

In the Q&A at the end of the call, we received a question about the importance of management teams in our research process. Bill IV explained that it’s one of the most important things we consider. We pay attention to what management’s saying and what they’re thinking, and whether or not they’re actually acting in alignment with what they’re saying and doing. And whether or not that’s actually generating true economic value for us.

The same goes for how we approach what we do for our investors. And, as the largest investors in our own strategies, we hold ourselves accountable every day for our thoughts and actions as investment professionals.

For the full replay of the call, please click here.

Title Quote Credit: Bill Miller, CFA from the recent call.

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References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

Past performance is no guarantee of future results. For important additional information on Income Strategy performance, please click on the Income Strategy GIPS Composite Disclosure. For important performance information, please reference the Deep Value Select GIPS Composite Disclosure. This additional information applies to such performance for all time periods.

Investment Risks: All investments are subject to risk, including possible loss of principal.

The views expressed in this report reflect those of Miller Value Partners portfolio manager(s) as of the date of the report. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned.