Bill Miller on Value Investors' Biggest Mistake

Legendary investor Bill Miller says there’s a smarter way to value-invest than just picking cheap stocks, according to a recent article in

Running his own fund after decades at Legg Mason, Miller looks for companies focused on “high returns on invested capital and free-cash-flow growth, as well as large market opportunities. That helps small and large investors alike distinguish stocks that are undervalued from those that are simply cheap.”

While the article notes that some value fund managers tend to start “cheating” late in a bull market cycle by adding growth names to their portfolios, it adds that Morningstar data assembled for “shows little move into growth stocks by value funds, at least major ones.” It reports, however, that Miller bought Facebook shares amidst the company’s social network scandal—which it says “have so far had little impact on the company’s advertising sales or profits.” Shares were trading at just 14 times expected 2019 profits, a “bargain” according to Miller.

“To the extent that value is based on a simple calculation about ratios,” Miller argues, “that’s a very simplistic definition of value. If people are buying things they haven’t analyzed, it’s not likely to end well.”