Commentary from U.S. Investor Bill Miller

Bill Miller’s fourth quarter 2004 market commentary is a must read for all investors. Miller is fund manager for the Legg Mason Value Trust, which has the incredible distinction of beating the return of the S&P 500 index for each of the past 13 years. When speaking about the world’s top investors, one must include Bill Miller at the top of the list.

His fourth quarter 2004 commentary on the U.S. stock market and economy are instructive. Although Miller is both too modest and too smart to attempt to predict where the U.S. equity markets are headed in the short-term, he is clearly bullish on future prospects. Investors would do well to listen to him, as those who have listened over the past 13 years have done quite well. I don’t believe that I could do justice to his words by summarizing his thoughts, so be sure to read the whole thing.

However, just a couple of passages that I particularly liked:

I am quite optimistic about 2005. Valuations are not demanding, especially in a world of low inflation and low nominal interest rates. Mergers and acquisitions should boom this year, providing windfalls for the shareholders of takeover targets. I would expect corporate share buybacks to accelerate and dividend growth to remain strong. High returns on equity and low nominal growth means lots of excess cash is available to be used for shareholders benefit.

If everything is so good, why are investors so glum? Well, being bearish or cautious always sounds smarter than being bullish. No one wants to be thought panglossian, in denial of evident problems and risks. Expressing concern, evincing skepticism, are signs of prudence, and being prudent is what we have all been instructed to be since the courts so held in the 1830’s.

Miller goes on to summarize his views that the investment alternatives in today’s economic environment are not as compelling as certain investments in equities:

My point is simple: this is just one of the things people are worrying about while the broad economic picture could hardly be better.

GE just reported strong earnings and is confident of double digit growth. IBM did the same. Citigroup CFO Sally Krawchek said recently on CNBC that it was “credit nirvana,” the best they had seen in almost 15 years, and Citigroup raised its dividend another 10%.

Who would park their money in cash at 2% and pay taxes when you could get 3.7% in tax-advantaged dividends in Citigroup stock, and own a piece of the world’s largest financial services firm, one that is perfectly well-positioned to be the banker to the developing world’s burgeoning consumers, at 11x earnings?

What are Miller’s largest investments today? According to public filings, his top ten holdings at December 31, 2004 are as follows:

Nextel Communications
Tyco International
UnitedHealth Group Incorporated
Amazon.com, Inc.
InterActiveCorp
J.P. Morgan Chase & Co.
The AES Corportation
eBay, Inc.
Eastman Kodak Company
MGIC Investment Corporation