Bill Miller's Legg Mason Value Trust Fund Shows Why Active Investing Doesn't Work

Active investing, otherwise known as stock picking is a trillion dollar industry that just doesn't work. Don't believe me? Look at what happened to Bill Miller, until last year considered one of the best stock pickers.

Active investing, otherwise known as stock picking is a trillion dollar industry that just doesn't work.  Millions entrust their money to "financial gurus" who use their superior insight and analysis to find the best stocks and generate the best returns.  In the process, they also charge you a fee. 

It's long been known that active investing does not work.  Sure, an investor may get lucky for a stretch and outperform the market but in the end, everyone reverts back to the mean. Don't believe me?  Look at what happened to Bill Miller, until last year considered one of the best stock pickers.

The fund outperformed the broader market every year from 1991 to 2005, a run that no other manager can match but the last couple of years have not been so kind.  In fact, losses over the last year have wiped out the last ten years of gains. 

The WSJ reports that:

"A year ago, his Value Trust fund had $16.5 billion under management. Now, after losses and redemptions, it has assets of $4.3 billion, according to Morningstar Inc. Value Trust's investors have lost 58% of their money over the past year, 20 percentage points worse than the decline on the Standard & Poor's 500 stock index.

These losses have wiped away Value Trust's years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods, according to Morningstar."

Investing money in an actively managed fund is a bad idea for two reasons:

1. The funds over the long run do not outperform broad indexed like the S&P 500.

2. You are paying extra for an "expert" to choose stocks to buy.  This fee reduces also works to reduce your return.

So, what's a better way to invest when you are ready to put money into the market?  Index funds which can be traded as mutual funds or ETFs.  Vanguard has become the largest mutual fund company in the world because of its low fee, index oriented approach.  Exchange Traded Funds (ETFs) can be bought and sold that mimic the performance of major indexes.  They also have very low expenses.  The most popular ETFs are SPY (mimics the S&P 500) and QQQQ (mimics the top 100 Nasdaq stocks).  There are now ETFs that track bond markets, commodities, and more.  The key is to choose a fund that has a low expense ratio and tracks a broad market.  

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • That chart sucks

    October 08, 2009

    This is way late, but yahoo charts are horribly misleading for mutual fund comparisons. They track share price and NOT overall return.

  • Angelo

    April 12, 2011

    The article might be true, but the logic is absolutely ridiculous. You point to one fund manager in one situation and draw such a sweeping conclusion? Have you heard of Warren Buffet? By the way, Bill Miller is a terrific money manager who suffered terribly during unusually bad world economic events. His fund is recovering. Look, I do believe in index funds----but I think in a portfolio, it's okay to put some money in actively managed funds too.

  • Thomas

    April 12, 2011

    I think the author's point is that active investing is very rarely a winning formula for the average investor. The returns often mimic the returns of indexes but the cost is much higher. For every outlier like Warren Buffet, there are hundreds of other managers that are not beating indexes. Bill Miller is an interesting example because he was always held out as someone who knew how to beat the market. It's a prominent example of how even the super investors eventually regress to the mean.

  • Paul Ruedi

    May 03, 2011

    The fact that Mr. Buffet has outperformed the market does not boost the active management makes sense idea. Moreover, by random chance there should be more folks like Mr. Buffet than exist.

    Even 15 years of outperformance does not suggest skill. It would likely take twice that amount of years to have a t-stat of two or higher.

    Oh the heartbreak of active never ends. I don't know who will blow up pension funds, endowments and investors, but he or she is being pitched every day to investment committees based on "track record" as everyone did with Mr. Miller.

  • Jeff Singer

    June 17, 2011

    Maybe you want to look at First Eagle Global and Overseas funds. Maybe taking less risk works, not just the focused funds that take higher risk and blow up, like CGM and Fairholme and Bill Miller

  • Carlos H Dragnub

    October 13, 2011


    Warren Buffet's fund is not a true mutual fund. Yes, it owns shares of companies he favors (Coke, for example), but it is really a holding company. And to that you say, "So what?" My question to you then is where is it placed in your asset allocation model. Does it become your S&P 500 position? And if it does become you S&P 500 position, you still need to pick funds in the small cap arena, international (both developed and emerging markets), bonds and you may want to add REITS. Picking the "winners" every year across all those segments is VERY daunting if not impossible over the long term.

    Carlos H. Dragnub

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