The Tulip Folly" Jean-Léon Gérôme. 1882

Read the Reflection, written 25 August 2021, below the following original Transmission.

There have been four great stock market buying opportunities in my lifetime. This is the fifth.

The first was in 1973–74. There was war in the Middle East in October of 1973; there was war in Vietnam; we had soaring oil prices, double-digit inflation, double-digit interest rates, recession, and a constitutional crisis in Watergate culminating in President Nixon’s resignation. I was a young first lieutenant in the Army making around $400 per month and putting $25 per month into the Templeton Growth Fund. In the fall of 1974, I went into the Merrill Lynch office in Munich, Germany and bought shares near the market bottom.

The second was in the summer of 1982. We had started our mutual fund in the spring of '82 and kept it mostly in cash as the market continued to decline. Mexico defaulted on its debt, the market fell sharply, and we got fully invested in July. In August, Paul Volcker cut rates and the great bull market was underway.

The third was in October of 1987 — the market crashed 22.6 percent on October 22. We had raised cash in the summer as the market got very expensive relative to bonds. Stocks peaked in August and began to decline. By the end of September, 30-year bonds yielded over 9 percent, a cash return roughly equal to the average annual return of stocks since 1926. The market collapsed and we put all of our 25 percent cash position into stocks. Our fund was the single best-performing fund of 1988 as most others maintained high-cash positions due to fears about the health of the economy.

The fourth was 2008-09. We did not navigate that period well, with the Opportunity Trust Fund being down over 60 percent in 2008. However, we remained fully invested and stayed that way throughout the 10-year bull market. The Fund was in the top 1 percent since the market low in March 2009 through the end of 2019.

We have been hit about as hard as anyone in this decline because we have been overweight in higher-beta names, believing (correctly) that, since the financial crisis, people have been risk- and volatility-phobic, and that perceived risk has consistently been greater than real risk. Going into 2020, I thought that economic risk was low and that, if the market was going to decline, it would be because of either geopolitical events or some exogenous shock to global aggregate demand or aggregate supply. We got that exogenous event in the form of a global pandemic that took stocks from all-time highs to a bear market decline of almost 30 percent in the shortest time in history.

As is typical of these sorts of egregious declines, we are down a lot more than the market in all of our products. In times such as these, I am reminded of what John Maynard Keynes wrote to his board when he was managing money during the 1937 market collapse. They had been urging him to sell as the market went down, and he refused. He told them, “It is the duty of every serious investor to suffer grievous losses with great equanimity.” He went on to note that their advice to sell more as stocks went down, if practiced by everyone, would be economically disastrous for the country, and that he wanted to be fully invested at the bottom and not out of the market when it recovered, which he would be if he followed their advice.

The market’s behavior in the last week of March 2020 gives a strong confirmation that this recovery from a near-certain recession will follow the pattern of every other one since at least 1973–74. The leaders will be low-P/E, cyclical names with operating or financial leverage, viz., the exact names that were clobbered the most in the decline. Those names were also the worst performers when recession fears were high — fall of 2018, first six weeks of 2016 — yet where no recession materialized. The reason why is fairly straightforward: prices and valuations are highly sensitive to the marginal return on invested capital and to business risk. When the economy is declining, or there are fears that it will, valuations on those companies whose return on invested capital (ROIC) is most sensitive to economic change, mostly traditional cyclicals, will decline more than those that are more resistant, such as consumer staples, utilities, bond proxies, and many recurring revenue businesses. Companies with high debt leverage and economic sensitivity fare the worst as the market discounts the possibility they will experience financial distress. When the market sees a recovery, the exact reverse occurs, which is what we saw March 24–25.

If, as most strategists think, we will have a short, sharp snap-back rally that takes us up 20 percent or more, which will be followed by a retest of the lows, then that retest will see the reverse, and again the cyclicals will lag, but not as much as they did on the initial collapse. I am agnostic on that, as my ability to forecast the market’s short-term path rounds to zero. So does theirs, by the way.

Last week gave a good indication of where the leaders and laggards are likely to be: names that have held up relatively well, such as AMZN, GOOG, FB, NFLX, were all down while most other stocks were up, led by cyclicals and high beta. The commonly offered advice in a steep market decline, such as we are experiencing, to “upgrade your portfolio” and to “buy quality names on sale” is a great prescription for underperformance in a recovery.

Sir John Templeton advocated buying at the point of maximum pessimism. The problem is that point is only known in retrospect. There is much pessimism and little optimism evident now, and it is impossible to tell whether stocks have declined enough to discount what the future holds with regard to the economic damage that the pandemic will inflict. In October 2008, Warren Buffett wrote an op-ed saying he was buying US stocks and urging others to do so as well. A few years later, he was asked how he knew that was the time to buy. He said he did not know the time, but he did know the price at which stocks were a bargain. They were a bargain then and, in my opinion, they are a bargain now. The market may have bottomed at an interim low on March 23, 2020 — or it may not have. I do believe that shares bought at these prices will prove to be quite rewarding over the next year, and perhaps a lot sooner. If you missed the other four great buying opportunities, the fifth one is now front and center.

Bill Miller
Miller Value Partners
Santa Fe Institute

Additional commentary

Miller Value Partners (3/16/20): How Markets as Complex Adaptive Systems Process COVID-19:

CNBC (3/18/20):

Clip 1:

Clip 2:

Full interview (paywall)

Ameritrade Network (3/26/20):


T-010 (Miller) PDF

Read more posts in the Transmission series, dedicated to sharing SFI insights on the coronavirus pandemic.

Listen to SFI President David Krakauer discuss this Transmission in episode 29 of our Complexity Podcast.


August 25, 2021

Betting on the Future

“The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.”1 So wrote G. K. Chesterton in 1908, ten years before last great pandemic to strike the world prior to the one in which we are still engulfed.

Capital markets are quintessential complex adaptive systems: they contain millions of agents constantly acting under their own local rules, with differing time horizons, adjusting their behavior as circumstances or expectations change, all in an effort to earn returns for themselves or for their clients that are sufficient to ensure their survival. The first rule of the money game is to be able to stay in the game; if you don’t have any money to invest, you can’t play the game. Warren Buffett has said the first rule of investing is “don’t lose money,” and the second rule is to remember the first one. That isn’t quite correct, though. Everyone in the game loses money from time to time; everyone makes mistakes. The legendary speculator Jesse Livermore once noted that if you were never wrong in the markets, eventually you would have all the money and if you were never right, you would go broke. George Soros was closer to the mark when he observed that it is not how often you are right or wrong that’s important; it is how much money you make when you are right, less how much money you lose when you are wrong that matters.

Capital markets, rephrasing Chesterton a bit, exhibit both structure and wildness. There is enough structure to enable one to think useful predictions can be made about future prices and enough wildness to vitiate those beliefs. Because the payoff for getting the future right, or mostly so, is high, making predictions about prices is endemic. One popular strategy is to look at history, at events and circumstances that are analogous to the present and see how markets reacted during similar times.

When this pandemic was compared to its closest analogue, the disastrous 1918 flu, the results of that exercise were not helpful. During the 1918–20 pandemic, the stock market was never more than 5% lower than when the pandemic began. Nine months after that pandemic got started, and during its second and deadliest wave, the market was actually up 11%. This time, after reaching an all-time high in late February 2020, the market had its biggest collapse ever in a four-week period, falling 37% to its low on March 23. Looking at similarities may be helpful, as long as one remembers Wittgenstein’s quip: “I will teach you differences.”2 The difference between this pandemic and the one in 1918 was that state and local governments shut down vast parts of the US economy in 2020, whereas in 1918 businesses continued to be open. The result of that difference was a decline of US GDP in the second quarter of last year of 33%, the steepest single-quarter drop in history.

When I wrote in April of 2020 that the collapse in the market put investors “front and center” in the fifth great opportunity to buy stocks in my adult lifetime, I was making a judgment based on a few observations that had been helpful in forty-plus years of surviving in the game (encompassing a couple of close calls) and being involved at SFI for over twenty-five years. First, since no one has privileged access to the future, trying to predict the path of a complex adaptive system with any degree of granularity, particularly over short timescales, is a very low-probability endeavor. Second, losing money is twice as painful as making money is pleasurable, as the psychologists have demonstrated, which makes fear dominant over greed, particularly in the short run. Third, the stock market goes up most of the time, about 70% of the years in the postwar period, so believing the market will be higher in the next year or so is a good bet. Finally, as Jesse Livermore also noted, the big money is made (or lost) in the big moves, and the big move down in 2020 from late February to the March 23 low was one for the record books. The odds seemed tilted in favor of the next big move being up, as it was in the previous four great buying opportunities that occurred after steep market declines, and so it has turned out in the fifth.

Read more thoughts on the COVID-19 pandemic from complex-systems researchers in The Complex Alternative, published by SFI Press.

Reflection Footnotes

1 G.K.Chesterton, 1908, Orthodoxy, London, UK: Bodley Head.

2 Wittgenstein once told his friend Maurice O'Connor Drury, “I was thinking of using as a motto for my book a quotation from King Lear: ‘I’ll teach you differences.’” See M. O’C. Drury, 1984, “Conversations with Wittgenstein,” in R. Rhees, Recollections of Wittgenstein, Oxford, UK: Oxford University Press.