Wednesday, April 6, 2016

Former Legg-Mason Guy, Bill Miller, Is Running A Portfolio Using An Earthquake Prediction Algorithm

We are not fans of Mr. Miller and over the years have taken a few shots at him.
Back in a 2011 it was a post titled Fama/French: "Luck versus Skill in Mutual Fund Performance" (LMVTX):

...I dug this out of the link-vault because my memory was jogged yesterday by a post at MarketBeat quoting Legg Mason's Bill Miller. I commented that Miller was a "One-trick mo-mo pony" and that despite his record-setting 16 year run of beating the S&P he wasn't that good a manager.

In the 90's, during the middle of his streak he went with the momentum tech names. During the 2000's he switched to the momentum financials. Here's the complete record of his Legg Mason Capital Value Trust vs. the S&P 500:

Chart forLegg Mason Cap Mgmt Value C (LMVTX)

...The portfolio's holdings of Countrywide Mortgage, AIG, Wachovia, Freddie Mac, Bear Stearns etc. affected performance negatively after mid 2007.

Since January 1, 2000 LMVTX has lost more than 50% vs. the S&P's 21% loss, a poor performance on either a relative or an absolute basis.

Yes indeedy, a concentrated position in scammy financials sure did negatively affect performance during the Great Unpleasantness.

Here's the latest from Bloomberg, February 11, 2016:

Bill Miller's a Hedge-Fund Guy Now With a Funky Model to Try Out
When pitching investors, you normally don’t want “hedge fund" and “earthquake” in the same sentence. 
But Bill Miller, already known for quirky investing methods, is starting a hedge fund that will make bets based in part on a computer model designed to predict natural disasters.

Called Seismic Value Partners 1, the hedge fund marks Miller’s first foray in that business after decades managing mutual funds at Legg Mason. He won approval last month from the U.S. Securities and Exchange Commission to open Miller Value Partners, a money management firm that will oversee his hedge funds. 
Miller has licensed the model from OpenHazards Group, a Davis, California, company run by engineers, mathematicians, scientists and business people. While many experts are skeptical, the idea is to apply the mathematics of forecasting the probability of seismic activity to the chances of a stock market crash. 
“We have used our experience derived from doing physics to take what we hope is a unique approach to modeling financial markets,” said OpenHazards Chief Executive Officer Bill Graves, a physicist who served as the first head of Cisco Systems Inc.

If it works, the model could help Miller dodge the type of cataclysmic loss that he suffered during the recession when he was caught holding too many financial stocks. His Legg Mason Value Trust plunged 55 percent in 2008, tarnishing a reputation earned by beating the Standard & Poor’s 500 Index for 15 consecutive years.

‘Extreme Events’Like stock market crashes, “earthquakes are extreme events,” said Lisa Rapuano, who helped Miller run the Legg Mason Special Investment Trust during the 1990s. “This has the potential to help Bill avoid big mistakes, which is one of the downsides of his investment style.”

Miller, 66, declined to comment.

Some scholars dismiss the idea of applying an earthquake model to stock-picking.

“I don’t think it has diddly to do with financial markets,” said Joseph McCauley, a physics professor at the University of Houston who has written several related books, including “Dynamics of Markets: Econophysics and Finance,” published by Cambridge University Press in 2004. “I’m surprised somebody is still messing with that stuff.”...MORE
Our octa- and nona- genarian readers may recall that Joe Granville made a similar transition:

...Always remember that earthquakes can be tricky for equity analysts.
August 08's "Long-time bear joins bulls: Controversial Joe Granville says Dow could rise 800 points" had a few Granville vignettes, here's one of them:

Published: January 11, 1981 
Joseph Granville doesn't use the word ''forecasting.'' He prefers to say that he applies to the stock market a ''theory'' that he declines to reveal but whose results he communicates to clients in a weekly investment newsletter.  
Last week, as his latest bullish issue was still in the mails, Mr. Granville's theory suddenly turned bearish and advised selling. That advice, transmitted to about 3,000 clients in emergency telephone calls, triggered a selloff that drove the Dow Jones industrial average down 23.80 points and resulted in a new one-day volume record on the New York Stock Exchange. The next day, Mr. Granville predicted an earthquake of Richter magnitude 8.3 would hit Los Angeles in May.
From the New York Times:

NOTES ON PEOPLE; As a Seismologist, He's a Good Stock Analyst...
Possibly also of interest:

November 2011
What Were the Odds That Legg Mason's Bill Miller Would Achieve the Results That He Did?

March 2014
"Luck vs. skill: What Bill Gross and Bill Miller have in common"