- Bill Miller, the founder of Miller Value Partners, trounced the market for 15 consecutive years by employing a value-based approach to his investments.
- Miller says he wouldn't be surprised if stocks etched out new highs late in 2020 or early in 2021.
- His sanguine view is bolstered by a confluence of three variables that are favorable at the moment.
- He shares a simple, no-frills trade idea to capitalize on the current environment.
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Investors who beat the market on a consistent basis are few and far between. Legends like Warren Buffett, Jim Simons, Joel Greenblatt, and Peter Lynch are among the few who took the seemingly impossible and made it a reality.
Bill Miller, the founder of Miller Value Partners, is cut from the same cloth.
From 1991 to 2005, Miller trounced the S&P 500 employing his value-based theorem. Today, he has a sanguine view of where things are headed.
"As I like to say, the market predicts the economy, the economy does not predict the market," he said on the "Masters in Business" podcast. "If the market did in fact bottom in the second quarter — as it appears it did — then that means it's getting better."
He continued: "I don't there's anything out of whack with what's going on."
For many, it's hard to believe that the market's voracious move higher is sustainable with much of the economy still in shambles. But to Miller, the notion that the stock market and the economy are inextricably linked in the short-term is ill-founded.
"If you go back and look at all the — going back from 1930 to like 2019 — and you look at the annual correlation between the market's return and the economic growth, the answer there is, I think, that the correlation coefficient is 0.09, meaning it's random," he said. "Zero is exact random. It is 0.09. So, there's basically no correlation whatsoever."
With that common pitfall through the evidence of hard data, Miller is keeping his focus on the factors that are pertinent to the current landscape. And to him, that's the economic rebound, the Federal Reserve's propensity to keep rates low, and inflation. If this trio of variables stays favorable, Miller thinks the market could ink new highs.
"And so, I think that it wouldn't — so, it wouldn't surprise me if the overall market hit new highs sometime late this year or early next year, which I think would probably be a surprise to most people," he said. "But if the economy is coming back faster — and there's not going to be any inflation, and the Fed's not going to raise rates, and we can have new high in GDP by the first quarter of next year — I can't see the reason why the market wouldn't be at an all-time high then."
Under that umbrella of thought, Miller thinks a "no brainer" trade is the way to capitalize on the moment.
"And so, one of those so-called no-brainer trades to me would be if you've got a 10-year horizon in the market, or even a five-year horizon for that matter, go long an equity index fund and go short the five-year or 10-year treasury," he said. "It would seem to me that it'd be very difficult to lose any substantial amount of money."
What's more, Miller says that inflation starts to tick up — a prospect many prominent investors have been warning about. That will essentially put his trade on steroids.
"But if it becomes a problem in year three, four, five, and the yield curve start shifting up significantly, then that would be kind of a home run trade."
An investor looking to mirror Miller's idea could purchase shares of the SPDR S&P 500 ETF Trust (SPY) and short a five-year or 10-year US Treasury note.
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