Bill Miller and Value Trust Case Study

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Capital Market efficiency is the degree in which the present asset price accurately reflects the current information in the market place. The EMH also states that the market is the most efficient mechanism at determining the intrinsic value as it has a greater ability to collect and respond to information than any other mechanism. If the market exhibits characteristics of strong form efficiency, the prices are assumed to reflect all information regardless if it private or public. This implies that no trader can gain a consistent advantage over any other trader or consistently achieve abnormal returns. New information regarding securities comes to the market in a random fashion where timing is independent of others. A semi-strong form EMH exhibits characteristics in which a stock price reflects all publicly available information. All new information is immediately incorporated into the stock price and thus traders cannot consistently have excessive return by taking advantage of the public information therefore eliminating abnormal profits However, a trader trading on inside information can achieve abnormal returns and outperform the market. In a weak form EMH, stock prices reflect all information including past prices. The random fluctuations of the stock cannot be predicted which implies that traders cannot consistently have an advantage based on past information like pricing patterns.

The loop hole is that if any trader gains public information first hand before any trader learns of it, they can generate abnormal returns and beat the others to the trade. If the EMH is right, how did Value Trust beat the market so many times? Luck is clearly not the sole explanation of Value Trust’s remarkable performance. It shows that Miller proved that the efficient market hypothesis did not do a very good job predicting how the market would behave. He was alert and had to do something to detect the beginning of a new outbreak and did things different from everyone else that set him up on a higher pedestal. Miller definitely had professional expertise in the market. Since Miller was a great market influencer, participants paid close attention to his actions. Miller was giving the bargaining power that manipulated the market because of his reputation. However, his actions in comparison to the market was small and past success has never been a guarantee of excellent future success. Thus, it is hard to credit all of his doing because of his reputation.

Bill Miller’s performance involved the mix of skill and luck. He outperformed the market based on his analysis and patience. He was willing to take risks in order to make enormous profits. I would not recommend to invest in Value Trust because his performance after 2005 and during the financial crisis shows that it was based on luck and the future of value trust was unstable.

What might explain the Fund’s performance?

The huge purchasing power by mutual funds drives stock prices to rise according to the fundamental analysis of the supply and demand theory. The success of the performance might also have been because investors were more confident in their expertise and were willing to expand their portfolio which also drove stock prices up.

What in Miller’s strategy might explain performance?

Miller’s advice to be wary of valuation illusions proves that it is all right to go out of your comfort zone and think out of the box. Analysis is also important to see the necessary potential of the stock. Wal-Mart and Microsoft were the two historical valuation mentioned that had high P/E ratio and high price when they went to public. Take risks in order to beat the market and get high premium returns.

How easy will it be to sustain Miller’s performance into the future?

It is not as hard because of his reputation and well know achievements. People look up to him and that gives him the advantage to purchase larger stocks and raise stock prices.

Discuss the performance with regard to the theory of capital market efficiency.

A good performance cannot explain the theory of capital market efficiency because information is incorporated in the prices already. Beating the market is getting higher returns than the market consistently.

How would you define excellent performance?

An outstanding average return compare to the S&P 500 I believe is defined as an excellent performance. Having evidence in beating the market with knowledge and understand and not base on luck is key.

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