The Perils of Being a Value Investor

A lot has been made over Bill Miller's love affair with Freddie Mac. I feel for the guy I really do. I'm sure many of you have been in similar situations where you see that the shares of a company have dropped by nearly half.... only to drop by another 50% later.

If you thought it was cheap then, it must be cheaper now right? "Good investing is all about consistency!" "Be true to your beliefs!"

Well, even if you do want to really believe in your previous calculations on the valuation of the company, if you really want to average down you need to buy way more shares at the lower price than you did before...

In Felix Saloman's words:

• On December 31, Freddie Mac shares were worth $34.07 apiece, and Bill Miller owned 15 million of them.
• By March 31, Freddie Mac shares had fallen 25% to $25.32 each, and Bill Miller owned 50 million of them.
• As of July 31, Freddie Mac shares had collapsed all the way to $8.17. And Bill Miller owned 80 million of them.
• Anybody else getting the impression that Bill Miller is one of the world's worst bear market fund managers?

While, I won't go as far as discrediting Mr. Miller's investment mind, his latest actions have been questionable. His Value Trust fund (LMVFX) has gone from $68 at the beginning of the year to $47. In all truth, this isn't that far of a deviation from most other value funds these days.

Still, it's sad that a little less than a year of bad performance (dropping ever since the market topped out in October) could wipe out 5 years of gains. His 5-year annualized now stands at -0.64%.

Watch out for those value traps!

The odd thing is, on the Legg Mason website, it describes the Value Trust fund as being of the "Large Cap Growth"