Bill Miller on Amazon, Bitcoin, and Buying at a Discount to Future Value

Bill Miller

For somebody who's been doing this for over 40 years, it feels familiar. There have been many cases when it's been much worse than this, but still — this is painful. Jesse Livermore talked about losing money as "tuition payments in the school of the market." Since November of last year, the tuition has been very high for me. I should ask President Biden for some student debt forgiveness.

The ARK Innovation Fund yesterday got down to where it was in March 2020 — it's lost all the gains since then. Dennis Lynch at Morgan Stanley and James Anderson at Baillie Gifford, probably the two best money management records around, are both down more than 50 percent from their November highs. In the crypto space, MicroStrategy got down to where it was trading before Michael Saylor started buying Bitcoin, giving back all those gains from a peak of around 1,200 to about 160.

The deeper reason for this is a regime change. We're in a secularly rising rate and secularising inflation environment. If you're under 65 and in the investment business, you have never invested in this kind of environment before. I'm one of the few — along with Lee Cooperman and Mario Gabelli — old enough to remember that period. October 6th, 1973, I was in the Army as duty officer when the Arab–Israeli War broke out. That kicked off the inflationary environment then, just as Ukraine kicked off the oil surge now. It took Paul Volcker from 1979 to 1982 to engineer a severe recession to break it. Our version of the Nifty Fifty — the disruptive innovation stocks — peaked in November 2021 and are suffering a similar decline to those 1973–74 falls.

Bill Miller

Nobody can predict these things — no one has privileged access to the future. Keynes made the point in 1937, when the market went down 50 percent: if you can't buy when prices are falling hard, you can't buy at all, because if it's the end of the world it doesn't matter anyway. Lower prices are always more attractive than higher prices. The most attractive prices are at or close to the lows. I don't know if we're there, but I do know that with six new highs today and two thousand new lows, there's a fair amount of pessimism.

Every correction in the past regime — 2011, 2014, 2015, 2018, 2020 — reached its low when about 40 percent of the S&P 500 was making 52-week lows. Yesterday we had about 20 to 25 percent on the new low list, but another 25 percent are within a percent or two of joining them. Any further sell-off and we'll probably be close to an intermediate-term rally point. The better technicians I follow think we could see 3,700 to 3,800, and if that holds, we'll have a big snapback.

Bill Miller

I don't like these periods because of the tuition payments I'm making to the bear market — it's been extraordinarily costly and painful. On the other hand, it's a much better time to invest. One Main Financial has an 8 percent dividend yield, trades at five times earnings, and is in the perfect environment: rising wages mean their credit is getting progressively better as people are flush with cash. General Motors is at five times earnings and every car they make is already pre-sold. Taylor Morrison Homes trades at 2.9 times this year's earnings with a 20-plus percent return on equity. Home builders typically trade at ten times average earnings. We also have a Ben Graham special in Bausch Health — their 90 percent ownership of their spun-out eye-care business is worth more than the current stock price, and you'll still have the underlying business trading at 2.1 times earnings. In a bear market you see exactly this kind of mispricing.

Bill Miller

The worst period was 2008–09 — worse than 2001. In 2001 we'd come off a long run, we still had a runway of beating the market, and even though we were down a lot we outperformed. In 2007–09 we underperformed badly, lost a lot of assets, and had to lay off people. That was much more stressful than just losing money. Now we don't have that level of assets — it's basically a family office, and I'm the largest investor in the public vehicles, so they're a pretty good proxy for how much I've lost from the peak. But I'm not too concerned, because we don't have clients firing us and we don't have people to lay off.

I can always tell when the market is close to a bottom when I get margin calls. I borrow money at negative real interest rates to buy productive assets — that's my view. Margin calls are painful because you have to sell things you absolutely do not want to sell. My cost basis in Amazon is effectively zero; my cost basis in Bitcoin is effectively zero. Selling those to meet margin calls means paying capital gains tax next spring, which I also hate.

Bill Miller

JP Morgan said when somebody told him he couldn't sleep because of how much money he was losing in the market: "Sell down to the sleeping point." That's the answer. Yesterday a well-known money manager — one of the best in the world — redeemed from our fund, millions and millions of dollars. I don't think he went to buy a mega-yacht; I think he was just worried about how much money he was losing. These situations are brutal.

Bill Miller

We bought Amazon on the IPO. When people ask me the best investment decision I've ever made, it was buying Amazon on the IPO. The worst? Selling a single share. We bought it on the IPO, doubled, sold it, came back in at $88 in 1998 — and then it promptly fell to six. We bought a little more as it fell, but when it finally cratered around 2002, when people thought Amazon was going bankrupt, that was when we really bought.

I had dinner with Jeff Bezos around 2001 and asked what he was spending his time on. He said: "The balance sheet — I'm making it as bulletproof as I can." In 2002 I asked the same question and he said: "The customer experience." That meant he was playing offence, not defence. Whatever the market thought was going on, that wasn't the reality at Amazon. That gave me enormous confidence.

The real turbo-charging came around 2012 or 2013, when the stock had come down by half from its highs. The options market implied that if Amazon got back to its old highs you doubled your money in the stock, but you made five times your money in two- or three-year LEAPS. So I bought a lot of those. When they paid off I exercised them rather than selling — deferring all the taxes. By 2020 Amazon was about 83 percent of my personal portfolio.

Bill Miller

That's when I said "Amazon is Fannie Mae." Peter Lynch had taught me about Fannie Mae — a company with a structural cost advantage that was obscured by surface appearances. Amazon sold direct to the consumer and missed all of Walmart's warehouse and supply-chain overhead. They had one or two big warehouses, inventory they could return to suppliers, and they were generating positive free cash flow. Barnes & Noble couldn't compete with them the same way IBM couldn't compete with Dell — one selling through stores, one selling direct.

100 percent of the information available to value a business is based on the past. But 100 percent of the value depends on the future. Amazon was a clear leader in its space, generating positive free cash flow, with Jeff Bezos as good a decision-maker as I'd ever seen. The stock could have gone to zero, but Amazon wasn't going bankrupt — and they could generate cash under basically any circumstances.

Bill Miller

That's the way I do think about it. To the extent that the past replicates the future — stable returns on capital, durable competitive position — all that past data is very valuable for figuring out what a business is currently worth. But for a company like Amazon, what matters is projecting the competitive advantage period forward many years. You really want to own companies where the growth rate and especially the "competitive advantage period" — as Michael Mauboussin would put it, or the "moat" as Buffett would say — can be projected out for many years, so that even if it looks expensive you can afford to be patient.

The growth investors I respected most had too little patience with the inevitable hiccups in companies' growth rates — they'd flee when fundamentals changed. Value investors, if they were comfortable with the fundamentals, would sit tight even if the stock fell. You really want both: conviction about the long-term competitive advantage and the patience to hold through the noise. Ideally you own companies you'd never have to sell because their valuation target keeps moving forward — what Buffett calls owning forever.

Take Gannett, at $3.70 today — a secularly declining newspaper business, no question, but generating free cash and converting aggressively to digital. We think it could be $20 in three or four years. That's a company where you're buying a bad balance sheet that's going to get a lot better, with debt that will largely disappear. Inflation is actually their friend — their debt costs are fixed while revenues can rise in nominal terms.

Bill Miller

It came out of William James, Wittgenstein, John Dewey, and Richard Rorty. Schopenhauer's insight — building on Kant — is that you have no direct access to things as they are in themselves. All you have is your representation of them. William James took this further and said: what you really care about is how useful these views are for navigating the world.

There's the story of the three baseball umpires. The first says, "I call them as they are — if they're strikes, I call them strikes." That's realism. The second says, "I call them as I see them." That's the coherence theorist — he might be wrong, but that's how he sees them. The pragmatic umpire says, "They aren't anything until I call them." That's the key.

My view on Bitcoin isn't ideological. I ask: how useful is this thing? Does it do a job in my portfolio that I can't get done another way? Under what circumstances will it do well, and under what circumstances won't it?

Bill Miller

Bitcoin is the only economic entity in the world — certainly the only monetary one — where supply is completely unaffected by demand. If gold were $18,000 instead of $1,800, a lot more gold would be mined. Bitcoin's supply grows at about 1.7 percent per year, declining in halving events every four years, until it reaches a fixed cap of 21 million coins in 2140. The only question you have to ask is: over the long term, will demand grow faster than 1.7 percent — then 1.5 percent, on down to zero? I think it will.

Warren Buffett says Bitcoin is a non-productive asset — he can't value it, so he ignores it. That's fine if the only things you think you can value are productive assets. But the objective of investing is not to own productive assets — the objective is to make money. The question is: can you make money with this thing?

I consider Bitcoin an insurance policy against financial catastrophe. It doesn't have to be all-or-nothing — not some apocalyptic scenario where the banks are all shut. When the pandemic hit, the Fed gunned the money supply and started bailing out commercial paper markets. Bitcoin functioned fine. There was no run on Bitcoin. When Bitcoiners realised inflation was coming, Bitcoin went through the roof. That's the insurance thesis.

In Venezuela, Nigeria, Lebanon, Ukraine when the war broke out, Afghanistan when the US pulled out and Western Union stopped sending remittances — if you had Bitcoin, you were fine. You could send it anywhere in the world from your phone. Gold can't do that. You can't carry gold across a border in a sack.

Bill Miller

His family had been in Argentina for 150 years and had been wiped out multiple times — the government nationalising banks, seizing accounts, inflating them away. He said: with Bitcoin, we can't be wiped out. The government cannot take it from us.

Bob Shiller visited Estonia and spoke to a room of a hundred businesspeople. He asked if any of them owned Bitcoin and every hand went up. When Russia took over after World War II, they nationalised the banks and seized everything. If you owned a business, you were sent to Siberia. These people said: if Russia comes again, they can't take our money this time, because we have Bitcoin and we can send it anywhere.

Wittgenstein's father was one of the wealthiest people in the world, and he kept money in the United States and England precisely because he couldn't trust the Austrian government. When Hitler took over, he seized everything from Jewish families — but the Wittgenstein family had enough outside Austria, and they negotiated their way out of the concentration camps by handing it over. Bitcoin would have changed that calculus entirely.

Bill Miller

Dan Morehead of Pantera Capital asked me the same thing after an interview — had I ever read anything that was genuinely thought-provoking as a case against Bitcoin? I said no. He said neither had he. Then I read a piece by Hillary Allen, a law professor whose expertise is financial crises. Her article, something like "Cryptocurrencies are Shadow Banking 2.0," made a point I hadn't fully considered.

What set off the 2008 collapse was ultimately the Reserve Fund — the big money market fund — breaking the buck. It wasn't insured, and when it happened the entire commercial paper market froze. The Fed had to step in and effectively guarantee all money market funds. Allen's argument is that stablecoins are like the Reserve Fund — no backing, no Fed to bail them out, entirely decentralised and opaque. Terra collapsing this week — going from a dollar to twenty cents — is exactly that risk. Her solution is either regulate stablecoins the way money market funds are now regulated after 2008, with total transparency about assets, or wall them off so they can't infect the broader financial system.

That's one reason I like Silvergate Capital — it's a bank that already operates under banking regulations, it services the crypto ecosystem, and it bought Meta's DM payment technology for $182 million. A regulated stablecoin built on that infrastructure would solve the problem Allen identifies.

Bill Miller

Several things. They are old, and they're not people who embrace new technologies. They look at the tried and true. They also don't want to take a lot of risk — Buffett has said many times he's taken enough risk in the insurance business. The analogy I use is the Sherlock Holmes story "Silver Blaze." A famous racehorse is stolen, Scotland Yard is baffled, Holmes is called in. He says the key is the guard dogs — the inspector says they didn't bark, and Holmes says exactly: they knew who the thief was.

All the people dissing Bitcoin are like the detective who missed the guard dogs that didn't bark. As Mark Andreessen memorably said when Buffett first dumped on Bitcoin in 2017: "The record of old white men who don't understand technology crapping on new technologies they don't understand is 100 percent." That Silver Blaze story jumped out at me, because the guard dogs here are venture capitalists — whose job is to assess new technologies. Not a single prominent venture firm has dumped on the technology of Bitcoin. Andreessen Horowitz and every other major firm now runs dedicated crypto funds. Last year $27 billion went into crypto ventures — more than all of Bitcoin's history combined. In the first quarter of this year, five times as much went in as last year's record. That's the measure of demand.

Bill Miller

I'd dispute that I'm a naive contrarian. I don't automatically like things because everybody hates them. What I do is understand the prevailing views, identify where there's excess exuberance or excess pessimism, and look at the evidence on both sides. We know from the psychological literature — from Kahneman — that the coefficient of loss versus gain is two to one. Losing a dollar is twice as painful as winning a dollar. So when a market has 2,000 52-week lows and six new highs, the owners of those 2,000 companies are genuinely unhappy. The only thing better than a stock at a 52-week low is one at a three-year low, a five-year low, an all-time low — because everybody hates it. That's a prima facie case to take the other side and look carefully at the evidence.

When I see a statement that could be quantified but isn't — just an emotional or normative description — I ask for the evidence. People say Bitcoin is a "climate catastrophe" and "uses as much electricity as Argentina." How much is that exactly? According to the Cambridge Centre for Alternative Finance, it's about 0.62 percent of world electricity usage — less than laundry, far less than air conditioning. Natural gas flaring alone uses more energy than Bitcoin. Strip away the normative language and you're left with a much smaller problem.

Bill Miller

That distinction was first pointed out by Frank Knight the economist. Risk is what insurance companies manage — they have data on the probabilities of bad events and their exposures, and they manage to those. But when people talk about "risk management" in stocks, they mean what Keynes called irreducible uncertainty: you don't know the probabilities, you can't know the base rates, so you can't manage it. You have to deal with it, and look at what happens if you're wrong.

People freak out when the market falls because they don't know if it'll fall five percent or fifty percent. For me, I don't know how much Amazon can fall, but I know Amazon isn't going bankrupt. I know they can generate cash under basically any and all circumstances — the only reason they wouldn't is when they're spending on capex because their business is so good. As Munger says, the best business to own is the one that, when it stops growing, gushes cash. That's Amazon.

The 1990 Gulf War is a good example. At the Barron's Roundtable, John Neff, Peter Lynch, Paul Tudor Jones — all luminaries, all cautious, all saying there's too much uncertainty. Jones went back to his office and said: if the smartest investors in the world are all worried, the whole world is worried — so the right thing is to go the other way. He bought heavily. As soon as the bombs started dropping, the market started rising. All the year's gains happened in about twenty days.

Bill Miller

In epistemology, one of the questions addressed is whether you can know something without knowing how you know it or being able to explain it. The answer is yes. You can have a strong emotional sense that X is true without being able to articulate why. For me, that would work by pattern recognition — "I've seen this kind of market before; it looks like this and this." Reasoning by analogy rather than strict quantitative logic. The most common application is simply: when has the market discounted what it's worried about? Or on the other side, when has it over-discounted what's clearly going to happen? I think we're close on the market right now. There's patent recognition from doing this for 40 years, and there's also some feel — some sense of when people are too excited or too cautious. As Buffett has said: you pay a high price for a rosy consensus.

Bill Miller

Samantha and Bill are certainly ready and eager. They're the same age I was when I took over sole management from my late partner Ernie Kiehne. I've passed my biblically allotted three score and ten years, and I want some time not being an owner responsible for all the operational and regulatory issues that go with running a business. I'll still invest — in the funds and in my own account — just without the obligation to clients and the compliance constraints that are so problematic in a market like this.

The compliance rules are genuinely problematic when you're always on margin and running a high-beta concentrated portfolio. When I get margin calls now, I'm often prohibited from transacting for seven days because Samantha may have been repositioning the portfolio. That meant I had to sell some Amazon and Bitcoin to meet calls — exactly the things I least wanted to sell. Retiring as the named PM gives me far more freedom to operate my personal account as I see fit.

Bill Miller

Actually, the comeback — not because I came back, but because the decade from 2009 to 2020 was in my opinion a far more impressive period than the famous 15 years in a row of beating the market. In the 15-year run, some years only 10 percent of managers beat the market, making it easier to stand out. In that 10-year period, looking back at one-, three-, five-, and ten-year performance, we were in the top one percent for every period — not just ahead of the market but in the top one percent. That was much harder.

I also appreciate the resilience. I could have packed it in after 2008–09 — laid down in fetal position. But it was intellectually interesting and challenging, and I'm competitive. That said, I think Nick Sleep and Zach Zakaria got it more right than I did by retiring young and giving themselves a long runway. Peter Lynch retired at what — 1986? He's been at Fidelity for over 50 years but hasn't managed money for 40 of them. I have a much shorter runway now, but I want to spend some of it on philanthropy and on reading what I actually want to read, not what I feel obligated to read.

Bill Miller

I'm in the William Green fan club. You're among the most thoughtful and insightful of financial journalists, and your book sitting right behind you is one I give to anyone who asks what they should read about investing — and about life. Thank you very much.