Contrarian Value Investing Embraces Growth and Psychological Discipline

Key Quotes

"I want to talk a little bit about your time with Bill Miller but before we get to that, let's start in college, magna cum laude from Washington and Lee, originally chemistry but eventually changes to accounting and business. What was the original career plan?"

Samantha McLemore explains that her initial college major in chemistry was based on a perceived aptitude rather than a concrete plan. She recounts realizing she was not as adept at chemistry as she thought, leading her to switch to accounting and business, which proved to be a more natural fit. This highlights how initial interests can evolve based on self-assessment and academic performance.

"I like to say I won the job lottery because it was the fall of 2001, so now we were in the tech market crash. It wasn't a great job market. Fortunately, you know, there were a lot of investment banks recruiting from my alma mater, so my plan was to go there. I was ready to do the all-nighters in New York, and Bill, who also went to Washington and Lee, happened to come back, you know, the fall of my senior year. He did some speaking, he met with the investment club, and I got very lucky. I asked him if I could send him my resume, and he said sure."

Samantha McLemore describes her fortunate entry into the investment management field, emphasizing the challenging job market of 2001. She credits a chance encounter with Bill Miller at her alma mater and her proactive approach of asking to send her resume as key factors in securing her first job as a junior analyst at Legg Mason. This illustrates the importance of seizing opportunities and taking initiative.

"Bill used to joke that he liked to hire people young so he could imprint them like the baby bird that whatever the first thing it sees, it thinks is its mother. So I was definitely imprinted by when Bill made the point, listen, we don't know what the best values in the market are today because it depends on the future and the future is unknowable. So no one knows what they are, but we do know if we look back over long periods of time, what the best values are because we have hindsight bias and we can look back and say, well, what went up the most, clearly that was the most, the best value."

Samantha McLemore shares a key lesson from her apprenticeship with Bill Miller, explaining his philosophy on identifying value. She highlights Miller's view that true value is determined by future growth, which is inherently unknowable, and that hindsight reveals past best values as companies that grew and compounded value over long periods. This perspective challenges traditional low-multiple value investing by suggesting that high-growth companies, often trading at higher multiples, can represent the best long-term values.

"Well, I think we are unconventional and we've always been unconventional. And Bill started the Opportunity Trust in 1999 at the peak of that tech bubble, and the idea was, let's create a fund with the maximum flexibility possible to go wherever it wants. And again, there's lots of structures in the business that make that hard because style boxes don't like that. People allocators want to put you in a box, and so it hurts demand for your fund when you're like, no, I'm just going to go wherever the best values are."

Samantha McLemore explains the unconventional philosophy behind the Opportunity Trust, which she now manages. She notes that the fund was designed with maximum flexibility to invest in the best available values, regardless of traditional investment categories. McLemore points out that this flexibility, while potentially hurting demand from allocators who prefer defined boxes, is intended to allow for better long-term returns.

"I think in investing and markets, having the right mindset is probably the most important thing. And it's a mixture of art and science. And a lot of people think the scientific part is more important, but I think the art part is more important because, you know, there's a lot of data on how much more you can make in equity markets over time. And so the reason that you can make more is because you have these periodic losses. And it, you know, I liken it to dieting. It's like, people don't fail at dieting because they don't know they shouldn't eat the cookie, right?"

Samantha McLemore emphasizes the critical role of mindset in investing, likening the "art" of investing to the challenges of dieting. She argues that while people understand the principles (like not eating the cookie or not selling during market downturns), the difficulty lies in behavioral execution due to emotional temptation. McLemore suggests that developing the right tools and mindsets is crucial for navigating these emotional challenges and achieving long-term investment success.

"I think the clearest parallel is the market valuation overall is at high levels that we haven't seen since then. So I think the markets at 22 times, you know, the next 12 months earnings, and it peaked at like 25 times then. So we're, you know, after the financial crisis, we were at very low levels and we've spent, you know, the past 16 years, you know, having great markets, some of the best markets we've ever had, and the valuations have risen."

Samantha McLemore draws a parallel between current market valuations and the dot-com bubble, noting that the market is trading at high multiples of forward earnings. She contrasts this with the post-financial crisis period, which saw low valuations, and highlights the sustained bull market over the past 16 years that has driven valuations higher. McLemore expresses a cautious stance as a value manager due to these elevated levels.