Theme and Background
This section discusses the impact of market panic triggered by geopolitical events (Russia's invasion of Ukraine) in the first quarter of 2022 on investment portfolios. The report notes that the market evolved from a routine correction in January into a full-blown risk-off panic, but the author believes long-term fundamentals remain unchanged and the current panic is excessive.
Core Thesis
The author's core investment thesis is: Adhere to a long-term value investing strategy and use market panic to buy undervalued assets. Counterintuitive judgments include:
- Market concerns about a recession are excessive (100% of surveyed economists expect a recession in 2023), but the author believes the economy is still growing and the likelihood of a recession is low.
- Defensive sectors are overly favored, while overlooked areas such as cyclical, consumer, and small-cap stocks have historically performed best after similar pessimistic sentiment starting points (annualized return of +17.4% vs. +10.3%).
- High-valuation, unprofitable growth stocks will continue to face pressure, but reasonably priced early-stage growth stocks (e.g., Farfetch) have been mistakenly sold off, presenting buying opportunities.
Key Arguments and Data
- Market Performance: Miller Opportunity Equity fell 7.12% net of fees in the quarter, underperforming the S&P 500's -4.60%; however, since its inception in December 1999, it has achieved an annualized return of 7.69%, outperforming the S&P 500's 7.23% by approximately 46 basis points.
- Long-Term Holding Advantage: Since 1927, the market has risen in 73% of years, 89% of 5-year periods, 93% of 10-year periods, and 100% of 20-year periods.
- Pessimism Indicators: The current "bulls minus bears" indicator has returned to March 2020 levels, placing it in the worst quintile historically. After similar pessimistic sentiment starting points, the annualized market return was +17.4%, significantly higher than the +10.3% during optimistic periods.
- Farfetch Case Study:
- When first purchased in 2019, the stock fell from $30 to $8-10, currently around $15.
- Revenue and gross profit more than doubled from 2019 to 2021, and the company achieved adjusted EBITDA profitability in 2021.
- Free cash flow is expected to turn positive in 2023, with estimated free cash flow per share of approximately $1.25 by 2025 (implying an 8% yield at the current $15 stock price).
- Founder and CEO Jose Neves' compensation plan: The stock price must exceed $75 by 2026 (5 times the current $15) for him to receive compensation, with a maximum incentive up to $250 (by 2029).
Comparative Data Table:
| Metric |
Opportunity Equity (Net of Fees) |
S&P 500 |
| 2022 Q1 Return |
-7.12% |
-4.60% |
| 1-Year Return |
-23.35% |
+15.65% |
| 3-Year Annualized Return |
+13.09% |
+18.92% |
| 5-Year Annualized Return |
+11.81% |
+15.99% |
| 10-Year Annualized Return |
+14.76% |
+14.64% |
| Since Inception (12/30/1999) Annualized Return |
+7.69% |
+7.23% |
Companies/Assets Involved
- Farfetch (FTCH): Core holding, bullish. The author believes the market undervalues its FPS (luxury digital technology platform) business and expects separate financial disclosures within the next 1-2 years. Founder incentives are highly aligned with shareholders (stock price needs to rise above $75).
- Alibaba, Richemont: Strategic partners of Farfetch, invested in Farfetch's China business in 2020.
- Neiman Marcus Group: Entered into an FPS partnership with Farfetch in 2022.
- Evercore ISI Economist Ed Hyman: Survey showed 100% of participants expect a recession in 2023 (the author considers this overly pessimistic).
- Jim Paulsen of Leuthold Group: Provided historical data supporting high returns after pessimistic sentiment starting points.
Investment Implications
- Directional Advice: The current market panic is excessive. Long-term investors should contrarian buy reasonably priced growth stocks that have been sold off (e.g., Farfetch), rather than chasing defensive sectors. Focus on cyclical, consumer, and small-cap stocks, which have historically performed best after similar pessimistic sentiment starting points.
- Risk Warning: High-valuation, unprofitable growth stocks will continue to face pressure and should be avoided. Short-term volatility is inevitable, but the historical probability of positive returns over long holding periods (5+ years) is extremely high (100% for 20-year periods).
Additional Analysis: Structural Misunderstanding of Volatility and Limitations of Risk Measurement
1. Historical Roots and Institutionalization of Volatility Bias
Samantha McLemore cites Howard Marks, noting that mispricing stems from "ignorance and bias." She further attributes volatility bias to two historical events:
- 2008 Financial Crisis: The extremely painful losses intensified aversion to volatility, causing hedge fund returns in the decade after the crisis (approximately 2010-2020) to be only half of those in the decade before (approximately 1998-2008). Data shows that in the pre-crisis decade, hedge funds' average annualized return was roughly twice the market return (about 12% vs. 6%), while in the post-crisis decade, it fell to half the market return (about 4% vs. 8%). This "myopic loss aversion" led investors to prioritize drawdown control over maximizing long-term returns.
- Misleading Academic Framework: Markowitz's Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) simplify risk to volatility (standard deviation or Beta), making it easy for institutional investors to calculate and regulate. However, this simplification ignores the perspective of long-term holders—if measured over a 20-year holding period, short-term price fluctuations (e.g., prices on the most panic-stricken days of the past year or two) should not be a risk indicator.
2. The Failure of Beta: The Case of Bank of America
McLemore uses specific data to refute Beta's effectiveness as a risk metric:
| Time Period |
Bank of America Beta (Based on Prior 5 Years) |
Actual Performance |
| 2006 Market Peak (Before Financial Crisis) |
0.9x (Below Market Risk) |
Significantly underperformed the market during the financial crisis |
| 2006-2011 (5 Years After Crisis) |
2.3x (Actual Risk Much Higher Than Beta) |
Stock price collapsed, permanent capital loss |
- Limitations of Beta: Beta is backward-looking and non-stationary. Before the financial crisis, low Beta masked the high leverage and risk appetite on bank balance sheets; after the crisis, high Beta excessively penalized banks that had already improved. The truly effective risk indicators are balance sheet quality and risk-taking willingness.
- Comparative Data: During the bear market following the tech bubble in the early 2000s, bank stocks outperformed the market due to low Beta, but this was only temporary. In the 2008 financial crisis, the actual losses of bank stocks far exceeded Beta predictions.
3. Permanent Capital Loss vs. Temporary Drawdown
McLemore clearly distinguishes between two types of risk:
- Permanent Capital Loss: Price and fundamentals cannot recover, such as corporate bankruptcy or business model collapse. This is the core risk she focuses on.
- Temporary Drawdown: Short-term decline caused by market sentiment or liquidity, but fundamentals have not deteriorated. She views this as an opportunity for long-term investors.
She quotes Buffett and Munger: Munger calls modern financial theory "disgusting," and Buffett says "volatility is not risk to us." She emphasizes that as long as investors have the right structure and psychology (e.g., long-term holding, avoiding leverage), volatility should not be a decision-making obstacle.
4. Current Valuation vs. Historical Precedents
McLemore compares Farfetch's valuation to historical troughs:
| Company |
Trough Valuation (EV/GP) |
Trough Time |
Subsequent Performance |
| Farfetch |
2.8x |
Q1 2022 (Near Initial Purchase Price of $10) |
To be observed |
| Amazon |
4x EV/GP |
2008 Financial Crisis |
Rose more than 10x over the next 10 years |
| Farfetch (2020) |
2.8x |
2020 COVID Crash |
Subsequently rebounded to $50+ |
- Historical Precedents: Amazon traded at 4x EV/GP at the trough of the 2008 financial crisis and subsequently became a long-term winner. Farfetch also hit 2.8x EV/GP during the 2020 COVID crash before rebounding sharply. This provides support for the current valuation, but whether it repeats remains to be seen.
5. Implications for Investors
- Avoid Institutionalized Bias: Institutional investors, due to MPT and CAPM, excessively avoid volatility, leading to declining hedge fund returns. Individual investors should be wary of this "herd effect."
- Focus on Fundamental Risk: Balance sheets, cash flow, and industry moats are better predictors of long-term performance than Beta.
- Leverage Volatility: When the market misprices assets due to short-term fear, long-term investors should buy contrarian. The Farfetch case shows that even if the stock price is near historical lows, as long as fundamentals have not deteriorated, there is significant upside over a 5-year horizon.
Summary
McLemore's core argument is that volatility is not risk, but opportunity. Through historical data (failure of Beta, changes in hedge fund returns) and specific cases (Bank of America, Farfetch), she demonstrates that market bias against volatility leads to mispricing. The real risk is permanent capital loss, which depends on corporate fundamentals, not short-term price fluctuations. For long-term investors, maintaining structural stability and psychological resilience, and using volatility to generate excess returns, is a sustainable strategy.
Theme and Background
This section serves as the first-quarter 2022 investment review of the Opportunity Equity strategy managed by Christina Siegel at Miller Value Partners, primarily summarizing the strategy’s market performance and key portfolio developments during the quarter.
Core View
The author does not present any new investment thesis or contrarian market judgment in this section. This chapter mainly functions as an index and disclaimer for the quarterly performance review, emphasizing that the report reflects only the fund manager’s views as of the publication date and does not constitute investment advice.
Key Arguments and Data
This section does not provide any specific data, case studies, or historical comparisons to support investment views. The content includes only:
- Strategy name: Christina Siegel's Opportunity Equity
- Time period: First quarter of 2022
- Key statement: The views in the report are subject to change at any time, and Miller Value Partners has no obligation to update them; past performance does not guarantee future results.
Companies/Assets Involved
This section does not mention any specific companies, assets, or holdings. It only notes that Miller Value Partners can be contacted to obtain the methodology for determining “Top Contributors” and “Top Detractors” (the top five contributors and detractors) as well as the complete list of holdings.
Investment Implications
This section offers no direct implications for investors. Its core function is to serve as a legal and compliance disclaimer, reminding readers that the report’s content represents only the fund manager’s personal views and should not be used as a basis for buying or selling any securities. Investors seeking substantive analysis should proactively contact Miller Value Partners to request the complete holding contribution data.