Bill Miller Reveals Secrets of His Success

If you were learning to play golf, you'd probably be pretty grateful to get a few pointers from Tiger Woods. And if you were taking up tennis and John McEnroe offered to help you with your backhand, you'd probably listen.

So it is with investing and Bill Miller, the manager of (LMVTX)Legg Mason Value Trust, a past master of Wall Street. Until last year, he had beaten Wall Street, as measured by the Standard & Poor's 500 index, for a record 15 consecutive years.

Much of the financial press have been focusing lately on the fact that the record ended in 2006 (more about this later). But Miller's latest letter to shareholders instead discusses something much more interesting -- he explains how he did it.

Miller says that if you want to find value in the market, you shouldn't just look for stocks that appear cheap compared with their net assets or next year's projected earnings. He says the real value investor needs to look at a company's stock price compared with all of its future cash profits -- including those many years in the future.

"As I often remind our analysts," he writes, "100% of the information you have about a company represents the past, and 100% of the value depends on the future."

That's why, for example, he was able to make big profits for his investors in technology stocks back in the late 1990s, when most "value" funds avoided them because they looked too expensive. And it's why he was willing to pony up for stocks such as Amazon(AMZN) and Google (GOOG) in the recent years.