Bill Miller Reveals Secrets of His Success

He says concentration only works when you see chances to make some really big profitable bets on individual stocks. In the past year, when value was spread more evenly, being too concentrated ended up hurting his fund.

Miller enters 2007 very bullish: As RealMoney.com's James Altucher pointed out earlier this month in his story "Bill Miller's Internet Stock Revenge," Miller has revealed he is starting to use leverage to buy stocks for the first time since 2002.

As of Dec. 31, 2006, his top 10 holdings were power company AES (AES), Tyco ( TYC), Sprint Nextel, UnitedHealth ( UNH), Amazon, Google, Wall Street bank JPMorgan(JPM), Qwest Communications (Q), Sears (SHLD) and mortgage lender Countrywide Finance (CFC).

One final note: Miller-watchers always focus on his Value Trust fund. But since the end of 1999, he has also run the smaller, lesser-known (LMOPX)Legg Mason Opportunity Trust . And it's doing better -- a lot better. Value Trust only rose 5.85% last year, compared with 14.8% for the S&P 500. But Opportunity Trust grew 13.41%. In fact, over its seven-year life, Opportunity Trust has produced four times the profits of Value Trust -- an overall return of 96% compared with 22%.

The reason? This fund gives Miller much greater freedom, and he can take more risks and put more money into small-cap stocks and foreign markets. The current differences: Two of this fund's top three holdings are steel companies -- U.S. Steel (X) and overseas giant Mittal (MT).

Naturally, the fund is more volatile. But it's also making the returns. Incidentally, I'm kicking myself, because I have had a small stake in the Value Trust for years, but I have nothing in the Opportunity Trust.

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