Bill Miller has compiled an astonishing long-term record as manager of the Legg Mason Value Trust. He is one of the only big-time mutual-fund managers to have beaten the S&P 500 for 15 years running. But as Barron's reported on Saturday, his streak is in danger. Through yesterday, according to Morningstar, the fund was down 10.14 percent, compared with a 2.78 percent gain for the S&P 500. Miller has clearly been the victim of some bad luck and poor stock selection. But Barron's offered an alternative theory why Miller is flagging: This summer he bought a humongous yacht.
When someone who's supposed to be looking out for public shareholders is instead mulling over wallpaper samples for staterooms, it's time to sell. The yacht has long been the classic indicator of someone who has so much money that he doesn't need to make any more. Unlike a jet, which can speed busy executives to their offices efficiently, a yacht has no useful purpose. And who has time to play with such an over-the-top toy? Someone who doesn't work weekends figuring out how to make money for other people. A classic 1940 investment book, aimed at debunking the practices of Wall Street, was called Where Are the Customers' Yachts?Today, you should ask: Where are the shareholders' yachts? If you look at the recent record of CEOs who have become yachtsmen, it's clear that when they buy a boat, it's the shareholders who usually get soaked.
Check out Power & Motoryacht'slist of the 100 largest U.S. yachts, connect them to the CEOs or chairmen of publicly held companies or mutual-fund managers who own them, and then see how their companies and funds have performed since the vessel was acquired. (For the consumer-porn voyeurs out there, the magazine also compiles a list of the largest yachts in the world.)
The largest boat in the United States, Rising Sun, belongs to Oracle founder and CEO Larry Ellison. It was completed in 2004, and it is 452 feet long. Here's a chart of Oracle's stock against the S&P 500 since January 2004—a slight underperformance.
The second-largest American yacht, Octopus, completed in 2003, belongs to Paul Allen, the co-founder of Microsoft who left the company in the early 1980s and has acquired an eclectic group of assets, including the Seattle Seahawks and the Portland Trail Blazers. Allen also owns the fourth-largest American yacht, the 300-foot Tatoosh, built in 2000. Since 1998, Allen has been chairman of the board of publicly held cable company Charter Communications. During Allen's boat-buying spree, Charter's stock has been a disaster: It has lost about 90 percent of its value since January 2000. Since the beginning of 2003, the stock has basically remained flat, in large part because, at about $1.40, it literally can't fall much more.
Ron Perelman, the financier who has long headed the publicly held cosmetics giant Revlon, checks in at No. 26 on the list, with the 188-foot Ultima III, which he bought in 1998. Alas, Revlon since 1998 has been a Titanic (the boat, not the movie). It has lost more than 90 percent of its value since its corporate chieftain became a maritime captain. And it's hard not to reach the conclusion that Allen and Perelman regard both yachting and running public companies as expensive hobbies, not as their life's work. That may be very entertaining for them, but it's costly for their shareholders.
(This year's list doesn't include one former fixture on the list. In 2000, hard-charging Tyco CEO Dennis Kozlowski bought a 130-foot sailing yacht, Endeavor. In June 2002, Kozlowski was forced to step down amid charges of corruption; he was convicted last year. As this chart shows, from the beginning of 2000 until Kozlowski's resignation, Tyco's stock fell nearly 70 percent.)
There are some exceptions to the Yacht of Doom Rule. Leslie Wexner, chairman and CEO of Limited Brands, has owned the nation's third-largest boat, the 315-foot Limitless (get it?), since 1997. The stock of the parent company of the Limited and Victoria's Secret has done remarkably well in the last nine years. Andrew McKelvey, the CEO of Monster.com, in 2005 purchased the 160-foot Discovery, and his stock has done well. Michael Kittredge, founder and chairman emeritus of Yankee Candle Company, has owned Parrafin (No. 18) since 2001, and the company's stock has handily outpaced the S&P 500 since then.
In the end, the results are less than heartening. The successes in the bunch don't come close to making up for the disasters. Does the yacht warning mean investors should dump shares in Bill Miller's Legg Mason Value Trust? No. It's very difficult for small individual investors to find managers with excellent long-term records. And Miller's long-term record is still phenomenal. Besides, there are signs that his approach to yacht ownership differs from those of Allen and Perelman. Many gazillionaires are content to see their boats and crew sit idle while they party elsewhere. Miller, according to Barron's, plans to rent his vessel out for charters. After all, he's a value investor.