HASHGLOBAL INSIGHT
True value investing is identifying those values that have not yet been fully understood by the market.
Henry Yang
Head of Hash Global Research
Crypto Investor & Talebian
Bill Miller is best known for outperforming the S&P 500 for 15 consecutive years while managing the Legg Mason Value Trust.
However, this renowned Wall Street value investor later did something that seemed less like “value investing”: he allocated more than half of his personal wealth to Bitcoin.
This almost constitutes a natural paradox:
Why would a value investor heavily invest in an asset that "lacks fundamentals"?
According to the classic framework of value investing, Bitcoin appears from the outset to have no place in Miller’s considerations: it generates no cash flow, lacks a balance sheet, and cannot be measured with a standard DCF model.
But Miller does not think this way; he has a unique understanding of Bitcoin's value.
To understand this, we can start with three stories about Bill Miller and Bitcoin.
Key Points of This Article
01
Three Umpires: The Starting Point of Value Investing—How to Define “Value”?
02
A Financial Disaster Insurance: No Cash Flow, Why Can It Still Have Value?
03
The Silver Blaze: Important Clues Often Lie Outside the Framework
01
DEFINING VALUE
Three Umpires: The Starting Point of Value Investing—How to Define “Value”?
Miller has been passionate about Major League Baseball (MLB) since childhood, with the Baltimore Orioles being his favorite team. He once shared a story about umpires in relation to investing philosophy.
The first umpire said, “I only call what I see.”
The second umpire said, “I only call what I think happened.”
The third umpire said, “Before I call it, it’s nothing.”
The three umpires correspond to three different worldviews. The first believes that there is an objective truth in the world, and we should strive to understand it as accurately as possible; the second recognizes that our perception of reality is always filtered through our own cognition; while the third is closer to William James’s pragmatism: The meaning of something does not only depend on “what it essentially is,” but also on what role it can play in reality.
This is also a key to how Miller understands investing.
When faced with an asset, we easily ask: “What exactly is it?” But what Miller cares more about is: “What can it do?”
The former tries to fit an asset into an existing framework and judge its value with familiar standards; while Miller prefers to start from the actual functions the asset possesses and understand in reverse: Under what circumstances would these functions create value, and whether the market has fully priced this value.
This is precisely where his understanding of Bitcoin begins.
02
AMAZON TO BITCOIN
From Amazon to Bitcoin: True Value Investing May Not Look Like “Value Investing”
Before buying Bitcoin, Miller had already gained fame for another “atypical value investment”: Amazon.
When the market believed Amazon was overvalued and not a typical “value stock,” Miller was not focused on how much money it was making at the moment, but rather: If the business model works, what will its cash flows look like in the future?
Thus, Miller is not a “cheap stock investor” in the traditional sense. He does not fixate on low PE or low PB values, nor does he automatically exclude a company from value investing because it seems “too expensive.”
This philosophy also explains why, years later, he could embrace Bitcoin.
The problem with Amazon at the time was: “How can it be value investing when it’s so expensive?”
The problem with Bitcoin later became: “How can there be value without cash flow?”
On the surface, these are two completely different questions, but they point to the same issue: Should we assess an asset’s value based on “what it looks like today”?
Amazon represents Miller’s answer.
Value investing does not equal buying “things that are cheap today,” but rather whether the market has “underestimated the future.”
Therefore, when Miller started engaging with and buying Bitcoin around 2014, he did not exclude it just because “Bitcoin doesn’t resemble traditional value assets.” He wanted to first clarify: If Bitcoin truly has value, where does that value come from?
One significant answer he offers is insurance.
03
FINANCIAL INSURANCE
A Financial Disaster Insurance: No Cash Flow, Why Can It Still Have Value?
One of the classic criticisms from traditional value investors regarding Bitcoin is that it does not produce cash flow.
Farms can produce food, companies can generate profits, bonds can pay interest, while Bitcoin just “exists there.” This is one of Buffett’s most classic criticisms of Bitcoin.
Miller has a very direct response to this: The goal of investing is not to own assets that can produce something, but to make money.
In a 2022 interview, he explained Bitcoin using insurance. The policy itself does not generate cash flow, and you do not purchase insurance hoping it will produce returns every day. Quite the opposite; you even hope you never have to use it.
But that does not mean insurance lacks value. Its value comes from: When a specific condition occurs, it can significantly change your payoff.
Miller believes Bitcoin may have a similar function. If a country experiences a severe financial crisis, the banking system is impacted, capital flows are restricted, or traditional financial channels cease to operate normally, investors' concerns may shift from “How much cash flow can an asset generate each year” to: Can I still own it? Can I transfer it? Can I take it to another financial system?
A smartphone, a private key, and a globally running network can allow an individual to continue holding and transferring their assets. This is not a “productive asset” in the traditional sense, but it may be a state-dependent asset:
In a normal world, it may not seem so necessary; but when the traditional financial system has problems, its value may suddenly become immense.
04
STATE-BASED VALUE
State-Dependent Assets vs. Cash Flow Assets: There Are Many Forms of Value
The logic of insurance also explains why Miller does not have to rely on the traditional DCF model to understand Bitcoin.
Traditional value investing usually calculates future cash flows, growth rates, and discount rates in a relatively continuous world, thus making it inherently difficult for an asset that does not produce cash flow to fit into this model.
However, when discussing Bitcoin, Miller is closer to a probability distribution method of thinking.
He once discussed a similar framework in 2015: first envision the different states that could possibly emerge in the future, then assess what value Bitcoin might have in each state, and finally assign different probabilities to these states.
In other words, he is not asking:
“How much profit can Bitcoin generate next year?”
Instead, he is asking:
“What could the future world look like? If the world becomes A, how much is Bitcoin worth; if it becomes B, how much is it worth?”
Having no cash flow does not necessarily mean having no value. When a new asset cannot be well explained by old models, Miller has another thinking habit.
This time, he borrowed from Sherlock Holmes.
05
THE SILVER BLAZE
The Silver Blaze: Important Clues Often Lie Outside the Framework
The Silver Blaze is one of Sherlock Holmes’s most famous stories.
A racehorse was stolen, and the police investigated for a long time but found no answers. When Holmes arrived at the scene, the police told him that the dog in the stable did not bark that night.
This statement led Holmes to discover a clue. If a stranger had broken in, the dog should have barked.
The truly important clue is not what happened, but why something that should have happened did not happen.
Miller applies a similar mindset to Bitcoin.
According to traditional financial logic, an asset that doesn’t produce cash flow, lacks central bank endorsement, and has no traditional balance sheet should have long been eliminated by the market.
But reality has not completely followed this model.
Bitcoin has experienced repeated skepticism and cycles, yet the technology, capital, and entrepreneurial activities surrounding it have persisted. Those who genuinely understand technological innovation did not collectively deny it like the traditional financial sector. On the contrary, a multitude of top tech investors, venture capital firms, and entrepreneurs continues to enter this field—this is an anomaly worth studying.
This cannot prove that Bitcoin is necessarily correct, but it reminds investors: When reality does not conform to an existing model for a long time, perhaps it is not just reality that needs to be re-evaluated.
Investors can easily cling to the belief that the market is wrong, others are wrong when conflicts arise between their models and reality, viewing reality as temporarily deviating from the “correct answer.”
A better question is: Is it possible that my model is wrong?
06
VALUE INVESTING
Moving Towards Bitcoin Without Leaving Value Investing
Many people understand value investing as seeking cheap stocks, but Miller never sees it that way.
What he is truly seeking is the future value that the market has not yet correctly understood. This is true for both Amazon and Bitcoin.
Thus, he does not dwell on the question “Bitcoin has no cash flow, so it has no value,” but rather shifts to a different perspective:
What role can it play in the future world?
From the three umpires, to insurance, to The Silver Blaze, Miller insists on not allowing existing definitions and models to complete his judgments.
This may be the real takeaway for investors to ponder.
He did not abandon value investing to accept Bitcoin.
On the contrary, it is precisely because he understands value investing deeply enough that he was not kept out by the question “Bitcoin has no cash flow.”
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