Author: Hash Global Research Bill Miller is best known for beating the S&P 500 for 15 consecutive years while running the Legg Mason Value Trust. However, one of Wall Street's most famous value investors later did something that didn't seem so "value investing": he allocated more than half of his personal wealth to Bitcoin. This almost constitutes a natural paradox: Why would a value investor invest heavily in an asset that “lacks fundamentals”? According to the most classic value investment framework, it seems that Bitcoin should not have entered Miller's vision from the beginning: it does not generate cash flow, has no balance sheet, and cannot use a standard DCF model to measure its value. But Miller doesn’t think so; he has a unique understanding of Bitcoin’s value. To understand this, start with three stories about Bill Miller and Bitcoin. Three Judges: The Starting Point of Value Investing—How to Define “Value”? Miller has been obsessed with MLB since he was a child, and the Baltimore Orioles are his favorite team. Regarding investment philosophy, he once told a story about a baseball umpire. The first referee said: "I only judge what I see." The second referee said: "I only award what I think happened." The third referee said: "It means nothing until I call it." The three referees correspond to three different world views. The first one believes that there is an objective truth in the world, and we just need to know it as accurately as possible; the second one realizes that the reality we see is always filtered by our own cognition; and the third one is closer to William James's pragmatism: the meaning of a thing does not only depend on what it "essentially is", but also depends on what role it can play in reality. This is also a key to Miller's understanding of investment. When faced with an asset, it’s easy to first ask: “What exactly is it?” But Miller is more concerned with the question: “What can it do?” The former tries to first put an asset into an existing framework, and then use familiar standards to judge its value; while Miller prefers to start from the real functions of the asset, and in turn understand: under what circumstances these functions will generate value, and whether the market has fully priced this value. This is also the starting point for his understanding of Bitcoin. From Amazon to Bitcoin: Real value investing doesn’t necessarily look like “value investing” Before buying Bitcoin, Miller was already famous for another "atypical value investment": Amazon. When the market believes that Amazon is overvalued and does not resemble a typical "value stock," Miller's focus is not on how much money it is making now, but on: If the business model is established, what will its future cash flow be like? Therefore, Miller is not a "bargain stock investor" in the traditional sense. He is not obsessed with low PE and low PB, nor will he directly exclude a company from value investment just because it looks "too expensive". This philosophy also explains why many years later, he was able to accept Bitcoin. The question Amazon asked back then was: “How can it be a value investment if it’s so expensive?” The question for Bitcoin later became: “Without cash flow, how can it be valuable?” On the surface, these are two completely different questions, but underneath they point to the same thing: whether we want to judge the value of an asset based on “what it looks like today.” Amazon represents Miller's answer. Value investing does not mean buying "what is cheap now", but whether the market "underestimates the future". Therefore, when Miller started to contact and buy Bitcoin around 2014, he did not exclude it because "Bitcoin is not like a traditional value asset". He wanted to figure out first: If Bitcoin is really valuable, where does this value come from? And an important answer he gave was insurance. A financial disaster insurance: Why can it be valuable without cash flow? One of the most classic criticisms of Bitcoin from traditional value investors is that it does not generate cash flow. Farms can produce food, companies can generate profits, bonds can pay interest, and Bitcoin just “is there.” This is one of Buffett’s most classic criticisms of Bitcoin. Miller had a very direct response: The goal of investing is not to own assets that can produce things; the goal of investing is to make money. In a 2022 interview, he explained Bitcoin in terms of insurance. The policy itself does not generate cash flow, and you do not buy insurance with the expectation that it will generate income every day. On the contrary, you hope you never need it. But that doesn’t mean insurance has no value. Its value comes from: when a certain state occurs, it can significantly change your payoff. Miller believes that Bitcoin may have similar functions. If a country experiences a serious financial crisis, the banking system is impacted, capital flows are restricted, or traditional financial channels fail to operate normally, then the question that investors care about may no longer be "how much cash flow an asset can generate each year", but will become: Can I still own it? Can it still be transferred? Can it also be taken outside another financial system? A mobile phone, a private key, and a globally operating network allow a person to continue to hold and transfer his or her 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 that necessary; but when problems arise in the traditional financial system, its value may suddenly become huge. State assets and cash flow assets: more than one value The logic of insurance also explains why Miller does not need to use 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. Therefore, it is naturally difficult for an asset that does not generate cash flow to enter this model. But when Miller discusses Bitcoin, he is closer to a probability distribution way of thinking. He once discussed a similar framework in 2015: first imagine different states that may appear in the future, then judge what value Bitcoin may have in each state, and finally assign different probabilities to these states. In other words, he is not asking: “How much profit will Bitcoin generate next year?” Rather, he is asking: "What might the world look like in the future? If the world becomes A, how much is Bitcoin worth? If the world becomes B, how much is it worth?" No cash flow does not necessarily mean no value. Miller had another habit of thinking when a new asset was never well explained by an old model. This time, he borrowed Sherlock Holmes. Silver Horse: Important clues, often hidden outside the frame "The Silver Horse" is one of Sherlock Holmes's most famous stories. A racehorse was stolen and the police investigated for a long time but could not find the answer. When Holmes arrived at the scene, the police told him that the stable dogs did not bark that night. This sentence instead led Holmes to discover a clue. If a stranger broke in, the dog would have barked. The really important clue is not what happened, but what should have happened and why it didn't happen. Miller applies a similar line of thinking to Bitcoin. According to the logic of traditional finance, an asset with no cash flow, no central bank endorsement, and no traditional balance sheet seems to have been eliminated by the market long ago. But reality doesn’t exactly follow this model. Bitcoin has experienced doubts and cycles again and again, but the technology, capital and entrepreneurial activities surrounding it have always existed. People who truly understand technological innovation do not collectively deny it like the traditional financial community does. On the contrary, a large number of top technology investors, venture capital institutions and entrepreneurs continue to enter this field-this is an abnormal signal worth studying. This certainly does not prove that Bitcoin is right, but it reminds investors that when reality does not fit the original model for a long time, it may not be just the reality that should be reexamined. When there is a conflict between models and reality, it is easy for investors to insist that the market is wrong, others are wrong, and that reality has only temporarily deviated from the "right answer." The better question is: is it possible that my model is wrong? Going to Bitcoin, but not leaving value investing Many people understand value investing as looking for cheap stocks, but Miller never saw it that way. What he is really looking for is future value that the market has not yet properly understood. This is true for Amazon, and so is Bitcoin. Therefore, he did not stop at the issue of "Bitcoin has no cash flow, so it has no value", but changed his perspective: What role can it play in the future world? From three judges, to insurance, to "Silver Horse", Miller insists on not letting existing definitions and models complete his judgment for him. This may be what investors really need to think about. He didn't give up on value investing before accepting Bitcoin. On the contrary, it was because he understood value investing deeply enough that he was not blocked by the problem of "Bitcoin has no cash flow".