SMARTMONEY: Crazy ride? How do you describe 2008?

MILLER: Dreadful, a disaster. When my streak was going on, people would ask: Won t it be a relief when it s over? And I said: No, it won t be a relief. How would it be a relief if we underperform? We underperformed by far more than we thought we would abstractly. There was a lot of disappointment from clients because no matter what you told them, expectations were too high. Everyone expected I would underperform eventually, but they didn t expect to see these types of declines.

SM: The fund had always been lauded for its thoughtful analysis and thorough research. How did you make mistakes like buying Bear Stearns before its collapse or Freddie Mac before its bailout?

MILLER: Take Bear. You never had a case before where an investment bank had failed and had a run on it that didn t have a legal problem or rogue trader. After Bear, we realized we were not being cautious enough about the depth of the crisis so we sold Washington Mutual and Wachovia and thought we were moving up the quality spectrum by buying AIG (AIG) and Freddie (FRE). We were not na ve about the depth of the housing crisis. We were prepared to take losses if we were wrong on that. But we weren t prepared for the government to come wipe us out preemptively; there was no funding crisis.

SM: So what were the lessons?

MILLER: There was a significant thing we missed in this. We do probabilistic scenarios and try to have robust tactics and strategies to deal with them. At the grossest level, I didn t have in our planning scenario a credible chance of another Great Depression. I figured everything post-World War II is fair game and that s a lot: Inflation going from 0 to 10 percent, crashes, Watergate, oil embargo, banking problems... A client said, You should have had a wider range. Obviously, but in retrospect, how wide? Should I plan for civil war or return to slavery? You have to draw the line somewhere and I drew it at the Depression and that was, as it turned out, wrong.

SM: So now what?

MILLER: All the strategies we have to deal with these events is based on there being a liquidity-driven crisis, like in 1987, 1994 or even 2002 debt deflation scare where the Fed cuts rates and grows its balance sheet to solve the problem. In that crisis, what you do is what we ve always done: When the injection comes you have three to six months to get invested, typically in the areas of the market that has been the source of the problem. And it works great. But this was not a liquidity-driven crisis but an asset-collateral driven crisis, with housing prices dropping and then stock prices dropping. In this crisis, liquidity injections offer only temporary relief and the problem is not solved until policies are adopted. Had we understood the difference we would have gotten defensive very fast, which is what we will do the next time it probably is not going to be in my lifetime but it may be in yours.

SM: What else have you learned?

MILLER: We also did poorly coming into this period because we didn t have energy, materials or industrials. We have tweaked the process so now if we have a group in the bottom decile of its historical valuation or it gets as cheap as energy did in 2003 whether or not we think the industry can earn more than its cost of capital, we will have exposure to it. It s for the same reason you diversify.

SM: We have had this amazing rally so now what? If you look at your portfolio, are these the companies that are going to help you recoup your losses?

MILLER and Cisco ( didn t do well in the next couple years because they were richly priced. Now, that top end of the high-quality spectrum is very cheap. That is where the values are shaping up.

SM: What s your take on health care?

MILLER and Amgen (, but there are broader areas opening up. Device companies like Stryker ( and Zimmer ( are under consideration for us. And I think in smaller biotech there are strong opportunities coming as soon as reform outlines are clear. I think there will be a huge merger and acquisitions wave.

SM: The Value Trust portfolio is more diversified in terms of sectors but what about holding more names?

MILLER: We owned a lot more names in Opportunity Trust than Value Trust and it did worse. We used to own 100 to 150 names so concentration is not part of our philosophy. It flows from where the opportunities are. If I m looking at three companies all in different industries that are all trading at 10 and I think they are worth 20, it pays to own all three. But if I think the last one is worth 100 it pays to concentrate in that one.

SM: What preoccupies you now?

MILLER: The traction the recovery will get. I m concerned about any thing that would be a shock to aggregate demand pandemic, terrorists, Fed policy.

SM: Aren t those always the risks?

MILLER: Well, no it s much worse now. People are talking about the deficit and the need for an exit strategy because otherwise we re going to have inflation. The best protection against inflation will be a strong economy. Pressure to exit too fast is a real risk, as is bad accounting policies.

SM: What about rebuilding assets or your record?

MILLER: Assets follow performance.

SM: Do you feel vindicated after this year s gains?

MILLER: Relief is a much better word. I m pleased that the shareholders who stuck with us are recovering at a faster rate than others...and I hope that continues.

SM: You had a rough 2008. How did you deal with it?

ROGERS: I felt the need to get on road, andon the phone to talk to more management teams than ever before because I felt this was going to be once in a lifetime opportunity to buy. When all your basic values are being questioned and the basic rules of the game are shifting while you are playing, it s unsettling. But I re-read books and I was never shaken from my philosophy at its core. I believed deep down that when you are most unsettled, you had to be able to think longer term than your peers and buy those great companies at bargain prices. As uncomfortable and unpleasant it was, you couldn t get rattled and sit on your hands to wait until the dust settled.

SM: Many advisers wanted to see the fund change. Did you think twice about your portfolio s concentration?

ROGERS: By staying in a focused portfolio, in a number of industries, it allowed us to stay true to our convictions at a period where lot of people were saying let s wait and see. So we didn t get moved one iota and actually went in the opposite direction.

SM: What did the post-mortems reveal?

ROGERS: There were a couple things cemented in my mind through this that we could have done better. One was being even more skeptical than we had been about acquisitions and being more aggressive with management teams to push them early to be really careful as they contemplate future acquisitions. They needed to understand as their major shareholder we would hold them to very high standards for the justification. With newspaper companies in particular, we not only missed the impact on classifieds from the Internet and sites like Craigslist but they all made acquisitions without a clear understanding how they could handle a significant economic downturn.

SM: The other?

ROGERS: I have always felt this business is more an art than a science. There s no substitute of a deeply built relationship with the CEO, CFO and yourself so when you get to crunch time and get on the phone you can read the body language and hear a bit of a difference in their tone. I realize that there are a lot of aspects of the business you can delegate that I don t have to micromanage, but this thing I need to be more focused on.

SM: You were very involved in the President Obama s campaign and some people wondered if that posed a distraction. Did that get in the way of spending more time on management relationships?

ROGERS: We are long-term investors. Some of the stocks that didn t do well were often bought three or four years ago, before the President even announced he was running. I m in the business of learning as much as I can about the world so the more people you can expose yourself to and more relationships you forge, the more knowledgeable you are. And the chance to be involved with the campaign was a once in a lifetime experience. I don t golf and I don t have any other distractions.

SM: What has worked this year?

ROGERS: The things that did really well were where we built bigger positions in our core areas. Gannett and CBS in particular were extraordinary for us. We build large positions. Everyone was like, That is the worst thing you can do.

SM: Earlier this year you said the market was the greatest liquidation sale. Now?

ROGERS: We are staying the course. I think potential upside is much greater than people anticipate.

SM: There are a lot of big-picture issues people are worried about, like higher taxes and regulation.

ROGERS: America will have ups and downs but over the long run stocks will go higher. We are underestimating the earnings power of Corporate America today. Regulation and taxes come and go. You can get so whipsawed based on rumors of what is coming out of Congress or what economists say. You have to focus on the long-term and individual businesses.

SM: What led to your mistakes?

WEITZ, Freddie (, AIG ( and Countrywide, that we thought were strong enough not just to survive but take advantage of what was coming. As we went through the fall of 2007, we started to get signs even the big dominant players weren t immune and Countrywide started to lose control of its destiny. That was the first real sort of sinking feeling that we underestimated what was going on. We sold Countrywide in the fall 2007 and we sold the last of the other three by July 2008.

SM: How did you feel after that?

WEITZ: After those were gone I felt great, even though the market was collapsing. I had that old feeling of past bear markets where I was comfortable with the solidity of our holdings and just happy to buy more.

SM: What lessons did you take away from the bad bets?

WEITZ: It s not that we are automatons that are immune to emotional forces. And maybe in times of turmoil we recheck our assumptions more frequently and ask more questions, but it s a matter of degree. I d be surprised if you heard any of the experienced managers say they have whole new idea to manage money. That doesn t mean you ignore anything. Things do change. We try to avoid big macro opinions but it s plausible this de-leveraging will take longer and there will be more periodic disappointments. And maybe that means we are more active in trading around our positions and using covered calls. We may find ourselves grinding out returns in a bit more active way than when we were in a nice 16-year bull market.

SM: What else is your team doing differently?

WEITZ: We did ask everyone to go back several times and look harder at balance sheets, maturity schedules, and covenants. There was a change in emphasis and we were trying to use our imagination about what could go wrong. But nothing really changed in what we were looking for and our level of patience.

SM: How do you view the market now after the run we ve had?

WEITZ: We have been trimming things we like because the position size is a little big. We joke about (the market) being like a sine curve. It still seems to me to represent the next few years. We are happy as can be with our favorite positions, but with 20 percent cash we don t feel in a rush to invest it. I wouldn t say there is a particular sweet spot of the market we are excited about.

SM: How do you feel about financials?

WEITZ is huge and labeled as such but we don t really think of it as a financial. Redwood Trust is probably one of our biggest that is seen as a financial and it is more like an investment company a niche investor in mortgage securities. It is not using any debt and it bought a lot of cheap assets that have rallied and they are in the same mode we are: Comfortable with what they own and optimistic there will be more opportunities coming along.

SM: So what s interesting?

WEITZ and Liberty Global. We like Discovery Communications (, which has half its revenue from affiliate fees and Washington Post (, which looks like a newspaper/TV firm but really is an education company. And we have had various plays in for-profit education world and have been in and out of Apollo (. It s a category of stocks that we have always been attracted to from a business standpoint but have trouble with valuations. Every once in a while they get hit and we have a chance to buy them but we have trouble keeping them for long.