Posted by: Lauren Young on September 26, 2008
This item was written by Lewis Braham, who recently authored a piece on focused funds for BusinessWeek
A Message on Washington Mutual 9/26/2008
Our normal policy is to explain position changes only following the end of each quarter. However, we are making an exception to comment on Washington Mutual. Earlier this month we sold Washington Mutual in Oakmark, Select, and Global Select funds. Our decision was influenced by both taxes and by the business value uncertainty created by the turmoil in the financial services sector.
We will more fully discuss the Washington Mutual sale in the next quarterly report.
We appreciate your continued interest in the Oakmark Funds.
Whether or not Nygren and Oakmark Select deserve investors continued interest is another story. As recently as June 30th, the date of the latest shareholder report, Select held almost a 5% position in WAMU.
Of course, holding one or two losers in this market is no crime, except for the fact that Nygren runs concentrated “focused” funds with very few holdings. For managers of focused funds, knowing the strengths and weaknesses of every stock in their portfolios is of paramount importance.
In Nygren’s case, one can argue he should have known better. He’s held WAMU in Oakmark Select for years, and it once was his largest holding, representing as much as 15% of his portfolio in 2006. Throughout the company’s subsequent decline, he would continue to talk of its fundamental strengths and would even add to his position from time to time.
One can argue that a manager who has this much exposure and history with a single company should be held accountable for his mistake. But there is a psychological phenomenon known as “anchoring” in the financial world in which investors become attached to their favorite stocks to the point of irrationality. When anchoring occurs, investors are stuck in what can be termed an abusive relationship with a stock and will refuse to admit anything’s wrong. Perhaps Nygren fell victim to this delusion.
In fairness to Nygren, no one could have anticipated the run on the bank that had occurred to WAMU in the past two weeks, depositors having withdrawn several billion dollars and moved to other banks. But the amount of leverage WAMU always had and the amount of bad mortgage loans on its books should have given a manager of Nygren’s experience and intelligence pause long ago.
He really blew this one.