WaMu Shows, Again, Smart Money Can Be Wrong

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Includes: BRK.A, BRK.B, JPM, WMIH
by: Dah Hui Lau

From AP News:

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

So, what can we learn from WaMu's ordeal?

  • Among WaMu (NYSE:WM) investors are Bill Nygren of Oakmark Funds, David Dreman of Dreman Value Management and Charles Brandes of Brandes Investment Partners. These are respectable, proven value managers with years of experience. So, the most important lesson here is that we have to do our own work. Even professionals can be very wrong.
  • WaMu was Bill Nygren’s largest position, accounting over 15% of portfolio. The significant value destruction of WaMu caused Oakmark Select I Fund to drop 14.6% in 2007 and a further 9% drop this year.
  • So, don’t make a financial company your largest position, unless it has a very strong balance sheet and no liquidity issues, plus superior management, like Berkshire Hathaway (NYSE:BRK.A).